The Rise of Solana DeFi’s Money Legos

The Rise of Solana DeFi’s Money Legos

Over the past year, decentralized finance (DeFi) has exploded in both value and adoption. The total value locked (TVL) in DeFi has grown by over 500%, from $51 billion to over $207 billion since last March, and multiple blockchains are claiming a larger share of the growing DeFi market.

DeFi services are becoming more accessible than ever in this multi-chain environment. Yet most blockchains share the same kind of architecture and therefore face the same problems. 

The onboarding of new users leads to network congestion, transaction speeds slow down, and the cost of using these blockchains tends to rise when this happens. 

A different kind of blockchain, Solana, is demonstrating a speed and throughput that’s capable of onboarding a billion new users to DeFi. Not only that, Solana is attracting a large number of developers who are building DeFi projects ready to meet this growing demand.  

Why Many DeFi Builders are Developing Projects on Solana

With a current advertised maximum of 65,000 transactions per second (TPS), Solana may be one of the few blockchains with the ability to host a global financial system. Moreover, transaction fees on Solana cost only hundredths of a penny.

Users want cheap and fast transactions, and Solana is definitely cheap and fast. For these reasons, the user experience on Solana is hard to beat.

Solana’s founders developed eight core innovations that enable transactions to be finalized more efficiently in terms of both cost and speed. As a result, a recent report from Bank of America asserted that Solana has the potential to become the Visa of the digital asset world.

When you combine all of these factors together, it’s not hard to imagine why investors, developers, and users are flocking to Solana.  

Solana Builds Big on Composability and Money Legos

There’s a huge network effect that comes with Solana’s incredible bandwidth. Solana can onboard millions of new users without having to raise the cost for transactions, but this isn’t the only upside.

Users can benefit from something called composability, or “money Legos,” a phenomenon that allows DeFi projects on the same network to integrate each others’ services to create new products. 

Legos are produced in many shapes and sizes, but every Lego block is designed to snap onto another Lego block, letting you build whatever your imagination desires. In a similar way, DeFi projects built on the same network can be connected with each other to make incredible ideas a reality. 

In this context, Solana is a base layer Lego block with tons of room for adding layer upon layer of Legos. So, the projects building on Solana today are creating the next layer of money Legos, the foundations on which future DeFi projects can build.

Stablecoins Build Next Layer of Money Legos for Sustainable DeFi on Solana

An example of a project building the next layer of money Legos on Solana is Hubble Protocol. Hubble’s main contribution to building Solana’s DeFi ecosystem is USDH, a crypto-backed and censorship-resistant stablecoin. 

USDH is censorship-resistant because it’s fully backed in value by crypto assets like Bitcoin’s BTC, Ethereum’s ETH, and Solana’s SOL. If these tokens, which cannot be “shut off,” hold their value, then so does USDH.

Stablecoins are essential to DeFi. One could say that stablecoins are the money in the money Legos of DeFi. However, many of the most widely used stablecoins in DeFi have several points of failure due to their centralized issuance and backing by fiat currency. 

It’s widely known that third parties cannot censor or freeze a decentralized blockchain asset like bitcoin. On the other hand, it’s been demonstrated that fiat in a bank account can be frozen, which is problematic if that fiat is the backing for a stablecoin. There have also been instances where stablecoins have been frozen by their issuer, even when they’re held on a decentralized network. 

These actions could be disastrous for the DeFi community, so Hubble’s USDH is a stablecoin designed to avoid these points of failure. 

How USDH Brings a Successful Stablecoin Model to Solana DeFi

A comparison can be made between Hubble’s USDH and MakerDAO’s DAI, a stablecoin that launched in 2017 on Ethereum. DAI was developed to provide the crypto community with a stablecoin that would be more censorship-resistant than its centralized counterparts.

At the time of writing, DAI is one of the top-five stablecoins in crypto (over $9 billion in circulation), and many projects on Ethereum have been built on DAI as a “money lego.” 

Continuing on the principles pioneered by MakerDAO, Hubble allows users to deposit their crypto assets and borrow a censorship-resistant stablecoin to use in DeFi. The benefit for users is they get to keep their long position on an asset while gaining liquidity they can put to work. 

The benefit for the DeFi community as a whole is that it has a strong primitive to build on through USDH.

Hubble isn’t just copying a great idea. It has made several improvements to MakerDAO’s model, as USDH hopes to do for Solana what DAI has done for Ethereum.

On Hubble, users can deposit multiple kinds of assets at once to borrow USDH, and they can borrow an extremely capital efficient 90.9% loan-to-value (LTV) before facing liquidation. The cherry on top is that USDH can be borrowed for 0% interest. 

How Composability and USDH Improves DeFi on Solana 

As mentioned earlier, one of Solana’s strengths is the composability of the network–the ability for developers to build products and services like they’re putting together money Legos.

By leveraging the power of composability, Hubble lets users opt into DeFi yield strategies with their crypto assets, while at the same time borrowing USDH against those assets. This is a huge development for crypto-backed stablecoins.

For example, if you deposited ETH into MakerDAO to borrow DAI in 2018, you watched the price of ETH rise, but you wouldn’t have seen your token holdings rise as well. If you deposited 10 ETH in 2018, you can withdraw 10 ETH in 2022. 

With Hubble, you can still let your tokens work in DeFi to increase your token holdings, even when you’re using those tokens as collateral to borrow stablecoins. That means when you deposit 10 ETH on Hubble, you can withdraw more than 10 ETH over time.

This is a huge advantage for DeFi users on Solana. Before Hubble, if you deposited your crypto assets to borrow stablecoins, you lost the chance to stake or lend those tokens. And, vice versa, if you staked your tokens, they were trapped in a staking contract, and you would have to withdraw them if you wanted to start borrowing. 

Hubble has changed the game by allowing Solana’s DeFi users to essentially have their cake and eat it too. It will be interesting to see what will be developed in the future with such an integral piece of Solana’s money Legos in place. 

Republic Capital Adviser LLC (“Republic Capital” or “R/Capital”) is an SEC Registered Investment Adviser that invested the company that wrote this article (Hubble Protocol). This article is intended for informational purposes only. It does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any trading strategy with any fund at Republic Capital or any of its affiliates.
Republic Capital is an affiliate of OpenDeal Inc. (dba Republic). Republic has several business lines, including but not limited to, OpenDeal Portal LLC, OpenDeal Broker LLC, Fig Publishing Inc., Republic Core LLC, Republic Deal Room Advisor LLC and other affiliates of OpenDeal inc., dba Republic, which are affiliates of Republic Capital.