Cardano DeFi Innovation: AMM-based Lending/Borrowing Protocol

[GENERAL] Name and surname of main applicant

Mohamed Elshami

[GENERAL] Are you delivering this project as an individual or as an entity (whether formally incorporated or not)

Entity (Not Incorporated)

[GENERAL] Please specify how many months you expect your project to last (from 2-12 months)

8

[GENERAL] Please indicate if your proposal has been auto-translated into English from another language

No

[GENERAL] Summarize your solution to the problem (200-character limit including spaces)

This proposal tackles these shortcomings by introducing an oracle-less, self-managed AMM-based lending/borrowing protocol.

[GENERAL] Does your project have any dependencies on other organizations, technical or otherwise?

No

[GENERAL] If YES, please describe what the dependency is and why you believe it is essential for your project’s delivery. If NO, please write “No dependencies.”

No dependencies.

[GENERAL] Will your project’s output/s be fully open source?

Yes

[GENERAL] Please provide here more information on the open source status of your project outputs

BSL 1.1. license. The code will be fully published on GitHub as part of the final deliverables.

[SOLUTION] Please describe your proposed solution

This proposal tackles the aforementioned shortcomings by introducing a novel oracle-free lending protocol for Cardano. It leverages a Duration-Weighted Constant Sum Product Market Maker (DW-CSPMM), a unique AMM model originally developed by Timeswap and designed for fixed-term, non-liquidatable loans. 

Core Design Concepts

• DW-CSPMM: The AMM utilizes a formula (X+Y)*Z=k, where (X, Y) are the token reserves representing the borrowed and collateral asset respectively, and a time-dependent interest component (Z) to manage loans and interest rates dynamically.

• Fixed-Term Loans: The protocol offers loans with a pre-defined duration and interest rate set at the outset, providing certainty for both lenders and borrowers. The Interest Rate (APR), is dynamically determined by the demand for borrowing and lending within the pool; it remains constant for individual positions once established but can fluctuate based on overall market conditions. To borrow, users lock up collateral based on a Transition Price (TP), which influences the amount needed and acts as a trigger price for repayment. At maturity, if borrowers fail to repay by the Maturity Date, their collateral is forfeited

• Non-Liquidatable Loans: To simplify borrower management and incentivize timely repayments, the protocol utilizes a Transition Price (TP) mechanism for collateral lockup and automatic forfeiture upon loan maturity default.

Market Participants

• Lenders: Earn a fixed interest rate on supplied funds, with a portion going towards transaction fees for liquidity providers.

• Borrowers: Access fixed-term loans with upfront collateral, with interest included and repayment unlocking the collateral.

• Liquidity Providers: Inject single-sided liquidity into pools, acting as intermediaries and earning fees from both borrowers and lenders.

[IMPACT] Please define the positive impact your project will have on the wider Cardano community

This proposal for an oracle-less, AMM-based lending protocol on Cardano aims to deliver a positive impact across the Cardano community by:

• New DeFi Primitive: Cardano's DeFi ecosystem is rapidly growing, and the demand for diverse financial instruments is increasing. This proposal introduces a novel AMM-based lending protocol to Cardano's DeFi. By expanding the range of DeFi primitives available, Cardano can cater to a wider range of user needs and use cases.

• Adoption and Growth: The proposed protocol addresses 32% of the DeFi market (According to DefiLlama). it can contribute to Cardano's share of this growing market. Given the fundamental utility of lending, this protocol is positioned to grow alongside the DeFi market.

• Enhanced Liquidity & Market Making: Unlike most lending protocols, this protocol introduces Liquidity Providers (LPs) who earn fees from both borrowers and lenders, incentivizing continuous participation and market liquidity. The permissionless nature of the protocol allows LPs to create markets for any token pair, further improving overall liquidity within the Cardano ecosystem.

• Improved User Experience: Fixed-term loans with predetermined interest rates offer predictability and ease of use for both lenders and borrowers. Additionally, the protocol offers non-liquidatable loans, which simplify participation for borrowers by eliminating the risk of collateral liquidation.

