Introduction

Currently, Layer 2 primarily consists of two camps: Optimism Rollup and Zero Knowledge Rollup. These two camps differ in their data transmission and verification methods. Op-Rollup is represented by projects like Arbitrum and Optimism; ZK-Rollup is represented by projects like zkSync and StarkNet. From a technical perspective, ZK-Rollup technologies have data transmission, verification, and speed advantages. However, they face higher technical development challenges and lack EVM equivalence, which leads to longer ecosystem development cycles. In contrast, due to simpler technical implementations, Op-Rollup was quicker to deploy and advance its ecosystem. Currently, the OP camp is developing more rapidly and is far ahead regarding ecosystem construction.

The leading project in Ethereum Layer-2 is Arbitrum, which has already secured more than half of the market share. By airdropping ARB governance tokens, the ecosystem continues to thrive, with currently locked funds amounting to $16.98 billion. Next is Optimism, which also boosted its Total Value Locked (TVL) in May 2022 through the airdrop of OP tokens, narrowing the gap with Arbitrum, with a current total locked amount of $8.43 billion.

Source：L2Beat

The influence of ARB and OP token airdrops has reignited enthusiasm for airdrop hunting in the market, with growing expectations for token airdrops within the ZK system. Consequently, ZkSync and StarkNet have rapidly attracted substantial funds and users. Since the ARB airdrop, the total value locked (TVL) in the StarkNet ecosystem has surged from $7 million to over $20 million. StarkNet launched its mainnet early in 2021 but is still in the early stages of network development, undergoing continuous version iterations. The ecosystem presently hosts about 100 projects, with limited usable Dapps, as most protocols are still under development. As anticipated, in February of this year, StarkNet officially launched a token airdrop event, drawing significant capital and user interest, rapidly evolving the ecosystem with several protocols going live, bringing the total TVL to approximately $150 million. At this stage, StarkNet’s performance in transaction costs and network speed is average compared to other Layer-2 competitors, and despite ongoing technical development and updates, there remains considerable uncertainty as to whether it can surpass Optimism or even Arbitrum.

Lending is the second largest DeFi track after DEXes, serving as fundamental infrastructure within the DeFi financial system and remains a crucial choice for building on-chain ecosystems. There are few native lending protocols in the StarkNet ecosystem, and zkLend recently announced the ZEND token airdrop, which has seen high market enthusiasm. This article will detail its product features, elaborate on its business logic, and analyze the project’s economic model and development status.

What is zkLend?

zkLend is a native lending protocol on the StarkNet network, featuring two primary products: the Artemis lending market targeted at DeFi users and the Apollo lending market aimed at institutional clients. The Artemis product has already been launched on the main net, while Apollo is still under development.

The team is based in Singapore, with members from the traditional finance sector and developers experienced in working with StarkNet. In March 2022, the team secured $3 million in seed funding from major investors, including Delphi Digital, Three Arrows Capital, and Alameda Research. Recently, following the StarkNet ecosystem’s announcement of a token airdrop that sparked high market interest, zkLend also capitalized on the market sentiment by announcing its airdrop plan, distributing approximately 3.89 million ZEND tokens to early users.

Product Experience

zkLend’s Artemis product for DeFi users is now live, adhering to lending protocols similar to Aave. It primarily offers two functions: deposits and loans. Depositors can place their idle assets into a capital pool, receiving an equivalent amount of zTokens as deposit certificates. Over time, these zTokens accumulate interest, which can be withdrawn at any time by the user. Borrowers can secure loans by collateralizing their assets, drawing funds from the capital pool, and repaying at anytime. If the collateral is insufficient to cover the debt, the account will be liquidated. Additionally, the protocol supports flash loans, which incur a transaction fee of 0.09% of the loan amount.

zkLend currently supports two wallets on StarkNet: Argent and Braavos. Users can connect their wallets, select the appropriate asset pool, and perform deposit or loan operations. The user interface (UI) design is relatively simple. On the deposit page, there is an option for collateral; if users check this option, they can obtain loan funds from the liquidity pool at an 80% collateralization rate. If this option is not selected, the deposited funds will provide liquidity.

