How to Invest in Silo Finance on Notum

Lending remains an important part of many countries’ economy. While some people borrow money from the bank at interest, others provide their funds and receive a profit for it, while the bank benefits from being an intermediary.

The DeFi space introduced lending relatively recently, but this type of investment has already gained a lot of popularity due to its innovative functions and proper level of security. DeFi lending allows users to borrow or lend crypto assets on decentralized applications. However, unlike banks, it uses P2P dApps, which ensures transparency of all processes on the platforms.

DeFi lending doesn’t require permission from central authorities and allows users to independently lock their assets on DeFi platforms. This type of investment gained recognition as getting rid of third parties eliminated the need for investors to share their profits and guaranteed them safety.

Low levels of involvement and automation have revolutionized the lending market. Investors can now deposit their assets to lending pools and earn rewards, while borrowers receive cryptocurrency for their needs without any eligibility criteria or large fees.

Today Notum will draw your attention to the popular lending protocol Silo Finance, and pay attention its operating principles and risks associated with it. We will also look at investment strategies that will allow users to invest their assets on Silo and receive fairly high rewards in 2024.

Silo Finance: the Essentials

• TVL: $157,74M
• Average APY: 1.64%
• Risk Level: Medium
• Blockchains: Ethereum, Arbitrum
• Foundation Date: 2021

In traditional lending, banks allow people to lend and borrow assets, and in the DeFi space, this role is given to lending markets. Silo Finance is a platform that creates permissionless and risk-isolated lending markets. In this way, Silo and other similar protocols allow users to take on this role without the need for a centralized entity.

Silo Finance performs the function of a non-custodial lending protocol, which allows to borrow crypto assets. It operates on Ethereum and Arbitrum and is designed to support any token asset on the chains it operates on.

Interesting fact! Silo Finance is among the top 20 most popular lending protocols in the DeFi space. In addition, Silo is on top 3 most popular protocols on Arbitrum by TVL.

DeFi lending markets have been around for some time and are therefore not new. However, despite the existence of giants like Aave, Silo aims to become the leading DeFi lending protocol, eliminating the main shortcomings of older protocols.

Aave and Compound are shared-pool lending protocols and create a single-pool lending market for all tokens. The disadvantage of such a system is that in the case of an exploit in collateral token or price oracle, intruders can steal any token since they are all located in the same pool.

Silo, in turn, uses an isolated-pool, which means each token has its own lending market. Assets on Silo are combined with the bridge assets ETH and the XAI Silo stablecoin. Thus, the protocols are only exposed to ETH and XAI.

«Since all tokens are paired with ETH or XAI, there is only a single market for every token asset, preventing fractured liquidity and allowing greater protocol efficiency» - Silopedia.

Using Silo, users can borrow protocol bridge assets, namely ETH and XAI on Ethereum, or ETH and USDC on Arbitrum. To do this, they need to make a deposit in the form of any network-supported token. The advantage of the platform is that each token has its own risk-isolated lending market or so-called silo. More information on using Silo can be found here, and a list of "Collateral token assets" can be found on the Markets page.

XAI Stablecoin

Silo protocol has its own cryptocurrency - XAI. This over-collateralized stablecoin has a soft peg to the US Dollar which means its value remains relatively stable. Users of the protocol can collateralize and borrow XAI in several isolated markets. The distinctive feature of $XAI is that it can only be borrowed in the Silo Protocol.

Interesting fact! The name of the stablecoin was created to pay homage to Wei DAI.

Since the SiloDAO is the only entity that controls the issuance of XAI, they can mint an unlimited amount of the stablecoin. Also, XAI crypto can be placed in any number of silos. The SiloDAO controls the interest rate on XAI loans in all silos and manages the circulating supply for XAI, adjusting the interest rates on loans.

At the moment, the SiloDAO controls two stablecoin functions - credit extension and credit retraction. To perform both functions, the DAO must decide on the amount of XAI that will be minted or burned. However, the ability to perform these functions allows The SiloDAO to respond more quickly to market conditions.

