Introduction to How Falcon Finance DeFi Infrastructure Works
Falcon Finance is a decentralized finance (DeFi) protocol that has received a lot of attention in the crypto ecosystem- particularly when it was recently chosen as the 46th project in Binance HODLer Airdrops program and was available to trade on Binance and other exchanges. Falcon Finance is essentially aimed at transforming the application of digital assets to create liquidity and sustainable yield without compromising the risk management and collateral criteria.
We shall discuss the unusual credit mechanisms of Falcon Finance in this article, specifically what a standalone and controlled credit account system would entail within the context of its synthetic asset and collateral system and why such a system is important, and how it compares to other DeFi systems.
What Is Falcon Finance? A Quick Overview
Falcon Finance is a decentralized protocol that aims at establishing a universal collateralization infrastructure enabling users to deposit any eligible digital assets (cryptocurrencies and tokenized real-life assets) as collateral and issue a synthetic dollar called USDf.
The dual-token model in the protocol contains:
USDf: A collateralized synthetic dollar that has been made to be pegged to USD by use of a diversifiedand risk-controlled collateral pool.
sUSDf: USDf is yield bearing through the earning of USDf in vaults that employ institutional-grade yield strategies.
FF Token: The governance and utility token of Falcon Finance that is employed in governance and incentives as well as other protocol perks.
It is used to provide liquidity to assets without selling them; this is particularly handy in volatile markets or when holding longer term positions.
Isolated and Managed Credit Accounts?
Falcon Finance does not directly refer to the term isolated and managed credit accounts in its official documents, but the notion is close to the idea of collateralized synthetic liquidity and internal credit capacity that it employs.
On the customary DeFi platforms (such as lending protocols such as Aave or Compound), isolated credit accounts often signify each single borrower account in which each loan receives unique collateral. They can be sold off individually when collateral values fall below the necessary levels. In contrast:
Falcon finance does not provide loans in the normal sense where individual users loan out money towards security. Rather, it pools collateral in a common system which facilitates the issuance of USDf and sets systemic capacity of the credit based on the aggregate collateral base.
The protocol basically calculates an actual real time credit capacity of the entire system through the constant assessment of the worth, volatility and liquidity of every asset deposited. This communal, as opposed to personal, credit evaluation can be considered as a controlled credit condition incorporated into the minting system of USDf.
Simply put, rather than having each user being offered a distinct loan account with distinct conditions, all collateral is bundled together and operated under the risk engine of the protocol, enabling:
Automatic modification of collateral requirements.
Risk reduction, which is automated in case market volatility rises.
The amount of synthetic credit (USDf) that the system can safely bear without over leveraging the collateral pool is continually calculated.
The idea of this system is to lessen the sharp and binary liquidations observed in most DeFi credit markets with a more integrated risk assessment that is adaptive to market conditions.
The working model of the Credit Model at Falcon.
The following is a summary of the way this managed credit structure works:
Minting Capacity and Pooled Collateral.
Users place their assets (such as BTC, ETH, stablecoins (USDT, USDC, FDUSD), or even tokenized real-world assets) in them. The protocol does not merely consider each deposit as individual credit line. Instead, it:
Relies on aggregated collateral in support of the issuance of USDf.
Constantly analyzes all collateral attributes (value, volatility, liquidity) to calculate the safe minting capacity of the protocol.
This is to say the protocol effectively establishes a system-wide credit structure- as opposed to a set of user-specific and isolated credit accounts- that enables the issuance of synthetic liquidity in a decentralized and risk-managed manner.
Risk-Managed Adjustments
In contrast to other DeFi lending protocols in which a single position may be sold in response to reaching a specific threshold, Falcon dynamically reacts by increasing or decreasing the needs of all the collateral:
As the volatility increases, the system is able to raise the collateral requirements in order to maintain stability.
With a stable market, collateral requirements can be loosened to provide additional synthetic liquidity.
This risk management is more of a series of separated user loans as opposed to an institutional credit score engine.
Artificial Credit and System Effectiveness.
Instead of providing direct loans, Falcon provides synthetic credit in USDf form, which could be used or staked by the user to generate yield. The group strategy entails:
The issuance of credit in the protocol is pegged on an overall quality of collateral and system wellness.
Indirectly, this leads to increased capital efficiency (e.g., minting USDf instead of selling assets) by the user.
Single liquidation signs are substituted by protocol-wide modifications to keep it steady.
Why This Matters in DeFi
The strategy of Falcon Finance is a development of DeFi credit models in the following aspects:
Inclusion of wider collatars: Widening of the collatars leads to greater flexibility and better use of capital.
Manage risk: Protocol level risk engines can provide a more stable platform as compared to individual loans that have sudden liquidation limits.
Synthetic liquidity over direct loans: With this type, a user mints stablecoins rather than borrowing, eliminating the risks normally associated with loans and unlocking value.
Such design might render synthetic liquidity systems more appealing to institutional clients as it replicates credit evaluation efforts in traditional banking, but all on-chain.
Summary: The New Credit Infrastructure.
The scheme of shared collateral and dynamic, protocol-wide, credit capacity of Falcon Finance is a new development out of the former, isolated credit accounts and into the latter, managed synthesis of liquidity. The protocol does not have disaggregated and independent loans but considers all collateral collateral as a common credit engine that decides whether or not to issue USDf safely- balancing yield opportunities and systemic risk control.
It is a combination of the decentralized, permissionless philosophy of DeFi with more sophisticated risk-management philosophy of conventional finance that makes Falcon Finance an interesting experiment in the next-generation synthetic asset and credit design.