Source：zklend app

In addition to Artemis, the team has also developed the Apollo lending market, which is aimed at institutional users and has not yet been launched. Both markets operate independently with their own capital pools and governance rules. Apollo will exclusively provide whitelist authentication for institutional users who have completed KYC verification, and users can use the service once their identity verification is approved.

Product Design

Lending Capacity

A user’s lending capacity is determined by the value of their deposits and the collateral requirements of the borrowed assets, calculated as Lending Capacity = Underlying Asset Value Collateral Factor. Besides, the concept of effective lending is introduced, defined as Effective Lending = Collateral Factor of Deposited Assets Loan-to-Value Ratio of Target Assets. The protocol has varying collateral and loan-to-value ratios depending on the collateral type. Typically, assets with higher volatility have lower collateral and loan-to-value ratios, e.g., USDC and ETH have a collateral factor of 80% and a loan-to-value ratio of 100%.

The protocol controls risks through bi-directional collateralization: on the one hand, the collateral is constrained by the collateral factor, limiting the maximum loan capacity based on specific collateral assets; on the other hand, borrowing actions are constrained by the loan-to-value ratio, limiting the number of target assets that can be borrowed.

Dynamic Interest Rate Model

Like common lending products, Artemis also uses a dynamic interest rate model, where each asset has a utilization-based interest rate curve that appears as a step function, with the optimal utilization rate as the turning point. For highly volatile assets, the set optimal market utilization rate is the lowest, but the interest rate changes are steeper. The optimal utilization rate also dynamically adjusts based on factors like market liquidity pool size.

Source：zklend gitbook

Liquidation Mechanism

The protocol liquidates the unpaid loan amount that exceeds the borrowing capacity according to the market rate, and the liquidation factor is dynamically set. Once the borrowed assets significantly rise or the basic collateral sharply drops, users must liquidate the loans exceeding the borrowing capacity until the loan position falls back within the borrowing capacity range. Currently, any StarkNet address can call the liquidation contract.

Economic Model

zkLend’s native token is ZEND, with a total supply of 100 million tokens. The team has announced its token distribution plan, where 35% is allocated for staking and distribution rewards; 33% is dedicated to ecosystem development; 17% goes to private and public offerings; and the remaining 15% is distributed among the team and advisors.

Source: zklend gitbook

The 33% of tokens allocated for ecosystem development are locked for five years, planned for future use for partners, operational expenses, etc. The 15% of tokens assigned to the team and advisors have a three-year vesting period. The 17% of tokens given to private and public offering investors are supported by around 20 angel investors and venture capitalists, with seed investors accounting for 6%, which are unlocked at launch and will vest over two years. Strategic investors make up 11%, with 8% locked at token launch and vesting over two years.

Source: zklend gitbook

The protocol recently announced the launch of the ZEND token and revealed its airdrop plan. The first phase of the airdrop (SZN 1) distributed 3,890,250 ZEND tokens to 42,695 early supporters, approximately 4% of the total token supply. 25% of the ZEND from this airdrop was unlocked immediately at token launch, with the remainder to be released linearly over 90 days.

Development Status

With recent earnings and the popularity of the underlying StarkNet, zkLend launched a token airdrop event, attracting substantial funds and users. The market has reached $73.96 million, with total deposits exceeding $50 million and total loans close to $24 million, achieving a capital utilization rate of 48%.

Source: zklend app

The team also recently launched a deposit incentive program, where users can deposit ZEND into zkLend to earn native returns. Rewards are calculated biweekly, and with ongoing capital inflows, the overall liquidity is currently good, and market enthusiasm is high.

Conclusion

As a native lending protocol in the StarkNet ecosystem, zkLend’s core product, Artemis, is comparable to mainstream lending protocols, and its institutional lending market, Apollo, is still under development, showing no significant product advantages. The lending track development is relatively stable, and achieving breakthroughs in the short term is difficult. zkLend depends on the development of the underlying StarkNet, and the recent token airdrop has heated the market. However, due to the significant siphoning effect of leading projects in the lending field, if leading protocols enter the StarkNet ecosystem, zkLend will face significant competition, posing certain challenges for future development.