Introduction

DeFi innovation has created many opportunities for profit. However, without a systematic strategy, direct investments may result in insufficient returns or losses. Both individual and institutional investors are seeking higher returns and lower risks. However, developing and deploying customized financial products on the blockchain independently incurs high costs. Professional asset managers with quality strategies also desire low-cost, customizable fundraising channels to expand their investment scale and increase returns.

Although some centralized financial (CeFi) institutions offer services related to crypto assets, their product thresholds are high, and they lack transparency. Therefore, the market needs better-decentralized solutions that provide transparent and secure investment experiences while helping asset managers gain trust and liquidity. In response to the market demand, Solv Protocol has emerged. It aims to build a comprehensive service system that includes asset creation, issuance, marketing, and risk management by launching infrastructure and various ecosystem services. The protocol has been updated to version V3, and Solv Finance is the platform that utilizes this protocol to provide services to users.

Project Background

Solv Finance has introduced various asset classes and profit opportunities in the cryptocurrency field, ultimately aiming to become a crucial infrastructure bridging liquidity across DeFi, CeFi, and TradFi. In 2023, Solv V3 was officially launched as the first trustless fund infrastructure built on the ERC-3525 standard. It further facilitates decentralized collaboration among trusted institutions, bringing transparent and non-custodial risk control mechanisms to the DeFi field.

Solv V3 provides a transparent and secure platform for global institutions and retail investors to explore various reliable cryptocurrency investment opportunities. It also provides efficient fundraising channels and the possibility to build on-chain reputation for excellent fund managers. Through these features, Solv is committed to discovering, creating, and realizing actual returns, thereby enhancing the maturity of crypto finance.

As of October 30, 2023, Solv Finance has successfully served over 26,000 investors and raised over $192 million for fund products on the V3 platform.

Supporters of Solv Protocol

According to Rootdata, the three founders of Solv Finance have rich experience in their respective fields:

• Meng Yan: Former Vice President of CSDN and an active KOL in the Crypto field.
• Will Wang: 20 years of experience in the financial IT field, leading the design and development of the world’s largest bank accounting system based on an open platform and distributed technology. Recipient of the “Outstanding Contribution Award” in the 20th Anniversary of Zhongguancun.

Other co-founders and team members also have rich technical and industry experience. The Solv Finance team has also applied for the ERC-3525 semi-fungible token standard, which has been approved and has become the cornerstone of Solv Finance’s products (details of the standard will be discussed in the next section).

Basic Information and Standard Content of ERC-3525 Application (Source: EIP)

In addition to the team’s continuous efforts, Solv has also received support from multiple venture capital and partnership firms, with publicly disclosed fundraising reaching $11 million. The lead investors include not only pure Web3 venture capitalists but also those from the Web2 foundation. With the help of this support, Solv’s product boundaries have expanded from purely on-chain DeFi strategies to RWA (Real-World Asset) product strategies.

Solv Protocol Financing Status and Investors (Source: Rootdata)

Core Components and Architecture

Solv’s ability to achieve diversified crypto investment experiences in a decentralized manner relies on two foundational infrastructures: ERC-3525 and the Risk Management Engine.

ERC-3525

ERC-3525 combines the quantity characteristics of ERC-20 (i.e., the ability to issue any quantity) and the non-fungibility of ERC-721 (i.e., uniqueness of NFTs), and adds a “slot” attribute in the standard to provide a more general classification mechanism for financial scenarios or business purposes.

The asset types using ERC-3525 are also known as Semi-Fungible Tokens (SFT). The data structure of SFT includes <ID, SLOT, VALUE>. For example, assuming ID represents different bond issuers, SLOT represents different bond series, and VALUE represents the quantity of each bond. For instance, <Apple Inc, 2025 Bond Series, 100> can represent 100 bonds in the 2025 bond series issued by Apple Inc. This structure allows investors and market participants to manage and trade different financial products in an organized and flexible manner while maintaining the distinction and traceability between assets.

SFT technical standard framework (Source: SFT Whitepaper)

Risk Management Engine

Solv V3 has built a highly collaborative decentralized institutional network that provides robust services for funds and risk management for Solv Protocol. Solv also enhances its risk management engine through various measures:

Solv V3 has built a highly collaborative decentralized institutional network that provides robust services for funds and risk management for Solv Protocol. Solv also enhances its risk management engine through various measures:

1. Non-custodial Solution
   In Solv Protocol, all assets, including user funds and LP tokens of liquidity pools, are stored in smart contracts, ensuring non-custodial asset management.

2. Multi-party Controlled Vault
   Solv Protocol adopts decentralized multi-party computation (MPC) to manage capital, with transactions jointly controlled by multiple parties. Under the supervision of built-in safeguard rules in the contract code, custodians, managers, and liquidators jointly manage transaction permissions. Even with unanimous consent, no single entity can transfer assets out of the system. This design effectively reduces counterparty risks, increases transaction flexibility, and serves as a strong line of defense to strictly limit any unauthorized withdrawals.

