From V1 to V4, from cross-chain lending to long-tail assets, what exactly has been done in Flux's "innovation model"?

Author: Hu Tao

Recently, news of Zhao Changpeng becoming the richest Chinese person has attracted public attention. According to a message released by a financial magazine on Weibo, Zhao Changpeng's net worth has now reached $90 billion (equivalent to 573.3 billion yuan). However, Zhao Changpeng's response was profound; he stated: If I sell 0.01% of the company's equity to someone for $1, then the company is valued at $10,000.

If I issue a token with a supply of 1 trillion and sell it to someone for $1, then I have $1 trillion—without liquidity, the valuation is not very meaningful. Indeed, in the crypto industry, liquidity is king.

In fact, whether in the innovative crypto market or traditional banking institutions, the two most basic financial activities—depositing and borrowing—are indispensable, as lending can provide more flexible liquidity for the entire financial ecosystem, allowing all parties to benefit from transactions. However, since cryptocurrencies have only been around for a short time, the development of the lending market in this field is not as mature as in traditional finance. Even some leading protocols have experienced so-called "black swan" events (such as Maker), as well as issues like lack of transparency in liquidation, high fees, and excessive collateralization rates—therefore, whether there can be a higher-quality lending protocol has become the focus of attention in the crypto industry, which is precisely the problem that the Flux protocol attempts to solve.

The Flux protocol is a decentralized lending platform developed by the ZeroOne team and is one of the few self-developed secure, non-custodial digital asset collateral lending protocols in the industry. It aims to improve the interest rate model, collateral model, and liquidation logic of existing decentralized finance lending products.

The Flux protocol adopts a multi-chain model and has completed deployments on Polygon, Arbitrum, OEC, Heco, BSC, and Conflux public chains. It is expanding to new public chains such as Harmony, Avalanche, and Solana, and has also obtained a whitelist from Optimism, with opportunities for future deployment on its network.

Zero One is an innovative and experienced team, with most core members coming from Tsinghua University, Peking University, Tencent, and Alibaba. They possess rich blockchain development experience and top-tier financial industry experience, ensuring the safe and stable operation of the Flux protocol.

Currently, Flux has received support from leading investment institutions in the industry, including A&T Capital, ConFlux, OKEx Blockchain Ventures, LP Capital, Kernel Ventures, and YBB Foundation.

We know that most current crypto lending protocols use a "zero-interest bond" method to generate returns, which means that borrowers deposit collateral, mint bonds with a certain maturity date, sell the bonds to obtain stablecoins, and depositors purchase bonds with a maturity date using stablecoins or other assets. However, in reality, this model is not friendly to both parties in the lending process, especially in a bull market environment, where users find it difficult to leverage market advantages to achieve higher returns.

The Flux protocol aggregates the assets supplied by each user to form a pooled money market. The Flux money market is defined by a pair of current interest rates (supply and borrowing rates), which apply uniformly to all users. Over time, these rates will adjust based on changes in supply and demand. For each money market, every change in interest rates is monitored through an Interest Rate Index.

Each change in interest rates is generated by user supply, withdrawals, borrowing, repayments, or liquidation of assets. User balances include accrued interest, simply put, it is the ratio of the current interest rate index to the interest rate index at the last update of the user's balance.

Undoubtedly, the Flux money market model can effectively improve trading efficiency and capital interest rates because when a user supplies assets, those assets become liquid resources. Liquidity providers (depositors) can withdraw assets at any time without waiting for a specific deposit maturity date.

Balances in the money market accrue interest based on the unique supply rate of that asset, and users can view their balances in real-time (accrued interest includes receivable and payable interest); when users perform transactions to update their balances (supply, transfer, or withdraw tokens), the accrued interest is converted into principal and paid to the user.

Flux allows users to easily borrow assets through credit staking, where users have full ownership of the borrowed assets and can freely allocate them to any other accessible place. Users do not need to set repayment dates, borrowing interest, etc.; they only need to specify what type of asset they wish to borrow to quickly obtain the asset. Similar to supplied assets, each money market has a floating interest rate determined by the market asset utilization rate, which dictates the borrowing cost (borrowing interest).

Each money market in the Flux protocol will dynamically adjust interest rates based on the supply relationship of assets in that market (fund utilization rate), without requiring any terms or interest rate negotiations between borrowers and depositors, completing asset flow based on market rates.

The Flux protocol also opens independent money markets for each asset, known as MoneyMarket, where assets are mapped into standard ERC20 Tokens: fToken. Borrowers can transfer assets to this contract to exchange for fTokens, and over time, borrowers can earn interest returns on fTokens.

It can be said that Flux's innovative lending model is highly competitive in the market and allows all parties in the ecosystem to benefit.

Flux Economic Model

The platform token of the Flux protocol, $FLUX, is a community-managed DAO token (currently in preparation), with a maximum token supply set at 21 million $FLUX to commemorate Satoshi Nakamoto. All tokens will be distributed to community participants over the next four years through platform integration and the Flux team.

