In this article, I want to explain two concepts for tackling liquidity fragmentation in DeFi lending and widening the opportunity space beyond lending pools:

• Lean Lending Liquidity

• Thesis-based Lending

For the sake of the article, I’ll assume the reader is familiar with currently available DeFi lending solutions and on a high-level with the general concepts behind them (e.g. lending pools, utilization function, p2p lending, perpetual and fixed-rate loans, collateral liquidations, etc.). For TL;DR scroll to the bottom.

Lean Lending Liquidity (LLL)

DeFi lending today - Lending pools:

Today, DeFi lending predominantly happens through lenders (suppliers) deploying funds into dedicated pools. These pools are either:

• “system-wide” exposing one to protocol-wide preselected portfolio of collateral assets (eg. AAVE), or

• “isolated” where capital exposure stays within pool-specific collateral assets. (eg. Morpho)

Within these encapsulated systems, liquidity is leveraged quite effectively - pool utilization parameters (or dedicated curators) set lending rates and liquidation bounds for the particular pool so participation for both lenders and borrowers is quite simple, as complexities are abstracted by programmatic parameters or curators (with varying custodial risks).

The hurdle is that these pool systems only work effectively in already liquid markets, and the various lending protocols inevitably compete to attract the very same supply capital and lenders. Simply put, as a lender you have to choose one of these systems or jump from one to another, incurring switching costs - including the time spent selecting the one with the most favorable rate in a constantly changing market or an intermediary to do this on your behalf.

Rates on these protocols usually follow market standards, as a result majority of the capital remains committed in perpetuity in a given pool, while other protocols try to incentivize switching to their pool by offering extra incentives like points or tokens - theoretically and sometimes practically increasing the returns for the lenders. In extreme situations, new protocols even pay liquidity partners directly to “compete”.

This is the status quo: first lenders deploy capital into a pool, and the money sits in that pool until borrowers utilize it. Such liquidity is only available within the constraints of the particular protocol.

What is Lean Lending Liquidity (LLL) and what does it solve?

The goal of Lean Liquidity is to put unutilized lending capital to work at the time of demand. Under LLL, funds are pulled from an arbitrary source to be fully utilized on demand whenever a new market opportunity emerges. This can happen in the contexts of both idle capital sitting a wallet or capital deployed to a lending protocol.

In the context of lending pools, Lean Lending Liquidity aims to find use for the yet unused portion of the lending pool beyond the barriers of that particular pool. This allows the capital allocator to keep earning a baseline yield in a pool of their choosing, while unlocking a path for that capital to be leveraged according to their own thesis.

This approach may seem extractive, but the effect is actually synergistic: it further contributes to increased pool utilization (removing the unutilized portion), effectively increasing yield for everyone in the pool.

How is it done?

Technologically, it’s very simple. The liquidity supplier can delegate withdrawal rights to another smart contract (LenderHook), which specifies the terms for requesting funds from the pool on behalf of the supplier. This does not mean a human intermediary but rather allowing data driven triggers to move the funds into another protocol such as (but not limited to) a p2p loan with higher returns than what the pool provides.

In the context of PWN the LenderHooks allow to sign PWN compliant p2p lending offers with the funds from AAVE, Compound or Morpho - exposing the lender to higher yield deals - without the necessity of having to leave the pooled protocols to do so. Keeping the yield until a better deal emerges. See Figure 1. for visual explanation.

Imagine this scenario:

Alice deploys 100,000 USDC into AAVE to earn ±2.45% APY. She unlocks the LLL to PWN, enabling her to fund p2p loans with an APR above 10% against assets she understands well - let’s say stETH Pendle PTs or her favorite NFT collection.

She then signs commitments to PWN offers without having to send the funds anywhere. Once a deal emerges on PWN, the funds are moved from her AAVE position directly, meaning she doesn’t lose any accrued interest during the deal discovery period.

Everyone benefits: Alice turns her 2.45% APY into 10% APR for 90 days, and AAVE supply gets further utilized, increasing returns for everyone else. Once the loan is repaid, the funds flow back to AAVE, maintaining the standard industry rate. Nice, right?