3. Net Asset Value (NAV) Management based on Oracles
   Solv’s system utilizes an oracle-based asset net value management system to ensure that the face value of fund shares always matches the value of the underlying assets in the liquidity pool, providing important safeguards for investment decisions, redemptions, and settlements. Additionally, this oracle-based management mechanism also ensures that the tokens issued by the platform accurately reflect the value of the underlying assets, allowing Solv fund tokens to seamlessly integrate into a wider DeFi ecosystem.

4. Settlement Efficiency
   In extreme market conditions, Solv Protocol’s system can utilize an oracle-based asset net value management system to promptly capture changes in fund net value and execute settlements, ensuring that the platform can respond quickly to fluctuations in fund value, especially during market volatility.

In addition to these two cornerstone products, Solv Finance has also adopted innovative fee mechanisms to coordinate various interests and ensure the accuracy of the net asset value (NAV). Each time the redemption NAV is updated, protocol fees are calculated. The calculation formula is: Recorded NAV Total Number of Shares Management Fee Rate / 360 * Number of Days since the Last Fee Calculation. The protocol fees are paid to the fund operator by issuing additional fund shares while deducting the corresponding protocol fees from the total assets to recalculate the NAV. This way, the fund operator receives their management fee by receiving additional fund shares while maintaining the accuracy of the total net asset value of the fund.

Products and Solutions

As a customer-oriented end-product, Solv Finance has managed $192 million in assets through 78 funds. At Solv Finance, users can not only view their investment portfolios but also apply to issue their own financial instruments. According to the official website, Solv Finance can design customized financial service solutions for users in as fast as 7 days. For ordinary investors, Solv Finance offers Open-end Funds and Closed-end Funds. The former has fewer entry restrictions and allows withdrawals on specific dates (e.g., 15th/30th of each month), while the latter has entry requirements such as investor whitelisting and redemption upon maturity. Currently, Solv Finance offers three types of open-end funds and multiple closed-end funds.

Solv Finance Product UI (Source: Solv Finance, 2023.10.30)

From the figure above, it is evident that the underlying assets and yields of the products vary due to different strategies.

1. Open-End Funds
   Blockin GMX V2 Delta Neutral Pool: Provides liquidity on GMX V2 and hedges on Binance. This strategy is developed by professional market maker Blockin Capital, aiming to create a low-risk, high-yield stablecoin mining pool for GMX. The annualized yield is around 25% (data as of October 23, 2023).
   Blockin GMX Delta Neutral Pool: Provides liquidity on GMX through Delta hedging on Binance. This strategy is developed by professional market maker Blockin Capital, aiming to transform GLP into a low-risk, high-yield stablecoin mining pool. The annualized yield is around 7.2%.
   RWA: Generate Yield On Your Stable Coins - ARB: Backed by a portfolio of US Treasury bonds from different providers, allowing investors to diversify their investments. This pool is only available to qualified investors who have completed Solv’s KYC and AML processes. The minimum purchase amount is $1,000, and the annualized yield is approximately 3%-5%.

2. Closed-End Funds
   According to the Solv Finance page, there are a total of 49 closed-end funds, and there are currently five funds that have not expired, The main strategies used are Delta Neutral and LSD.
   Through the different types of funds mentioned earlier, we can also see that Solv offers a variety of strategies for investors to choose from. According to the Solv Protocol Document, Solv V3 currently provides four main solutions:

3. Delta Neutral
   Delta Neutral is an investment strategy that involves combining multiple assets or derivatives to eliminate the impact of price changes on the value of the investment portfolio. In this strategy, the portfolio’s Delta (i.e., the impact of price changes on the portfolio’s value) is set to zero. By doing so, investors can protect their investment portfolio from adverse market movements while still capitalizing on other market variables such as volatility or time decay to generate profits.
   At Solv Finance, a common example is a strategy running on Uniswap or GMX. By monitoring open positions and currency fluctuations, Blockin’s fund manager dynamically hedges risks. Historically, the fund has achieved an annualized return of 10-30%. Apart from a minor decline of 1.1% during the USDC decoupling period, the returns have been consistently stable.

4. Yield Enhancement
   This strategy involves liquidity staking, particularly ETH liquidity staking, benefiting from Ethereum’s POS mechanism. The investment manager can convert users’ ETH into LST (liquidity staking derivatives) and enhance staking yields through various LST strategies, such as participating in liquidity pools and lending.

5. Structured Products
   Structured products classify risks into junior and senior tranches. The junior portion of this strategy offers higher returns but also carries higher risks. Due to the higher risk involved, Solv Protocol often requires fund managers to invest in this portion of the funds. The senior portion, on the other hand, is structured as Delta Neutral and is available to ordinary investors.

