The Starkware team is building the next-gen ETH Layer 2 with StarkNet, and zkLend might be the best way for you to participate.
But what is zkLend? What do Artemis and Apollo have to do with it? And how can you participate in this star-filled protocol? We’ll cover all this and more.
Why StarkNet?
As outlined in the project’s White Paper, the team behind zkLend identified the booming DeFi market in 2021 through what is lovingly known as ‘DeFi Summer.’ This period saw an explosion of various L1 and L2 chains in response to Ethereum’s scalability problem.
Many of these alternative chains offered a faster and cheaper alternative to Ethereum’s costly gas fees and constant network congestion. However, these gains often came at the cost of security, as these alt-chains often have far fewer validators and thus greater centralization than Ethereum.
This is where StarkNet comes into the picture. By building on StarkNet, the zkLend team can benefit from the greater scalability and speed of an L2 while maintaining the security of Ethereum.
If you want to know more about Starkware and Starknet, I highly recommend you check out our write-up on how their zkSTARK technology is changing the world of L2s.
Why zkLend?
zkLend noticed the increasing institutional literacy in DeFi and came to two fundamental conclusions.
- Ethereum is unrivaled in terms of security and decentralization
- There is a huge opportunity in institutional DeFi
The DeFi market is merely a drop in the ocean compared to traditional finance (TradFi). For example, the total DeFi market capitalization amounts to only $145B, compared to a total global equities market cap of over $100T.
If even a single-digit percentage of TradFi investment made its way to DeFi, it would bring trillions more dollars into the industry.
The zkLend team targets this massive chunk of capital with unique segregated money markets. One for retail and one for institutions, both backed by the security of Ethereum.
Accessing zkLend
StarkNet and by extension, zkLend, is not EVM compatible. So, you cannot access the service through your standard Metamask wallet. You will need to generate a StarkNet wallet. A list of compatible wallets can be found here.
Once your wallet is generated, you will need to bridge to StarkNet from Ethereum. A list of bridges can be found here.
The Fundamentals
zkLend is a money-market protocol that utilizes zkSTARK technology to maximize scalability and retain Ethereum’s security and uncompromised decentralization.
The platform enables any users to deposit, borrow and lend in an efficient and decentralized manner. Users can earn interest on deposits and borrow assets seamlessly.
zkLend caters to both institutional and DeFi users, providing a permissioned and compliance-focused solution for institutional clients (“Apollo”) and a permissionless service for DeFi users (“Artemis”).
Fundamentally, both Apollo and Artemis function similarly but will remain independent of each other with separate capital pools and governance for each.
Artemis – For DeFi Users
Artemis enables users to deposit assets to earn a yield, with the option to utilize these assets as collateral to borrow, similar to other money-market protocols such as Aave and Uniswap.
Lend
Users can deposit various digital assets into an asset pool to provide liquidity for the market. In return, users will receive zTokens representing their deposited pool share. Over time, the user’s zToken balance will grow to account for the interest earned during this period. The zTokens represent claims on the deposit pools and, in some cases, can be used as collateral to enable borrowing.
Users can deposit any amount into a pool with no lock-up period.
Here’s an example using the above screenshot’s rates:
- Bob deposits 100 USDC and receives 100 USDC zTokens, representing his stake in the liquidity pool. Bob will accumulate an additional 72.29 USDC tokens if he leaves his funds in the lending pool and the APY remains constant. At any time, Bob can redeem his USDC zTokens for USDC.
Borrow
Users can borrow assets across the various money markets using their deposited assets as collateral. This is an essential function of any money market and maximizes liquidity pool utilization.
The borrower’s financing rate will depend on the interest rate model, which can be found on page 19 of the protocol’s White Paper.
Flash Loans
Borrowers can leverage reserve pool liquidity without collateral to exploit arbitrage opportunities in the market as the loan is paid back within the same block. Borrowers will pay a fee for their flash loan, with the proceeds distributed evenly back to all pool liquidity providers they borrowed from. Artemis/Institutional users will have access to this feature (where applicable).
Asset Pools
High-risk assets will be monitored more closely than their less volatile counterparts to compensate for price downturns and market risk.