More information about Silo Finance crypto can be found here.

Source: Silopedia

Why Invest in Lending with Silo Finance?

Pros

Secure design

The protocol is created to minimize isolated risk since Silos can only borrow the bridge asset from each other. By investing assets in a Silo, users do not share risk with other tokens in the protocol.

Protocol's efficiency

Each asset on the platform receives only one Silo to concentrate liquidity. Since the bridge asset connects all Silos, liquidity moves flexibly within the protocol and gives the collateral token the ability to borrow from another asset.

Permissionless environment

The protocol was designed to be limitless and inclusive and to support all assets in the networks it operates on. Also, since Silos use default collateral factors, they can be changed or adjusted at any time.

Level of safety

Silo pays proper attention to its security and has therefore undergone numerous audits from leading security firms. The main ones include ABDK, Quantstamp, Certora and Immunefi.

Efficiency

Each market on Silo supports only two assets - the bridge token, and a unique token. Due to this design, liquidity is concentrated in separate pools, thereby ensuring a high degree of efficiency.

Non-custodial nature

Since Silo is a non-custodial lending protocol, users always have control over their assets. Therefore, Silo cannot control your invested assets.

Silo Finance: Investment Strategies

To start investing, users should visit Silo App, connect one of the suggested wallets - Metamask, Coinbase Wallet, or WalletConnect, and select a network. After this, investors will have access to a huge number of isolated markets on the platform and will be able to choose the option that suits them. Let's look at two popular options on the Silo App:

USDT on Ethereum 
TVL - $266,9k, Total APY - 28.69%

This market on Silo allows users to deposit their crypto assets to receive rewards. Once the cryptocurrency is placed, the market will allow users to borrow it, while the investor will receive rewards with a total APY of 28.69%. The total borrow APR of this pool is 47.2%.

Source: Silo App

USDC on Ethereum 
TVL - $397,53k, Total APY - 2.28%

Another popular Silo market on Ethereum is USDC, which allows users to provide their assets to receive passive rewards. By depositing their cryptocurrency into this pool, investors receive a total APY of 2.28%. The total borrow APR of USDC on Ethereum is 3.4%.

Source: Silo App

Silo Finance: Risks and Disadvantages

Silo undoubtedly offers users several unique advantages, such as isolated risks, a decent level of safety, the non-custodial nature of the protocol, and many others. However, the platform also has a number of risks that are worth paying attention to before providing liquidity.

Cons

Smart contract vulnerabilities

Even though Silo passed the smart contract audit from ABDK, the risk of undetected bugs still exists. Thus, smart contracts can still contain syntax and economic errors. In addition, since they are written by people, they may have other unknown bugs and vulnerabilities.

Platform complexity

Isolated markets on Silo may be difficult to understand, especially when it comes to beginners and inexperienced investors. Since Silo offers a large number of markets, navigating the platform can be quite complex.

Oracle manipulation

If the oracle price rises, the investor will be credited with an inflated deposit amount, allowing them to borrow more assets than they can cover with collateral in case of liquidation. In addition, oracle manipulation can also lead to cascading liquidations.

Governance attacks

There is also a risk of adding a malicious token asset as a bridge asset to all Silos, which could potentially lead to the theft of all assets held in the protocol. Such attacks can occur when a party obtains enough tokens to make a malicious change through control.

Additional information about the Silo Finance risks can be found in the official protocol documents.

Notum’s Verdict

Silo Finance is a fairly popular lending protocol on Ethereum and Arbitrum, allowing users to easily lend and borrow crypto assets. Its TVL of more than $157 million speaks about the security of the platform and the proper level of trust from crypto users.

Silo uses an isolated pool, thereby creating a lending market for each token, which protects user assets. The protocol also has its own over-collateralized stablecoin XAI, which can collateralized and borrowed in several isolated markets. The token itself can only be borrowed in the Silo Protocol.

Despite some risks associated with contract review vulnerabilities, oracle manipulation, and governance attacks, Silo remains a popular moderate-risk protocol offering many benefits to users and investors.

Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.