Lending vs Swapping

Examining the Difference Between Lending and Swaps in DeFi

There are two fundamental building blocks of DeFi:

• On-chain Lending (lending networks like Compound, Aave, and CREAM; and other lending protocols like MakerDAO and Liquity)

• On-chain Swaps (Automated Market Makers like Uniswap and Balancer)

While they are equally important for the success of DeFi, they offer different levels of inclusiveness. Although we won't examine how swaps work on a technical level, we will cover a few differences between lending networks and AMMs.

Permissioned vs Permissionless

State-of-the-art AMMs (eg. Uniswap, Balancer) offer permissionless listing for new tokens. This means anyone can create a Pair (or a Pool) for whichever tokens they’d like, and the new Pair immediately gets added to Uniswap’s UI. In this way, any project can enjoy on-chain liquidity for swaps from its infancy, without passing anyone’s approval or paying a listing fee.

On the contrary, the prominent lending networks (eg. Compound, Aave) require a governance decision in order to add a new MM. Passing a governance decision to list a new token is incredibly unlikely, so only a handful of privileged tokens can enjoy lending and borrowing services.

Why is it so Difficult to List a Token on a Lending Network?

Lending networks and AMMs handle risk in very different ways. Let’s look at Uniswap and Compound for example.

Uniswap is comprised of many Pairs that run side by side. These Pairs are isolated in terms of the risks they impose on users. That is, a user that does not interact with a specific Pair is not exposed to risks from that Pair. Uniswap’s approach to security is based on this isolation: let anyone create any Pair they’d like, and give users the choice to interact with those they want, whether it's a Pair whose safety has been well established or not.

This approach won’t work for Compound. If Compound were to add a single problematic money market, then all users - even those who do not interact with it - would be immediately exposed to risk. This is because depositors in the problematic MM can borrow from any other MM and if they end up not repaying their loans, any MM could end up having a deficiency.

Compound’s approach to security is very different from Uniswap’s: Compound takes responsibility for keeping their users safe and therefore has a gated approach. Compound’s users must trust the governance processes to make decisions that don't introduce unnecessary risk and keep their collateral safe.

The Ola Finance Solution

Ola Finance is a player in the on-chain lending space, but it achieves Uniswap-like inclusiveness. Its goal is to allow smaller tokens to offer lending and borrowing services to their communities. In essence, Ola Finance does to on-chain lending what Uniswap did to on-chain swaps.

While Compound is a lending network, Ola Finance is a platform that contains many separate lending networks running side by side. Ola Finance is made up of all the lending networks (Compound-like instances) in its Registry, each supporting a different set of tokens, parameters, etc.

At Ola Finance, anyone can add a lending network to the Registry - just like anyone can add a Pair to Uniswap. To create a new lending network, one simply needs to configure the lending network's parameters and submit a transaction on-chain. Currently, the creation of new lending networks goes through the Ola team. To read more about building a lending network, jump ahead toBuilding a Lending Network.