Decentralized finance service B.Protocol has announced plans for a new version that will improve the settlement of under-collateralized loan positions on lending platforms.
In a statement issued Tuesday, the backing liquidity protocol for DeFi lending platforms revealed that the upcoming v2 is based on a White paper for a new Backstop Automated Market Maker (B.AMM) written by a couple of anonymous community members.
According to a blog post Posted by B.Protocol founder Yaron Velner, the v1 layout that used professional liquidators to share profits with users instead of miners was not enough to address the capital inefficiency problem.
Unlike centralized exchanges like Binance, which offer leveraged trading up to 100 times user deposits, the leverage ratio on decentralized exchanges (DEX) rarely exceeds five times. This significantly lower leverage limit is despite the huge pool of liquidity available to DEX platforms.
For Velner and the authors of the B.AMM white paper, the low leverage limit of DEXs forces lending platforms to be conservative with their credit guarantee factors. In fact, with high slippage and tight spreads on AMMs like Uniswap and SushiSwap, the settlement on DeFi lending platforms appears restricted to flash loan arbitrage.
DeFi lending platforms like Maker use a market maker-gatekeeper (or gatekeepers) system responsible, among other functions, for executing settlements. These caretakers have come under scrutiny during Black Swan events like Black Thursday in March 2020.
However, as Cointelegraph previously reported in early June, DeFi’s settlement mechanisms generally performed well amid a “tsunami of settlements in May.”
B.Protocol’s solution to the problem consists of a platform that allows users to provide liquidity for possible settlements (debt repayment in exchange for a guarantee) through an automatic rebalancing protocol that converts the guarantee for the payment of the debt.
According to Velner and the B.AMM white paper, the rebalancing process will be based on the stable exchange of Curve Finance invariant for the asset price. While the stable exchange invariant is designed for correlated asset pairs like Dai (DAI) and Tether (USDT), B.Protocol v2 will expand it for uncorrelated pairs like DAI and Ether (ETH).
In a conversation with Cointelegraph, Velner explained how the stable exchange invariant will be expanded to work for uncorrelated asset pairs in B.Protocol v2:
“The system is specifically designed for uncorrelated assets. This is possible because the system is based on an external price supply (for example, Chainlink). Curve Finance’s stable swap invariant is only used to determine the discount in the rebalancing process. “
Related: Cointelegraph Consulting: DeFi Hit By Liquidation Tsunami In May
By using an external price feed like Chainlink, the price of B.Protocol’s assets can be generalized in terms of US dollars.
According to the B.AMM white paper, the proposed high-leverage DeFi settlement platform can handle settlement of up to $ 1 billion per month. The announcement also revealed that DeFi lending platforms can increase their collateral factors up to four times in Protocol B v2.
In addition to the potential to increase collateral factors for DeFi loans, Velner also told Cointelegraph that the team ran simulations on the protocol during volatile periods in May and the results showed substantial returns for users.