Article Summary, Automatically Generated By AI
About Ajna Protocol
- Ajna protocol facilitates peer-to-pool secured loans without governance and external price feeds.
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Features:
- Permissionless pool creation
- Price specified lending
- Market-derived interest rates
- Liquidation Bonds
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Numbers and figures:
- 100 (example price in price bucket)
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Case studies/anecdotes/examples:
- Automated Market Maker (AMM) as a DeFi primitive
- Vital takeaways,
Introducing Ajna Protocol: Pioneering a New Era in Decentralized Finance
The Ajna protocol pioneers a novel approach to peer-to-pool secured lending, eliminating the need for governance and external price feeds. In contrast, prevailing lending and borrowing protocols reliant on smart contracts necessitate active governance (e.g., setting rates and updating contracts) and/or rely on external price feeds (such as oracles like Chainlink). The subjective decision-making inherent in governance, rather than market forces, determines the pricing of collateral and loan parameterization, thereby exposing these protocols to solvency and liquidity risks. The overhead of governance and maintenance creates significant barriers to entry in the on-chain asset lending and borrowing market. Ajna’s innovative design, characterized by the following features, resolves these issues:
Permissionless pool creation: Inspired by the popular DeFi primitive, the automated market maker (AMM), Ajna pools exist in distinct pairs: a quote token, furnished by lenders, and a collateral token, provided by borrowers. These pools enable lenders to gauge borrower demand for their quote token and, conversely, allow borrowers to assess lender demand for loans backed by their collateral. Notably, pools can be created permissionlessly, empowering anyone to establish a pool for borrowing arbitrary fungible tokens using arbitrary fungible or non-fungible tokens as collateral, thereby eliminating the need for a governance process to whitelist approved tokens.
Price-specified lending: Ajna innovatively replaces external price feeds (oracles) by empowering lenders to input the price at which they are willing to lend. This price represents the amount of quote token (i.e., the token being lent) they are willing to lend per unit of collateral pledged by the borrower. For instance, if a lender deposits at a price of 100, they are willing to lend 100 units of quote token per one unit of collateral. Ajna pools separate prices into predefined buckets to reduce the complexity of the protocol; henceforth, prices are referred to as “buckets.” Borrowers can then tap into the aggregated liquidity of these various buckets. Depositing in a price bucket enables lenders to assume discrete solvency risk based on their personal risk tolerance. In the worst-case scenario, a lender should receive collateral at the price at which they lent to the pool in lieu of their quote token deposit.
Market-derived interest rates: Ajna employs deterministic rules to establish interest rates based on user behavior within the pool. These rules are predicated on the assumption that aggregate average loan collateralization (pool collateralization) serves as a reliable indicator of an asset’s volatility profile, given that borrowers inherently seek to avoid liquidation, which they will inevitably face over time if they fail to provide adequate collateral for their loan. Ajna leverages pool collateralization to determine the desired utilization ratio (i.e., the equilibrium between utilized and unutilized deposits) for the pool, thereby establishing a target utilization. Subsequently, we can examine the meaningful actual utilization, which is a short-term exponential moving average of the debt-to-total-lender-deposits ratio for the average loan in the pool. Interest rates are adjusted based on these values to guide the pool towards equilibrium. When the meaningful actual utilization falls short of the target utilization, a surplus of lenders exists, and rates can be lowered. Conversely, when the meaningful actual utilization exceeds the target utilization, a shortage of lenders prevails, and rates can be increased.
Liquidation Bonds: The eligibility of a loan for liquidation is determined formulaically by the contract, but the actual liquidation process is contingent upon an external user triggering it. To initiate this process, the user must post a liquidation bond, which essentially constitutes a wager with a payoff curve analogous to a short put option spread. This bond is, in effect, a bet on the outcome of a pay-as-bid Dutch auction for the collateral, where the bidder’s goal is to place bids below the loan’s neutral price. This mechanism fosters fair outcomes by imposing a penalty on frivolous liquidations. While there is no inherent incentive to spuriously liquidate a borrower in Ajna, this mechanism introduces an explicit deterrent against liquidating loans that are adequately collateralized relative to the market price of the collateral.