Now, let’s explore how to leverage LLL effectively in p2p lending:

Thesis-based Lending

Here we are getting into PWN specific functionality. P2P (order-book) lending is challenging. Protocols like ETHLend (now AAVE) learned this the hard way, which led them to invent lending pools - making them the most used lending solution in DeFi today. For highly liquid assets, pools provide a simpler borrow/lend solution. However, pools have a downside: they rely on automated/incentivized liquidation mechanisms. These mechanisms not only constrain pool usage to liquid assets but also make it difficult to use unique or complex assets as collateral.

Moreover, there’s a proven demand for fixed-rate loans with no liquidations (aka Lombard loans) and for leveraging more complex, synthetic assets such as LP positions, fixed-rate vaults, and NFTs. This is where p2p lending shines - it’s a much more democratic and flexible approach to DeFi lending and it unlocks the end-game of DeFi composability for complex tokens.

At PWN, we have first focused on enabling the lending utility for every token using the p2p mechanism and like others we also learned the hard way that setting the lending terms can be challenging for both lenders and borrowers. Lenders are used to the convenience of simply clicking a button to “earn yield” without sculpting every single offer or setting individual terms for similar assets in a pool, but this also comes with an opportunity space. The complexity of deal making remained to be one of the blockers for LLL to unlock liquidity in p2p lending as well. That’s until now.

This is where Thesis-based Lending comes into play. Instead of committing to a specific p2p offer and setting individualized deal parameters, a “Lending Thesis” allows for a broader, generalized commitment to combination of collateral assets and provided terms with one single signature while maintaining the full flexibility of the p2p lending mechanism.

For example, a lender can say:

“I’m willing to lend against any ETH-based liquid-staking derivative at 70-80% LTV and 4% APR for 60 days, using any of my stablecoins on any chain,” or “lending against any bluechip NFT at 40% LTV and 20% APR.” And simply commit to such a thesis in one click.

How is it done?

A Lending Thesis encapsulates a multitude of commitments to a combination of collateral and credit assets (or funding sources via LLL) with fixed terms for a given duration, all signed with one signature. This approach abstracts away from individual p2p offers, exposing lenders to entire asset classes like LSDs, bluechips, LPs, etc. with industry rates. See Figure 2. as an example setup:

From Curated Lending Strategies to Individualized Lending Theses

Lenders will be able to subscribe to a existing lending strategy, copying industry rates provided by curators, or form their own thesis and event offer it to others in order to earn a cut of the fees generated by their selections.

The first step is to enable curated Lending strategies - where a curator sets the competitive market parameters for other to simply subscribe to. Think of this as an equivalent of copy-trading (or copy-lending) someone else’s strategy. The second step will be to enable anyone to craft their own Lending Thesis - as complex or simple as they desire fully leveraging the universality of PWN.

On the borrower side, nothing changes—borrowers can simply accept the terms lenders provide or make their own requests with terms of their choosing.

Summary

We’ve developed both solutions in response to community and user feedback gathered over the last 12 months. These solutions address the hurdles people faced when utilizing existing lending solutions or trying the back-to-the-roots p2p lending deals on PWN. The result is the merger of these two components, enabling broader capital utilization and effective liquidity transfer within our tokenized ecosystem, without opportunity costs.

To summarize:

• Lean Lending Liquidity (LLL) allows soft-committing rather than hard-transferring funds for exposing lenders to new opportunities with higher yields while they keep getting base-yield from pooled protocols. .

• Thesis-based Lending enables mass-commitments toward an arbitrary set of collateral tokens, using any source of lending capital - including existing lending pools (AAVE, Compound, Morpho) with one signature.

The Figure 3. explains how are both concepts applied to the PWN p2p lending protocol, naturally expanding the basic p2p lending functionality.

The combination of the two makes PWN the perfect transfer hub to better distribute liquidity within our ecosystem and once it serves its purpose and is repaid, bringing it back toward its strong foundations of existing lending liquidity protocols. Imagine contributing to the economic growth of your own crypto niche by providing liquidity to that community at your comfort level, with ease and no opportunity cost to you. Bootstrapping the crypto-native economy one community at the time. That’s what we built PWN for.