Of this, 75% of $FLUX will be distributed to community participants, 10% to the Flux protocol team, and 15% to the Flux community fund (1% will be reserved for early community volunteers, and 14% will be used for community development and Flux liquidity reserves).

The main purpose of $FLUX is to incentivize liquidity providers on the Flux protocol and is also the core of Flux protocol governance. $FLUX is used to vote on the outcomes of Flux improvement proposals. Additionally, $FLUX can be placed in the protocol's security module to provide security and insurance for the protocol itself and depositors, earning certain rewards and fees from the protocol in this manner. The total supply of Flux is 21 million tokens, with a token model of ERC-20. All $FLUX tokens are generated through mining, with no angel or VC investment allocations, no private placements, and no pre-mining.

From V1 to V4, Flux's "Innovative Template" Continues to Upgrade

So far, Flux has officially launched three versions, and is currently developing V4 for long-tail asset lending. In the V1 version, Flux adopted a strategy similar to other lending platforms (such as Compound), providing a pooled money market for users to deposit and withdraw specific assets to earn interest, or over-collateralize and pay a certain interest to borrow assets.

Although this is Flux's first version, it has made certain optimizations to traditional crypto lending interest rates, collateral models, and liquidation logic. A notable advantage of this version is that it can set different loan interest rates based on asset volatility, meaning that under the same collateralization of funds, the Flux protocol can lend out more crypto assets.

Flux allows users to easily borrow assets through credit staking, where users have full ownership of the borrowed assets and can freely allocate them to any other accessible place. Users do not need to set repayment dates, borrowing interest, etc.; they only need to specify what type of asset they wish to borrow to quickly obtain the asset. If it is a cross-chain asset, they can also borrow assets from the Conflux chain to a specified Ethereum or Bitcoin address with one click.

Similar to supplied assets, each money market has a floating interest rate determined by the market asset utilization rate, which dictates the borrowing cost (borrowing interest). To control risk, Flux sets a collateral factor for each asset based on risk (as shown in the table below), prohibiting over-collateralization. Combining asset prices, balances, and collateral factors allows for dynamic calculation of borrowing limits for each account; each account can collateralize assets and borrow within the borrowing limit; collateralized assets cannot be withdrawn but can still earn deposit interest.

At the same time, the borrowing balance of each account must not exceed the borrowing limit, and the ratio of the account's deposit amount to the borrowing amount is referred to as the collateralization rate. When the collateralization rate falls below a certain threshold (liquidation collateralization rate), liquidation will be triggered; users can increase their collateralization rate by adding deposits or repaying all or part of the loan to avoid asset liquidation.

The biggest highlight of Flux V1 is the unified liquidation model. To reduce the risk of the Flux protocol and protect liquidity providers, when a borrower's account collateralization rate falls below the liquidation collateralization rate, the borrower's deposit assets can be liquidated by any account (liquidator) to repay the loan into liquidity. The liquidator must repay all of the borrower's loans into the liquidity pool to obtain the borrower's entire deposit (collateralized assets). Here, the liquidation collateralization rate is a constant 110%, and the account collateralization rate is the ratio of the account's deposits to borrowings.

Any address on the Conflux chain can participate in liquidation fairly and without resistance, without relying on any centralized system. Based on the time-priority principle, liquidators can liquidate "liquidation accounts" (i.e., accounts below the liquidation collateralization rate).

When an account's collateralization rate falls significantly below the liquidation collateralization rate, dropping below 110%, it is referred to as a breakdown, which is participated in by the platform. At this point, specific liquidators designated by the Flux protocol participate in the liquidation. Breakdown liquidation is inevitably a loss, so liquidators must pay a 6% fee when liquidating assets to a specific liquidator contract, serving as a liquidation reserve for breakdown liquidation and providing liquidity.

It is not an exaggeration to say that liquidation is a very important aspect of every lending product. Mainstream liquidation methods include English auctions, Dutch auctions, sealed bids, etc., but none are very suitable for unstable market conditions with severe price fluctuations. Therefore, Flux has explored its own collateralization rate and liquidation model, separating collateralization rates and liquidation. For example, the collateralization factors for stablecoins like USDT and DAI are 130%, while mainstream coins like ETH and BTC are 140%, with a maximum borrowing asset of over 70%.

However, liquidation is unified and separate at 110%, meaning that only 90.91% of the collateralization rate will be liquidated. There is a 20% buffer between the maximum borrowing of 70% and the liquidation of 90%, which is sufficient to cushion user risk. Moreover, once the liquidation line is reached, user assets can be quickly auctioned off to avoid the risk of breakdown due to price fluctuations.

Thus, the Flux protocol's high collateralization rates, high liquidation lines, and the separation of maximum borrowing asset lines and liquidation lines ultimately ensure that even in a major downturn, zero liquidation can be achieved, and user assets will not suffer any losses.

Although significant improvements have been made on the "lending" side, Flux V1 still adopts an over-collateralization model, meaning that if you want to borrow a certain amount of cryptocurrency, you must deposit collateral exceeding that amount. Of course, this lending model remains mainstream in the crypto industry, but it is not user-friendly, and asset utilization rates will significantly decrease as a result. Therefore, maximizing the utilization of user-collateralized assets has become the next problem that Flux attempts to solve.

