#FalconFinance @Falcon Finance $FF
DeFi's early history has shown us that liquidity almost always comes with a cost.
The cost is typically liquidation.
You'll get liquidity, but in doing so you lose control of your position.
If the market falls against you, your assets will be sold automatically, usually at the worst possible time.
This has been viewed as a cost of entry to DeFi for quite some time now.
All on chain lending systems use overcollateralization, liquidation thresholds, margin calls, and cascading sell pressure to protect themselves and the lender.
These mechanisms are viewed as design necessities, not choices.
Falcon Finance questions this.
Instead of asking how to better liquidate collateral, Falcon asks another question altogether:
Can we create a collateral system that doesn't have to liquidate?
The Core Idea: Collateral Without Forced Sale
Falcon Finance has a core idea that fundamentally changes how collateral works in on-chain lending.
Most on-chain lending systems treat collateral as a temporary asset.
You put in your assets to secure a loan, and you cross your fingers that there won’t be enough downward price pressure to trigger liquidation.
Falcon Finance views collateral as a foundation that is not a ticking time bomb waiting for liquidation.
Collateral is a base layer of productive assets that can continue to produce liquidity, and remain intact.
Users deposit liquid assets (including digital tokens, and tokenized real world assets) into the Falcon system, and against those assets they can mint USDf, an overcollateralized synthetic dollar that provides stable, on-chain liquidity.
The key point here is that users don’t have to sell or close their positions to gain liquidity.
This changes how users view capital and risk.
Why Traditional DeFi Systems Fail
Understanding how Falcon Finance works, is best understood by understanding the failures of all of the previous DeFi models.
Liquidation is meant to protect lenders, but it has the opposite effect; it makes markets more unstable.
When markets fall fast, liquidations pile up on top of one another.
Prices fall faster.
More positions get wiped out.
Liquidity dries up at precisely the moment when it is most needed.
Many of you who have traded through a sharp pull back have experienced this phenomenon first hand.
Assets that could have stayed productive are instead dumped into thinly traded markets.
Long term holders are punished for short term volatility.
Protocols act "as intended", however the end result seems irrational.
This isn’t user error.
This is a design flaw.
Falcon Finance has removed the need for users to dispose of assets to gain liquidity.
Universal Collateralization as an Infrastructure Layer
Falcon Finance views itself as a universal collateralization infrastructure.
This is important.
Falcon Finance is not trying to be a specific lending platform, nor is it a narrow scope stable coin issuer.
Falcon Finance wants to provide an infrastructure layer that can be utilized by other platforms, users, and strategies.
Universal collateralization means that many types of assets can be used as productive collateral.
Not just volatile digital tokens, but also, tokenized real-world assets that represent claims to off-chain values.
This is important, as the future of on-chain finance will be much broader than just using purely native digital assets.
Capital markets don't exist in vacuums, and neither will blockchain-based capital markets.
Falcon Finance was developed with this future in mind.
USDf: Liquidity With No Forced Liquidation
USDf is the synthetic dollar that is created within Falcon Finance.
It is an overcollateralized synthetic dollar.
Every unit of USDf has backing greater than the unit of value it represents.
While this is not a new idea, it is how USDf fits into the larger picture that is novel.
USDf is not simply a unit of account, it is a tool for creating liquidity, while still keeping the user's underlying assets open.
This is particularly useful for long-term holders, who may not want to sell, but still need to have flexibility.
In traditional finance, this type of functionality exists via securities backed loans.
Falcon Finance provides a similar type of logic on chain, without relying on any form of centralized intermediary.
Collateral As A Source Of Ongoing Value
Falcon Finance also introduces the idea of treating collateral as a source of ongoing value, as opposed to a static deposit.
In many DeFi platforms, collateral sits idle, and is either locked, monitored, and then either released or liquidated.
Its primary function is passive.
Falcon Finance views collateral as a source of ongoing liquidity generation, without depleting the assets used as collateral.
This is a fundamental shift in how we view collateral.
This shift has numerous implications, as it allows users to think in terms of balance sheet management, rather than short-term borrowing.
As such, capital efficiency is improved, not due to increased leverage, but because assets are able to remain productive.
This approach to capital management aligns more closely with the ways in which sophisticated financial actors think about capital.
Stability Through Design Choices, Not Market Assumptions
Stability in on-chain systems is often tenuous, because it is dependent upon assumptions regarding market behaviors.
Falcon Finance uses design choices to achieve stability, rather than making assumptions about market behaviors.
Conservative overcollateralization and risk aware parameters are used to absorb volatility, rather than to eliminate it.
While this does not render the system impervious to market stress, it does render it more resilient.
Resiliency is far more valuable than perfection.
Tokenized Real World Assets And Their Role
One of the most forward-thinking aspects of Falcon Finance is its support for tokenized real world assets as collateral.
