Launching Warp V2: Custom Lending Pool Generation With Warp Finance

Warp Finance
5 min readApr 20, 2021

DeFi lending and borrowing on assets outside of the norm is near-impossible. To answer the call of the community, Warp is unveiling the capability for custom isolated lending pairs, which can be built by users and are optimized for the best interest rates and lowest gas fees.

It’s an exciting time for Warp Finance. Warp initially launched as a novel use case for liquidity provider (LP) tokens, but we’ve expanded to optimize the entire lending process. We’re working at warp speed to build a platform that seamlessly integrates with Uniswap V3 and will solve some of the lending problems that plague DeFi. New and advanced functionalities will improve connectivity between blockchain layers and expand lending possibilities.

Now, we’re eager to announce that we will enable users to create their own lending pairs and pools on our platform. This provides space for new kinds of assets and lets users build pools custom-tailored to fit their needs.

The Current State of DeFi Lending:

Lending protocols are integral to the continued functioning of the DeFi space. As they facilitate trustless lending and borrowing of digital assets, lending protocols are crucial in yield farming strategies and provide exposure to assets without the need to actually buy them.

The leading projects in crypto lending dominate in terms of total value locked (TVL) but are plagued by large, protocol-inherent problems. They all have set lending pairs and limited assets, meaning that only specific and specified assets can be supplied and borrowed. If we take Maker as an example, users can only borrow DAI. To be fair, there’s a reason for this: Aave and Compound are set up so that risk is spread over the whole protocol, meaning that if even one of the assets drops in price substantially, it affects the entire ecosystem.

However, this system of risk distribution ultimately limits a user’s options. Under this system, the protocol, rather than the user, is the arbiter of how much risk one can take on and what they can trade.

Goliath protocols also suffer from goliath gas fees and non-specific interest rates. Community members have frequently spoken out against the high gas fees that accumulate with even the smallest of tasks. Interest rates are also illiquid and limited in their range. Compound has a maximum interest rate of 50% and a minimum interest rate which stops before it hits zero.

The Warp Solution:

We’re working to systematically target the major problems that we’ve identified with these dominant protocols. As both developers and community members, our team is dedicated to building a lending solution that brings a new level of utility and customizability to DeFi.

As a solution, we are releasing functionality for isolated lending pairs in the Warp protocol.

Soon our users will be able to build customizable lending pairs according to their choice of layer and asset type. Instead of being limited to set asset types, any digital asset a user may have can be included in a lending pair. These pairs are distinct from the rest of the ecosystem, letting users choose the risk level and asset exposure best for them. Each pool’s risk is isolated, guaranteeing that if a specific coin goes haywire, only that pool is affected.

In the example of a pool between DAI and ETH, users will first deposit the tokens and select the pool’s parameters, such as the collateralization ratio and fees. The pool will then launch, enabling borrowing and lending of DAI and ETH, using one as collateral to receive a loan in the form of the other:

Users can now make individual decisions for lending. This increases transparency and allows users to carefully consider risk instead of putting them at the mercy of the ecosystem.

A particularly exciting opportunity that results from isolated lending pairs is the ability to short irregular coins and tokens.

There are not many ways to short less traded tokens, and with this solution it would unlock the capability for traders to structure their portfolios in innovative ways. The DeFi community has been vocal about their desires for increased ability to margin trade with crypto assets. Now, users will be able bet that an alternative asset is overvalued in addition to betting it will go up.

To short a token, users create a pool with one asset they want to short, and another that they think will remain stable or increase in value. After putting the stable asset in as collateral, the user would borrow the risky asset and directly sell for the stable asset. By the end of the loan, which could be as short as the time for a single block, as in a flash loan, the user would be able to buy the risky asset at a reduced price and make a profit. This process can be repeated to maximize gains or be combined with other DeFi strategies to increase yield.

Additional benefits of Warp’s infrastructure come with our efforts to optimize DeFi lending.

Our first step is to remove upper and lower bounds on interest rates so the interest rate matches supply and demand. Moreover, the interest rate will be optimized to avoid utilization hitting 100%, which deactivates borrowing in-pool and has been a proven issue for other protocols. The rate will be responsive to supply and demand: it will drop to zero to incentivize borrowing when needed, and increase to attract lenders when necessary.

User freedom is a top priority, so interest rate parameters for each pool are customizable, like our oracle system; pool creators can use their preferred oracle.

We’ve also worked to optimize gas fees, targeting a lower gas usage so Warp is affordable for every user. We do this by encoding our contracts to reduce the types of assets supplied or borrowed, using less gas. We understand that high gas fees are DeFi’s biggest barrier, and we’re committed to making the space more affordable and user-friendly.

Additionally, reflective of our commitment to Layer 2 functionality, we will enable users to lend and borrow Layer 2 assets. We are working to realize efficient value transfer across layers, and introducing lending pair functionality is an important step in that direction.

With our new implementation, Warp is building a lending protocol that is cheaper, smarter, and more responsive. There are so many opportunities that arise from lending pools, and we expect our users to come up with creative and complex DeFi strategies. Combined with the drop of Uniswap V3, which will be fully Warp-compatible, the next chapter in DeFi is on our doorstep.

This new infrastructure also enables a governance functionality.

Warp token holders will have the ability to vote on new lending pools, given specific parameters and oracle availability. That way, Warp users are more in control of their own financial capabilities than ever.

Next Steps:

Project launch is coordinated with the launch of Uniswap V3 in May, 2021. This project is currently mid-audit. After the audit is completed, we will begin running tests. Security is our utmost concern, and we take every step to make sure additions are fully ready to use at launch.

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Warp Finance

DeFi’s first isolated lending protocol that optimizes yield-bearing receipt assets, and much more!