In Flux V2, Flux launched a margin lending model (or leveraged lending model), allowing users to lock in value through a staking process, using collateralized assets as margin to borrow multiple times the value of assets for mining or trading.

In this version, Flux offers up to 10 times leverage for mining, where users only need to obtain financing rights through collateralized margin. The leverage and automatic reinvestment features enable users to achieve higher annualized returns, allowing borrowers to leverage larger principal amounts for absolute returns, while lenders can also earn more interest income. Moreover, in Flux V2, user leverage mining profit fees, opening fees, and deposit fees are all zero.

At this point, Flux can basically meet the vast majority of lending needs, but for the larger-scale crypto market, liquidity still seems not to be fully released. This is because the crypto market has now entered a multi-chain era, where liquidity is often "split" across different chains, affecting user returns and limiting the expansion of the crypto lending market.

To address this issue, the Flux V3 cross-chain lending protocol has emerged. With the support of the Hotpot Swap lossless cross-chain exchange protocol developed by the ZeroOne team and the Poly Network heterogeneous chain cross-chain interoperability protocol as the underlying cross-chain technology, users can perform lossless asset reallocation and lending across different blockchains. More importantly, Flux V3 does not charge cross-chain fees, only a small transaction fee.

Undoubtedly, Flux V3 introduces a cross-chain lending mechanism that expands more imaginative space. Frankly speaking, a key constraint troubling the development of crypto lending is that liquidity is confined to a single chain, resulting in the "liquidity island" problem, making it difficult to capture resources and users from the entire ecosystem.

In fact, Flux itself also has resource advantages, as it is backed by the high-performance Conflux public chain. Users and developers within the Conflux ecosystem can also provide effective support for Flux V3, while the cross-chain lending feature of Flux V3 effectively opens up "liquidity channels" between multiple blockchains, allowing the native chain to continuously receive liquidity and user resources.

On the other hand, it also allows users to access a broader community and ecosystem. Currently, the Flux Protocol's cross-chain products have covered Polygon, Arbitrum, OKExChain, Heco Huobi Eco Chain, and BSC Binance Smart Chain, enabling cross-chain reallocation, lossless cross-chain, and cross-chain lending operations, empowering the DeFi lending ecosystem.

At this stage, Flux has initiated the development of Flux V4 for long-tail asset lending. We know that in traditional markets, assets with weak short-term demand are often referred to as long-tail assets, which tend to have strong latecomer advantages.

In the crypto market, however, "long-tail crypto assets" outside of popular and mainstream tokens seem to have not attracted much attention and lack supporting tools. Flux V4 will provide opportunities for those overlooked tokens to enter the lending market.

If long-tail asset holders have a place to borrow liquidity, they do not need to hastily sell their assets and can effectively hedge against asset volatility risks.

It is not an exaggeration to say that if Flux V4 can secure a foothold in the early development stage, it is very likely to become one of the leading protocols in this field in the coming years.

Innovating While Staying True to Safety

If you are a veteran in the crypto industry, you certainly won't forget the "black swan event" that occurred on March 12, 2020. Due to a sharp drop in ETH within a short period, lending platforms led by MakerDao and Compound experienced a large number of liquidated assets, while the Ethereum network faced unprecedented congestion, preventing borrowers from paying margin calls and liquidators from obtaining digital assets through the Ethereum network for auction.

Lending is different from other blockchain use cases because it directly involves user assets, so it must provide the highest level of security support to ensure user asset safety. In this regard, Flux has made ample preparations, such as developing proactive liquidation bots and establishing a complete risk control system that includes factors such as network congestion, chain attacks, and contract attacks.

Additionally, Flux's liquidation contracts use a rapid liquidation auction method, where any liquidation target is directly sold at a 3% discount on the platform without an auction process, allowing assets to be auctioned off directly. It is worth mentioning that Flux has established a long-term auditing partnership with Certik, which will conduct thorough audits of Flux's code and smart contracts, identifying risks. Currently, both V1 and V2 versions have successfully passed audits, and V3 audits are merged with the self-developed cross-chain protocol Hotpot audit.

Conclusion

From a developmental perspective, Flux has consistently aligned with the blockchain industry's rhythm, improving liquidity, expanding ecosystems through cross-chain capabilities, and supporting long-tail assets, bringing revolutionary innovations with each iteration to continuously strengthen its leadership position in the crypto lending market. All of this is supported by the strong team behind the project.

The Zero One team's underlying development capabilities surpass those of most projects, and the courage and patience to start from scratch to write lending contracts is enough to prove their confidence. Moreover, the team has a clear understanding of how to upgrade contracts. Each detail of the contract is carefully considered, and the V2 and V3 versions were theoretically formed even before the V1 code was completed. In fact, the Zero One technical team is continuously expanding, with more developers joining the ecosystem.

From the agricultural era to the industrial era, lending has always been the core and foundational function of financial markets, as well as an important driving force for economic development, and the crypto world is no exception. In the future of the crypto finance field, Flux is bound to play an indispensable role, and its subsequent development is worth watching.