Assets with similar risk characteristics and/or high correlation in price movement will have comparable collateralization ratios and interest rate curves, while assets with high volatility may be restricted from being used as collateral but only available for lending and borrowing.
zkLend also employs ‘core markets’ and ‘isolated markets’ pools to separate interaction and risk between stable assets such as USDC and ETH and variable assets such as StarkNet ecosystem tokens, respectively. The protocol will review the assets periodically to determine whether they can move to become collateral.
This segregation of markets allows for greater risk management and a more stable market.
Apollo – For Institutional Clients
Apollo serves as the platform for institutional users in DeFi targeting well-established operations such as venture capital firms, hedge funds, market makers, and decentralized autonomous organizations (DAOs). Apollo will function similarly to Artemis but will feature key differences in its operation.
Whitelisting Layer and White Listers
The key distinction between Apollo and Artemis is that Apollo is only accessible to permissioned users who go through know your customer (KYC)/know your business (KYB) processes approved by the zkLend team.
The whitelisting layer ensures that only permissioned participants can access pools for borrowing and deposits. Permissioned borrowers can create pools with custom requirements on loan terms and criteria for lenders looking to fund said pools.
On the borrower’s side, the whitelisting process includes multiple compliance checks, stringent legal due diligence and administrative onboarding procedures, and tailored technical procedures for access within the platform.
One or more third-party providers will manage all due diligence. The decision to whitelist borrowers will be determined by the zkLend team, with plans to transition to a DAO model planned for the future.
The zkLend team plans to create a DAO that will deliberate on the regulator-approved and/or licensed whitelists that will be allowed to engage with the Apollo market.
The institutional onboarding process will feature on-chain and off-chain components to provide background and reference information on prospective clients. The zkLend team will have dedicated institution and compliance teams to ensure product needs are met and compliance requirements are established before whitelisting.
ZEND Token
The protocol’s yet-to-be-released token is ZEND. The token will be an ERC-20 token and an interoperable utility token. Users can stake their ZEND tokens in the protocol’s ‘safety module’ and receive an equivalent amount of staked Zend (stZEND).
This safety module is designed to act as a risk management tool in a liquidity shortfall, primarily a safeguard against extreme asset price fluctuation, liquidity squeeze events, oracle issues, and liquidation risks.
Those that actively participate in zkLend’s safety module will enjoy
- Revenue sharing
- Emission rewards
- Governance rights
The cooldown period for converting stZEND back to ZEND is ten days upon the trigger. Rewards for stZEND, however, will be claimable in the form of ZEND directly.
Additional use cases for the stZEND token may include membership perks, enabling holders of stZEND a discount (with a cap) on their borrowing and lending activities on Artemis.
Governance
ZEND will operate as the governance token for Artemis and Apollo. Holders of stZEND will be able to vote on matters that affect either or both protocols, with voting rights weighted proportionally to the number of ZEND tokens staked.
Users will be able to propose and vote on issues such as listing new asset markets, modifying interest rate models, incentive thresholds, and deprecating old asset markets.
Conclusion
zkLend will be fundamental to the success of the DeFi ecosystem on StarkNet. With its institutional lending pools, stringent risk management, and zkSTARK integration, it is well-positioned to capture a significant chunk of Ethereum DeFi. Check out this project before it launches to stay ahead of the game and, as always, DYOR.
Further Information
- zkLend Twitter – The one-stop social media page to follow. All updates will be posted here.
- zkLend Discord – The best way to learn about the protocol is to engage with the community through Discord. Don’t be shy, and feel free to ask questions.
- zkLend Medium – In-depth articles, updates, and AMAs all in one handy location.
- zkLend Telegram – If you’re unfamiliar with Twitter or are an avid Telegram fan, you’ll find all the alpha in this channel.
- zkLend Linktree – Everything zkLend related, collected onto one page for your perusal. Check out the Spotify link for all AMA recordings and discussions with the heavily acclaimed ZEND&FRIENDS show. Incredible insight from top names within the DeFi world and Starknet system.
- zkLend Intern – The must-follow Twitter account for all your zkLend threads, memes, and GIFs. Find out the need to know from the most recent (and best) hire at zkLend.
- zkLend White Paper – Study the technical and financial fundamentals of the project. A must-read for sensible DeFi users.
