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The scoop on Seamless Protocol

Seamless evolves the traditional DeFi lending model by implementing an innovative and permissionless smart contract system for users to supply and borrow without requiring high collateral lockups.

Where We Began: Traditional DeFi

Compound and Aave laid down the brickwork for decentralized lending and borrowing to emerge 🧱. To ensure that a borrower does not run away with the borrowed funds, they require overcollateralization (e.g. for a borrower to receive $80 of tokens, they might need to lock up $100 in value, for instance). This ingenious solution enables the permissionless system—the locked up collateral could be liquidated if it lowers in value, so if everything works as intended, the liquidated collateral would make the lenders whole 🧠

The problem, however, is that not everybody has the ability to lock up $100 for every $80 they seek to borrow (just as a theoretical example). That system works fine for whales 🐋, but isn't very efficient or practical for everyone else.

That's where Seamless comes in, offering traditional overcollateralized borrowing, as well as the innovation of Integrated Liquidity Markets (or ILMs, for short), which enable undercollateralized borrowing as well.

🦄 Where We've Gone: Shepherding Modern DeFi

After analyzing user behavior, it was clear that users only borrow crypto if they have a purpose for the borrowed funds—for instance, this might be to amplify exposure to an asset, like putting staked ETH down as collateral to borrow funds to buy more staked ETH.

In web2, about 40% of worldwide transactions take place through credit cards (did you know: credit is another way to repackage the concept of borrowing 🤔), but today, it's still not easy to spend crypto on goods and services—spoiler alert: check out the next section for future musings about ideas of where Seamless may evolve 👉

For that reason, Seamless has chosen to enable INTEGRATED (liquidity) markets, where users can select what they would like to do with their borrowed funds, before they even borrow. This is how ILMs work!

⚙️ Under the hood: Integrated Liquidity Markets (ILMs)

ILMs may seem complicated, but they're actually pretty simple. Here's how they work 👇

👔 Situation: Ceasar wants to use an ILM that loops his cbETH exposure to give him a 3x larger position of cbETH (this means he wants to borrow against his cbETH to buy more cbETH) 🔄

  1. To start, Caesar must add some cbETH into the ILM smart contracts—let's say he puts in $1,000 of cbETH in.
  2. The ILM smart contracts will use his cbETH to borrow USDC in an undercollateralized (😲) borrow—even though Caesar only put in $1,000 worth of value, the ILM smart contracts are able to borrow $2,000 in USDC from the pool.
  3. The ILM buys more cbETH with the borrowed funds to maintain the target of 3x exposure—so now there's $3,000 worth of cbETH under Caesar's position, even though he only added $1,000 of cbETH to start.
  4. When Caesar wants to stop amplifying his exposure, the ILM will sell the cbETH to pay back the $2,000 of borrowed USDC, and the remainder (net any fees) would go back to Caesar.

That's it! ILMs are customizable and composable, so the community of SEAM governance token holders can vote in an endless set of new strategies and markets ✨

Welcome to the Modern Era of DeFi

Seamless Protocol is the first decentralized, native lending and borrowing protocol on Base.