SoK: Lending Pools in Decentralized Finance

Abstract

Lending pools are decentralized applications which allow mutually untrusted users to lend and borrow crypto-assets. These applications feature complex, highly parametric incentive mechanisms to equilibrate the loan market. This complexity makes the behaviour of lending pools difficult to understand and to predict: indeed, ineffective incentives and attacks could potentially lead to emergent unwanted behaviours. Reasoning about lending pools is made even harder by the lack of executable models of their behaviour: to precisely understand how users interact with lending pools, eventually one has to inspect their implementations, where the incentive mechanisms are intertwined with low-level implementation details. Further, the variety of existing implementations makes it difficult to distill the common aspects of lending pools. We systematize the existing knowledge about lending pools, leveraging a new formal model of interactions with users, which reflects the archetypal features of mainstream implementations. This enables us to prove some general properties of lending pools, such as the correct handling of funds, and to precisely describe vulnerabilities and attacks. We also discuss the role of lending pools in the broader context of decentralized finance.

SoK: Blockchain Decentralization

“…Wang [2021a] summarizes challenges and potential improvements to the interoperability of blockchain systems. • Applicability: DeFi [Bartoletti et al, 2020, Werner et al, 2021, Xu et al, 2021 is one of the fastest growing use cases of blockchain, fostering a revolution in financial technology. Layer-2 protocols [Gudgeon et al, 2020] are protocols built on top of blockchains that complete offchain transactions while using the blockchain only as recourse for disputes.…”

The Blockchain Oracle Problem in Decentralized Finance—A Multivocal Approach

“…Not to be confused with Liquidity Pools; lending pools are financial applications that create a crypto-asset loan market. Managed by a system of smart contracts and incentive mechanisms, they create advantages for lenders as well as for borrowers [66]. Loans are an essential part of the financial ecosystem, and in the DeFi platforms, it is possible to lend and borrow crypto assets without KYC procedures [50].…”

“…Front-running attacks are due to the natural condition in which the oracle is the first to be aware of critical data uploaded to the blockchain to run a smart contract. Arguably, the early awareness of data gives an important advantage to the oracle data provider [66]. Knowing that an asset price will be sent to a specific platform at a precise time may enable fraudulent operations.…”

SoK: Decentralized Finance (DeFi)

“…Lending and borrowing of on-chain assets is facilitated through protocols for loanable funds (PLFs) [76], [77], which refer to DeFi lending protocols that establish distributed ledger-based markets for loanable funds of cryptoassets. In the context of a PLF, a market refers to the total supplied and total borrowed amounts of a token, where the available (i.e., non-borrowed) deposits make up a market's liquidity.…”