Breaking free from collateral chains: Nolus Protocol

Crypto lending has always been a core pillar of the DeFi space, allowing users to lend and borrow digital assets. Lending holds a noteworthy 18% market share in DeFi*, representing one of the largest use cases (*June 14, 2023 - Source: defillama.com).

Nevertheless, the efficiency of crypto lending is somewhat restricted due to the collateralization requirements. Users must lock up a greater value of crypto as collateral than the amount they intend to borrow. This hurdle has limited the accessibility of crypto lending to a wider audience.

Recognizing this challenge, Nolus aims to bridge the gap and make crypto lending more inclusive for users. By addressing the inefficiencies and complexities associated with DeFi lending, Nolus aims to remove those barriers and finally enable a hustle free lending experience. Let’s dive in.

What exactly is Nolus?

Nolus is a permissionless proof-of-stake (PoS) blockchain built using the Cosmos SDK (Tendermint Core) and WebAssembly (WASM) smart contracts. After months of testing, Nolus launched its public mainnet in May 2023 and expects a fully working protocol in the next weeks.

Being an appchain on Cosmos, Nolus needs its own token, $NLS. According to the whitepaper, $NLS will serve multiple functions. It allows users to enjoy a reduced interest rate by staking $NLS, provides eligibility for special down payment options, provides governance rights for holders, acts as the currency for transaction fees on the network, and finally acts as reward for validators. $NLS will be made available to public on June 15, 2023.

The core and main offering of Nolus is the so-called DeFi Lease. A DeFi Lease defines a money market between lenders, seeking to earn yield on stablecoins, with borrowers who want to borrow more digital assets than their current equity allows.

DeFi Lease

Nolus DeFi Lease enables users to secure financing up to 150% of their initial investment while maintaining ownership of the coveted digital assets. The user’s entrance into the Lease requires only a single payment. Early repayment fees, monthly charges, penalties, or additional fees are not charged by the protocol, only interest fees. Once the Lease is fully repaid, the user is granted full ownership of all leased assets.  

When a DeFi Lease is initiated, the down payment is locked in a smart contract, serving as collateral. The interest rate for the borrower remains fixed throughout the lease contract, ensuring predictable cash flows and yield distributions for lenders.

Nolus Protocol operates on a cash basis model, where actual yield is rewarded to lenders. The interest accrued from DeFi Leases is collected at specific intervals, and if not paid, it is automatically deducted from active DeFi Lease positions.

To ensure risk mitigation, the Nolus DeFi Lease imposes a requirement on users. They must maintain a margin between the total debt and the current price of the digital asset locked in the Lease contract. This means that at any point the amount owed should be less than the current price of the asset:

Current Loan Debt Due < Current Price of Digital Asset

In case of asset depreciation, the user will be notified at various thresholds off the liquidation price to prevent liquidation. If the price of the digital asset continues to decline, the Lease contract will initiate only a partial liquidation of the user's position to restore the loan's balance to a healthier level, not liquidate the whole position as is common in many protocols. In case of severe downturns, the entire position will be liquidated.

However, there is also a potential benefit for users if the price of the locked digital asset appreciates. They can take advantage of this price increase to repay the loan (partially or fully).

These risk management measures are put in place to strike a balance between the benefits and potential risks of the DeFi Lease, providing users with favorable conditions while maintaining a prudent approach.

Other technological pieces

Nolus plans to utilize the Inter-Blockchain Communication (IBC) and Interchain Accounts to access different liquidity hubs without causing fragmentation across various blockchains.

IBC is a protocol that enables different blockchains to communicate and interact with each other in the Cosmos ecosystem, allowing for transfer of assets, data, and message. The Axelar 9 gateway further extends this functionality, enabling transfers across all supported EVM blockchains.

On the other hand, Interchain Accounts enable different blockchains to access application features and carry out actions native to other chains. Unlike traditional token transfers between chains, Interchain Accounts allow entire blockchains to control accounts on separate chains. The protocol's smart contracts handle the complex process of sending and swapping assets on targeted AMM blockchains or applications.

Another planned roadmap item is to leverage liquid staking derivatives (LSDs) to create self-repaying loans to enhance the efficiency of lending and borrowing.

Advantages and challenges

As mentioned, under-collateralized loans are one of the main USPs of Nolus, providing financing up to 150% on the initial investment.

In addition to this, Nolus aims to mitigate the risks of liquidation (claiming) having a 40% lower liquidation rate compared to the market average.

While Nolus brings these innovations, there are some potential disadvantages to consider. Compared to the Ethereum ecosystem (Arbitrum, specifically) where the DeFi landscape is currently experiencing a renaissance, Nolus may have limited liquidity options. It is true that IBC and Interchain accounts will somehow mitigate this fact, but liquidity is still not as important as in the Ethereum ecosystem.

Also, one thing important to consider is Nolus promoting the adoption of the Nolus DeFi tokens within the broader DeFi ecosystem. This could be achieved through their inclusion in Osmosis pools (one of Nolus' partners) or, preferably, through the direct usage tokens in other protocols.

Conclusion

In conclusion, Nolus presents an innovative solution to address the existing issues in lending and borrowing and stands out as a noteworthy project not only within the Cosmos ecosystem but also in the broader DeFi landscape. We have witnessed projects like DYDX migrating from Ethereum to Cosmos to benefit from improved scalability. Nolus has the potential to leverage similar advantages, delivering scalability, enhanced security, and innovative financial products within a single platform.

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