⚙️How Ion Works
A high-level technical overview of the architecture underlying Ion Protocol.
Last updated
A high-level technical overview of the architecture underlying Ion Protocol.
Last updated
Lenders are DeFi users looking to deposit into Ion Protocol and earn sustainable ETH-on-ETH yields. They can select any combination of available markets to deposit into, choosing the counterparty assets that fit their ideal risk profile and yield outcomes.
Borrowers are stakers or restakers who are seeking increased exposure to yield and points. Ion Protocol was specifically designed to provide a more secure and capital-efficient environment for borrowers of staked & restaked collateral. All loan positions are price-agnostic, and their parameters (interest rates, LTVs, position health, etc.) are determined by consensus layer data and secured with ZK data systems.
Ion Protocol can be broken down into three core components: Lending, Borrowing, and Liquidations. Though at the core of many lending platforms, within Ion, these mechanisms were all designed with optimizing the DeFi experience for staked & restaked assets in mind. Rather than designing the protocol with price-based dependencies like the rest of DeFi, Ion Protocol was designed to underwrite ETH-denominated yield and Ethereum-based infrastructure risks specifically.
Composable Markets: Ion inherits the composability of being able to create distinct isolated markets as well as markets of multiple collateral types. This modularity allows users to better minimize systemic collateral risk in the protocol and mitigate negative second-order effects that can arise from including more risk-on collateral. This market flexibility allows markets to have more granularity on the tailoring of risk parameters to the specific characteristics of each collateral asset, such as adjusting LTV ratios and interest rates. Composable markets also offer the protocol more control over newly listed assets to assess their performance and risk profile before considering the inclusion of more risk-on asset types in a single shared pool.
ZKML-Supported Risk Underwriting: Ion Protocol uses a risk analysis engine, Clarity, powered by ZKML that generates validator credit ratings to analyze the propensity of validator subgroups to be slashed. This enables us to properly monitor the state of many validators on the beacon chain. By monitoring this activity, Clarity aggregates provider metrics to better underwrite staked and restaked asset markets to better inform parameterization around staked asset slashing risk.
Flash Leverage: Ion Protocol possesses automated flash loan enabled borrowing strategies that minimizes user friction to access rewards multiples on their collateral. Users automatically source additional collateral via flash loans and swaps and repay debts in the same transaction by borrowing from Ion. The system supports multiple strategies for leveraging or deleveraging, equipped with slippage tolerance for risk management, and the interface helps users identify the most cost-efficient transaction paths.
Yield Reactive Interest Rates: Traditional DeFi interest rate models are set according to specific utilization rates of the supply asset and adjusted via governance in reaction to market dynamics. However, in Ion Protocol's markets, each collateral asset receives a uniquely parameterized interest rate model, regardless if the asset being borrowed is the same. In addition, these markets are specifically designed to support validator-backed assets like LSTs and LRTs which generate yield. For collateral assets that earn substantial returns, Ion's interest rate maturation curves reacts to the yield changes of the underlying collateral to enable borrowers to minimize the fluctuations in their costs while allowing lenders to capture any return to the upside.
Solvency-Based Underwriting: Ion introduces a novel approach to underwriting validator-backed assets. Ion quantifies the solvency of a LRTs and other staked and restaked assets based on the ETH in its provider’s validator reserves instead of depending on price oracles or AMM counterparty liquidity. This mechanism removes volatility and asset de-pegging from being a risk that borrowers are exposed to. In Ion Protocol, borrowers only get liquidated after serious slashing events or if they don't pay their interest, greatly decreasing the risk profile of being a borrower in DeFi.
This means liquidations are triggered by changes in consensus layer state, not by price oracles.
Staking-specific Liquidations (AKA price-agnostic): Liquidations on Ion Protocol consider the underlying value of ETH present in validators that back a representative staked or restaked asset mapped to the validators’ balance. This enables Ion to liquidate positions by assessing changes in the underlying balances of the validators backing a collateral vault rather than by volatile price action. Additionally, because slashing events are inherently more discrete than price decreases, they tend not to cascade quickly (except for correlated slashing events under network-wide collusion). Ion opens Dutch auctions against liquidatable positions to liquidate only the amount of borrower collateral necessary to bring back the vault to a target health ratio, enabling safer loans with minimized liquidation impact for borrowers.