Real-world assets possess different risk characteristics than purely digital tokens.
They often have less volatility, different liquidity characteristics, and external methods of determining value.
Falcon Finance enables these assets to be used as collateral within on-chain systems, thereby expanding the number of usable forms of capital.
This is not insignificant.
This requires careful design to ensure that the off-chain value is correctly represented, and conservatively on-chain.
Falcon Finance has constructed a framework that is capable of handling this complexity, rather than avoiding it.
Reducing Market Distortion From Forced Sales
One of the unintended consequences of liquidation heavy systems is market distortion.
When collateral is sold in large quantities, it generates artificial supply.
Prices fall faster than they would naturally.
Confidence is undermined.
Falcon Finance's model inherently reduces this reflexive selling pressure, as users are not immediately forced to exit their positions.
As such, markets are permitted to find their natural equilibrium.
This does not completely eliminate risk, but it does smooth its expression.
Over time, this type of stability can attract participants to on-chain markets, who currently view DeFi as too volatile.
Yield Without Unnecessary Complexity
Yield in DeFi is often associated with complex structures.
Layered strategies.
Recursive borrowing.
Hidden leverage.
Falcon Finance takes a simpler view towards yield.
By enabling collateral to remain intact, while still generating liquidity, it has opened new paths to yield, that do not rely on precarious loops.
This is particularly beneficial to institutional investors, regulators, and conservative capital, who are currently evaluating DeFi systems.
Simplistic designs are not weaknesses, they are often prerequisites for longevity.
Improving Capital Efficiency Without Increasing Risk
Capital efficiency is a highly sought after metric, however it is often pursued aggressively, and even recklessly.
High levels of leverage appear attractive in non-volatile markets, but disastrous in volatile markets.
Falcon Finance improves capital efficiency, by eliminating unnecessary dispositions of capital, rather than increasing leverage.
This distinction is critical.
Users can obtain liquidity, without compounding additional risk.
Collateral continues to be over-collateralized.
Falcon Finance views survivability above short-term optimization.
I have found that systems that are designed with this approach to capital management tend to be more durable.
A Different Relationship Between Users and Risk
Falcon Finance subtly alters how users interact with risk.
Users no longer need to constantly monitor liquidation thresholds, but can focus on broader portfolio decisions.
Users no longer react to short-term price movement, but can develop plans based on longer-term value.
This does not eliminate users' responsibility, but it does align incentives more naturally.
Risk becomes something that needs to be managed, rather than feared.
First Infrastructure Then Applications
Falcon Finance views infrastructure as the primary focus, rather than features.
By focusing on the foundational elements of collateralization mechanics, stability, and composability, it establishes a base for other platforms, users, and strategies to utilize.
This could include lending platforms, yield strategies, structured products, or entirely new financial primitives.
Infrastructure generally lasts longer than applications.
This is not a guarantee of success, but it is a thoughtful strategy.
Governance and Long Term Alignment
Any system that is responsible for managing collateral and issuing synthetic assets, must consider governance.
Falcon Finance has been developed to allow for growth through formal processes, rather than arbitrary changes.
Risk parameters, collateral standards, and upgrades to the system are expected to evolve as the ecosystem matures.
The objective of Falcon Finance is not rigidity, but evolutionary development.
Decentralized finance (DeFi) governance is often undervalued until something fails.
Falcon's architecture demonstrates an understanding of this reality.
On Chain Liquidity as a Shared Resource
One of the more interesting implications of the model presented by Falcon Finance is the manner in which it presents liquidity as a shared resource.
Liquidity is not simply a profit opportunity, but a collective resource that supports the functioning of markets.
By limiting forced liquidations, and maintaining stability, Falcon Finance supports healthier on-chain ecosystems.
Thinking in terms of liquidity as a shared resource is unusual, but essential to the maturation of DeFi.
Comparing Philosophies, Not Merely Features
It is easy to evaluate competing protocols on the basis of their features.
However, it is more meaningful to compare the philosophies behind competing protocols.
Falcon Finance is based on the philosophy that long term capital should not be penalized for short term volatility.
That liquidity should not require the destruction of underlying value.
That stability should derive from structure, not optimism.
Whether this philosophy proves to be superior will ultimately be determined by real world usage, and stress testing.
However, it is certainly a philosophy that merits exploration.
Conclusion
Falcon Finance does not attempt to eliminate risk.
It does not seek to create a new form of money.
It does not rely on overly optimistic assumptions regarding market behaviors.
Instead, Falcon Finance seeks to create a paradigm shift.
Collateral that remains intact.
Liquidity that does not require exiting a position.
A synthetic dollar backed by overcollateralization, rather than leverage.
In a space that is often dominated by speed, and showmanship, Falcon's approach appears to be deliberate.
Sometimes, systems that are deliberately developed, are the ones that endure.
