Alternative Paradigms
Alternative paradigms encompass existing models and approaches used to account for liquidity management.
Features | Fund-Based Approach | Pool-Based Approach | Adaptive Pooling |
|---|---|---|---|
Credit-Risk Diversification | ❌ | ✅ | ✅ |
Deep Liquidity | ❌ | ✅ | ✅ |
Instant Borrowing | ❌ | ✅ | ✅ |
Lender Early Withdrawals | ❌ | ✅ | ✅ |
Lender risk / reward options | ✅ | ❌ | ✅ |
Protocol flexibility | ✅ | ❌ | ✅ |
In this approach borrowers initiate a liquidity request, depositors review the request, and decide whether to provide funds. Once fully funded, liquidity is transferred to the borrowers. There are several drawbacks with this approach. From the borrower’s perspective, there is no guarantee of the funding process being completed, and it can often take a considerable amount of time. From the depositor’s standpoint, there is a high level of concentration on a single borrower, leading to increased default risk. Due diligence is also required, and depositors’ funds remain inaccessible for until a borrower makes a repayment. In contrast to this approach, the adaptive pooling model provides instant liquidity access to borrowers once approved, credit risk diversification for lenders, and depositors can withdraw funds if liquidity is available.
Liquidity Flow for Fund Model
In this approach depositors contribute their liquidity into a single shared liquidity pool. Borrowers, once authorized, can instantly access liquidity provided enough is available. Depositors benefit from credit risk diversification, and have the flexibility to withdraw funds provided enough liquidity is available. However, all depositors follow the same mechanism and rules for depositing and withdrawing liquidity. This uniform treatment overlooks the diverse risk and reward preferences of that depositors may posses. It also hinders the provision of differentiated options, which could cater to depositors seeking more specialized features or incentives. Moreover this approach lacks flexibility in accommodating system changes, often requiring the creation of a new pool for substantial modifications, leading to cumbersome transitions and potential disruptions. This limitation hampers system agility and responsiveness to evolving market conditions and innovative features.
Liquidity Flow for Deep Liquidity Pool Model
The adaptive pool model allows us to provide a customized experience tailored to different groups of depositors. In general, it enables us to better meet their needs and cater to various preferences and requirements. This level of customization should enable us to offer a superior service and a more satisfying experience for our depositors. More broadly, this approach provides us with a significant level of flexibility and adaptability to the changing needs of our customers and future industry developments. It is possible to spin up a new FeederPool with slightly different behaviour from the others and connect it to the MasterPool without impacting the existing system at all. There are no new versions required, and no transitioning of depositors. This approach is highly scalable; a system with 100 FeederPools does not impose a higher computational burden compared to a system with a single FeederPool.
Last modified 25d ago