• Collaboration and Engagement: Open development is key. We'll share regular progress reports and actively seek community feedback to shape the protocol's future. A collaborative roadmap will identify future use cases and explore integrations with existing Cardano DeFi protocols (e.g., yield aggregators) to unlock new possibilities.

[CAPABILITY & FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

Mohamed leverages his combined experience in financial engineering (commodities derivatives, risk management) and tech leadership (CTO, Web3 startup) to spearhead this project.

In terms of technical feasibility, Cardano's DeFi ecosystem has matured considerably, with AMMs and DEXs demonstrating their effectiveness. This established foundation reduces risks associated with eUTXO and concurrency challenges, initially addressed by pioneering protocols like SundaeSwap. We'll leverage this proven experience in our protocol development, minimizing development risks.

Contingent on the success of this proof of concept, future product launch will seek to address regulatory uncertainty or requirements.

[PROJECT MILESTONES] What are the key milestones you need to achieve in order to complete your project successfully?

Project Initiation & Technical Design (2 Months)

Milestone outputs:

• Initiation, planning and research.
• Develop the technical design for the DW-CSPMM AMM model.

Acceptance criteria:

• Written project plan, and outcome of the research backing up initial implementation decisions.
• Technical design document for DW-CSPMM AMM model.

Evidence of milestone completion:

• Documents and technical will published on senarylabs.xyz.
• Progress report will be published on senarylabs.xyz.

Smart Contracts Development (2 Months)

Milestone outputs:

• Develop core smart contracts (lending, borrowing, pool management).
• CI/CD, node infrastructure and preview testnet setup.

Acceptance criteria:

• Initial implementation smart contracts covering core protocol mechanics.

Evidence of milestone completion:

• Test cases for various scenarios relevant to the POC (e.g., different loan sizes, collateral types, testing loan maturity and repayment).
• Progress report will be published on senarylabs.xyz.

UI/UX Development & Off-chain Integration (2 Months)

Milestone outputs:

• Development UI for lending/borrowing & LP functionality
• Further development iterations for the protocol smart contracts.

Acceptance criteria:

• Fully functional DApp deployed on Cardano preview testnet.
• Address any issues reported in Milestone 2 report.

Evidence of milestone completion:

• Demo DApp publicly accessible.
• Progress report will be published on senarylabs.xyz.

POC Evaluation & Future Development (2 Months)

Milestone outputs:

• POC deployment on Cardano mainnet & invite selected users to evaluate the POC.
• Develop a product development roadmap outlining the next steps for the protocol's full development and potential future features.

Acceptance criteria:

• Fully functional DApp deployed on Cardano mainnet.
• Create a small lending pool (ADA/USD) for demonstration.

Evidence of milestone completion:

• Fully published source code on Github.
• Progress report will be published on senarylabs.xyz.

[RESOURCES] Who is in the project team and what are their roles?

Mohamed Elshami – LinkedIn

Lead Developer & Founder of Senary Labs

Role: responsible for the protocol design, implementation and full stack development of this project.

[BUDGET & COSTS] Please provide a cost breakdown of the proposed work and resources

Total estimated budget 100,000 ADA (45000 USD)

Development Costs:

• Smart Contract Development – 60,000 ADA
• UX & Frontend development – 25,000 ADA
• Infrastructure & development tools – 5,000 ADA

Operational Costs:

• Cloud Hosting – 5,000 ADA
• Deployment & Testing – 5,000 ADA

For the duration of 8 months, a minimum of 20 hours will be allocated to the project per week (0.5 FTE).

[VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

This Proof-of-Concept development approach, allowing us to validate the AMM-based lending model with a controlled budget (100,000 ADA). This minimizes upfront costs while delivering valuable insights for future development.

A successful POC for an oracle-less AMM lending protocol can attract further investment and developer interest, leading to a more robust and competitive DeFi ecosystem on Cardano.

By releasing the project as open-source, we aim to promote transparency, collaboration, and community involvement in building this innovative DeFi primitive.