Isolated Modules
Why isolated module architecture was chosen for Tren Finance, and how it works
Last updated
Why isolated module architecture was chosen for Tren Finance, and how it works
Last updated
Any protocol that deals with collateral, whether it be a perp DEX or money market, has to choose between two design options: vs isolated architecture. Some protocols will offer both, but each will be separated within the protocol. We'll explain the pros and cons of both design options, along with why we chose isolated module architecture for Tren Finance.
Isolated modules essentially offer the opposite pros and cons, by sacrificing greater capital efficiency in favor of lower levels of associated risk. On Tren Finance, tokens A, B, C, D, and E would be separate modules based on each asset's unique risk profile, so token B would likely have a lower debt ceiling. But even if each asset had the same debt ceiling of 200K USD, the max loss that the protocol could face in the event token B's flash crash would be token B's debt ceiling amount of 200K USD. Only token B's module would be affected, eliminating the potential for systemic risk.
There is no right or wrong answer in choosing between cross-collateral and isolated module infrastructure. The decision is dependent on a protocol's goals and product market fit. A lending protocol that deals with blue-chip only assets may decide that there is very low systemic risk due to the limited number of collateral assets it offers, and choose a cross-collateral architecture.
The TrenBox contract acts as a secure container where you can deposit collateral to borrow XY and manage your loan. Each TrenBox is linked to a smart contract address, and each address can have only one XY per collateral type. If you're familiar with Vaults or CDPs from other platforms, TrenBoxes function similarly.
You can close your TrenBox at any time by fully paying off your debt.
Cross-collateral pools offer greater capital efficiency, but with generally higher levels of associated risk. With a cross-collateral lending market, for example, a protocol (the lender) could accept a total of 5 tokens (tokens A, B, C, D, E) as collateral, with which users (the borrower) can borrow up to 1 million USD (). A user could deposit tokens A, B, and C for a combined collateral value of tokens A + B + C, and use this to borrow asset(s) offered by the protocol. This offers greater capital efficiency, as the user can use the combined value of tokens A, B, and C as collateral. However, if token B were to suddenly flash crash without recovery for whatever reason, this exposes the protocol to systemic risk. If a significant percentage of the overall collateral pool consisted of token B, then borrowers would not be able to repay their loans, leaving the protocol in . If Token B made up 50% of the collateral pool, the protocol would face losing half of its debt ceiling (500K USD in this example). Even if Token B made up a lower percentage of the collateral pool, the overall collateral pool value could still be worth less than the loans issued. To cover some of the bad debt, a protocol could make the decision to liquidate or partially liquidate the collateral pool, which could even affect users who hadn't used Token B as collateral.
Tren Finance, on the other hand, is a new type of protocol that (re)collateralizes assets such as LP tokens, money market deposits, and restaked assets. For a protocol like Tren Finance, isolated modules make the most sense due to the high levels of risk management that it offers. Even if a collateral asset has high levels of , , , and (link to all of these risk pages), isolated module infrastructure indirectly helps alleviate these risks simply due to its ability to contain risk and avoid systemic debt.
Isolated modules contain the risk to individual pools, hence protected deposits. If there is an issue with one asset, it only affects that asset and not the protocol. In a cross-collateral pool with Tokens A, B, and C, even if you just deposit Token A, you may still be affected if Token B flash crashes. With isolated modules, this is not the case. Assets on Tren Finance are also not lent out to other borrowers, as is the case with borrowing & lending protocols, and avoids risks of governance attacks. Furthermore, Tren Finance does not have , so deposits really are protected.
Isolated modules alleviate , , , and .
All tokens on Tren Finance are paired with XY, creating a single market for every token asset. This approach prevents and enhances protocol efficiency, contrasting with pure lending pair methods where each new pairing generates a separate lending market.
While some protocols allow the creation of markets for any asset, attracting liquidity is a separate challenge. To entice lenders, these protocols often offer higher interest rates to offset the risks. Instead of this approach, assumes responsibility as the sole lender of the protocol and the protocol incentivizes participants who stake XY and hold veTREN. The protocol, acting as the sole lender by minting XY for each pool, allows the DAO to capture 100% of the supply side interest. This model enables the protocol to adopt a loss leader strategy, offering lower collateral rates than competitors to drive growth, while offsetting losses with interest from other assets. Stakers of XY benefit by gaining a diversified lending position, providing a liquidity backstop in the event of bad debt.
TrenBoxes maintain two balances: one for the collateral asset and another for the debt, which is denominated in XY. You can adjust these balances by adding collateral or repaying debt. As you make these changes, your TrenBox's ratio will be updated accordingly.