6. RWA Assets
   This strategy primarily invests in real-world assets such as US Treasury bonds, trade receivables, and traditional asset financing. An example is leveraging the yield of on-chain US Treasury bonds through cyclical borrowing or investment.

Competitive Analysis

As an applicant and creator of ERC-3525, Solv Protocol has been leading the application of ERC-3525 in the Web3 field. Compared to directly issuing tokens or NFTs as financial instruments, ERC-3525 is more flexible and has stronger composability, making it very friendly to issuers due to its underlying technology that supports the customization of various elements. Therefore, Solv has its unique advantages in terms of technology.

In terms of services, Solv still has room for improvement. Currently, Solv mainly provides asset management services to ordinary users, which involves DeFi strategies and RWA business.

In terms of DeFi strategies, well-established DeFi platforms such as Yearn Finance and Beefy have already started to layout decentralized asset management. As of October 30th, Yearn Finance has a Total Value Locked (TVL) of up to 320 million USD, with a peak value exceeding 6 billion USD. In contrast, Solv Finance currently has a TVL of less than 5 million USD. The number of strategies open to Solv is also much smaller compared to Yearn and Beefy. However, in terms of strategy yield and user experience, Solv Finance has a more user-friendly UI and, due to strategies from professional fund managers, the average yield is much higher than Yearn.

Yearn Finance TVL Changes (Source: DeFiLlama, 2023.10.23)

According to the data from RWA.xyz, the competition in the RWA field is extremely fierce, with the Top 5 projects occupying the majority of the market share. Solv, since its launch on October 23rd, has raised 1 million dollars in assets within seven days. With this pace, Solv has the potential to challenge the top 5 leaders in the RWA market. However, its product’s return rate of 3%-5% is relatively low compared to other protocols, which may become one of the obstacles in its business development.

The market share of tokenized US Treasury bonds (source: RWA.xyz, 2023.10.30)

Tokenomics

The official introduction of the token $SOLV by Solv is limited. In their documentation, we only found the following sentence: “The largest portion of the $SOLV token allocation will go to our community members. Part of the token supply will be airdropped to shareholders of the open-ended funds as a priority. While the specifics are still being finalized, this airdrop will serve as extra yield for liquidity providers on the protocol.“

Therefore, further disclosure from the official is needed.

Ways to Participate in the Project

As an investor, if you wish to invest your funds in Solv’s strategies, you can directly access Solv Finance’s dApp and select “earn” to view all the fund strategies. Users are free to choose the appropriate fund for the subscription. Different funds and strategies have different risks and purchase restrictions, and users can click on specific fund pages for more information.

Solv Finance Product Purchase Page (Source: Solv Finance)

If you are a fund manager or a financial securities issuer, you can click on the issue button to contact the Solv team and obtain issuance approval. Then, follow the operational guidelines to set specific parameters and successfully issue.

Information about the application process (Source: Solv Finance Official Website )

Outlook

From the analysis of competitiveness mentioned above, we can see that although Solv has innovative technology, it still lacks in terms of service and user scale. The number and scale of products launched on its official website are relatively small, indicating the need for further development. However, its advantages are also very apparent. As the current platform operates on an application basis, its products are more professional and user-friendly compared to general asset management platforms and RWA platforms. Moreover, in the current bear market environment, the RWA product raised 1 million dollars in just one week, demonstrating astonishing fundraising speed and great potential.

Of course, Solv also has challenges and risks that need to be continuously addressed in the future:

1. Legal and Regulatory Risks
   When dealing with NFT tokenized real assets, the Solv project may encounter legal and regulatory compliance issues, including compliance requirements related to securities laws, anti-money laundering regulations, and other relevant regulations. Illegal or non-compliant operations may result in legal risks and liabilities.

2. Market Volatility Risk
   Solv’s open-ended fund operation model is exposed to market volatility risks. Despite the fund manager’s investment of most of the funds into trading platforms for mining profits and hedging transactions on trading platform tokens to protect investor capital, market uncertainty, and volatility always exist. If the market experiences severe fluctuations or a significant drop in digital asset prices, it may be detrimental to the fund’s value and result in losses of investor capital.

3. Risk Management
   The fund manager’s investment decisions and capabilities are crucial to the fund’s performance. If the fund manager makes strategic errors, lacks investment skills, or fails to react promptly to market changes, it may lead to a decline in fund performance.

Conclusion

Solv Protocol showcases the innovative application of blockchain technology in asset management. Leveraging ERC-3525 and other unique technology stacks, it offers investors and asset managers a transparent, secure, and efficient platform. Despite challenges from market competition and legal regulations, Solv has demonstrated its development potential through continuous product iterations and market expansion. In the future, with deeper integration of DeFi and RWA strategies, as well as a more defined legal and regulatory framework, Solv is poised to assume a significant position in the digital asset management field. By continuously enhancing user experience and expanding its product line, Solv will drive the advancement of decentralized finance, opening up more possibilities for investors and asset managers.