Fringe’s Non-Rehypothecating Model

Understanding the Superiority of Fringe’s model in DeFi Lending

In the dynamic realm of Decentralised Finance (DeFi), Fringe Finance emerges with an innovative non-rehypothecation model. This piece delves into how this model diverges from the prevalent rehypothecation practices in DeFi lending and its implications for risk management, lender confidence, and borrowers’ rights.

Rehypothecation in DeFi: An Overview

Rehypothecation in DeFi involves using assets posted as collateral for other yield-bearing activities, like lending to other users. While this offers yield on the collateralized asset and, therefore, the ability to lower the actual borrowing costs, it introduces significant risks.

Understanding the Risks of Rehypothecation

Rehypothecation, common in both traditional finance and DeFi, raises several risks:

• Liquidation Challenges: Because assets are being lent out, they might not be available for liquidation in volatile markets, risking lenders’ capital.
• Restricted Access for Borrowers: Borrowers may face delays in accessing their collateral if it’s lent out, a risk present in the current model used by lending platforms.
• Exposure to Default Risks: Borrowers may unwillingly share lenders’ exposure to default risks, whereby the users who borrow collateral become insolvent.
• Collateral Shorting Risks: Rehypothecated collateral can be shorted, potentially devaluing it, to borrowers’ disadvantage.
• Governance Rights: Rehypothecation can lead to misuse of governance rights associated with certain collateral assets. If the collateral is loaned out, those other users can influence governance decisions that negatively affect the token’s price, to the borrowers’ disadvantage.
• Rehypothecation greater than asset supply: Rehypothecation can result in the total borrowing of an asset being greater than the total supply of that asset, which makes liquidations inefficient and could lead to the loss of borrowers’ collateral assets.

Fringe’s take: A Distinctive Model with enhanced security

In contrast with many DeFi platforms, Fringe ensures that the collateral borrowers provide is securely locked and not used for other purposes. This enhances our users’ risk management and maintains borrower control over their assets, though slightly less capital-efficient. Fringe’s model ensures collateral availability at all times, crucial during market downturns.

In addition, Fringe gives borrowers the option of earning yield on their collateral by supporting yield-bearing assets as collateral, like wstETH and ERC-4626 vault tokens.

The ERC-4626 is a standard interface for tokenized vaults in the Ethereum ecosystem. It was designed to create a unified framework for vault-like contracts, which hold other types of assets. The key aspect of ERC-4626 is its focus on representing the shares of a vault as a fungible token. This tokenization allows users to easily trade, transfer, or otherwise manage their share of the assets held in the vault. By adhering to this standard, different vault implementations can ensure compatibility with a wide range of tools and services in the DeFi ecosystem, making it easier for users to interact with different vaults and for developers to integrate these vaults into their applications.

These are considered lower-risk compared to traditional rehypothecation:

Wrapped Staked ETH (wstETH): Its liquidity in external markets mitigates rehypothecation risks.

ERC-4626 Vault Tokens: Given there are no external markets for ERC-4626 Vault Tokens, Fringe lists these tokens based on the assurance of asset redemption by the ERC-4626 vault, reducing associated risks. Only ERC-4626 vaults that guarantee the availability and redemption of underlying assets will be listed.

By enabling assets like these, Fringe allows borrowers to increase their capital efficiency without resorting to rehypothecation inside the platform.

Conclusion: A Paradigm Shift in DeFi Lending

Fringe’s model offers lenders better liquidation assurances and lower insolvency risks. Borrowers benefit from guaranteed collateral availability and reduced risks of collateral loss. This confidence translates into more capital supply and potentially lower interest rates for borrowers.

Fringe’s non-rehypothecation model challenges the high-risk strategies in DeFi lending, offering a safer, more stable alternative. It caters to those seeking reliable investments in DeFi, ensuring control and safety of collateral assets. The model provides stability and security, making it an attractive choice in the DeFi market.

Fringe Finance — DeFi for everyone.