July has been one of the most productive months for Honey Labs, so much so that it’s easy to lose track of everything we’ve been building. This, along with a small nudge from Gaius, inspired us to create monthly reports for the Honey DAO.
Without further ado, let’s dig right in.
Our flagship product, NFT lending markets on Solana, has been deployed to devnet. If you’re in the DAO, check it out here.
While the majority of programs were completed back in May, the team has spent time redesigning liquidations from the ground up, allowing us to create the most sophisticated liquidation engine of any NFT lending protocol (and I’d even argue, of any DeFi lending protocol).
This is a major part of our claim to being “the most scalable NFT lending protocol”. To connect the dots a little bit, we need to understand how debt works in DeFi. Below is some context to help better understand liquidations and debt, feel free to skip it if you’d like.
Loans in DeFi can be thought of as mortgages in the real world, where the collateral is worth more than the debt being issued. But how many mortgages can be issued by a single bank? If every home in America had a mortgage, and the housing market began to deflate, banks would find themselves with more collateral than they can sell. Why? Let’s start by visualising the housing market as functions of supply and demand. Here, the supply is anybody selling a house, and the demand represents future homeowners looking to purchase a house.
During a liquidation, debt is converted into supply, when the underlying collateral (a house) is listed on the market by the bank. Whilst the demand stays constant (or decreases) more supply is introduced into the market as liquidations continue to occur.
The problem is the same with NFTs. The more NFTs you’re willing to accept as collateral, the more NFTs would have to be theoretically sold (and sold fast) for lenders to be made whole when the market dips.
We have a few problems here. How can we make sure that the incoming supply matches with demand as fast as possible? How can we make sure we don’t issue more debt than the demand could absorb in a market downturn?
There are of course quantitative answers to these questions, which we’ll be publishing in August with our Honey Research Center.
Let’s go over how the revamped liquidation design allows us to tackle these issues, by preparing liquidations before they happen (matching supply and demand before supply is introduced into the market) and creating mechanisms for backstop liquidity (aggregated demand) to safely issue more debt, and thus be far more scalable.
So how does it work ?
The updated liquidation engine now has four core components instead of one.
Let’s start with NFT bidding.
Liquidations will now be at the forefront of our DAO, as the honey.finance app will feature a new liquidations page. On the liquidations page, users will be able to see all open positions across Honey’s lending markets and bid on them.
Collateral with lower health factors, and thus closer to their liquidation threshold, will feature at the top of this page. As the position approaches this limit, bids can be placed by any user to seize the collateral at a discount.
Collection wide bids
To create an even more resilient safety net for liquidations, collection bids allow users to not only bid on individual NFTs approaching liquidation, but to place buy orders across an entire collection.