Root Finance is a decentralized Lending & Borrowing protocol operating on Radix. The platform enables users to participate as either depositors or borrowers within an overcollateralized market environment. As a non-custodial liquidity protocol, Root Finance allows lenders to earn passive income by providing liquidity to the market, while borrowers can obtain funds in an overcollateralized manner.
- Key Features
- Protocol Overview
- Core Functionality
- Supported Assets
- Root Receipts
- Interest Rate Model
- Liquidation Mechanism
- Key Features
- Non-custodial Design
- Decentralized Governance
- Interest Rate Model
- Liquidation Mechanism
- Flash Loans
- Security Measures
- Root Points System
- Technical Details
- Smart Contracts
- Security Measures
- Audits and Vulnerabilities
- User Interaction
- Supplying Assets
- Borrowing
- Repaying Loans
- Liquidations
- Root Points System
- Earning Mechanisms
- Quests and Bonuses
- Point Calculation
- Verification Process
- Leaderboard
- Future Utility
- Risks and Challenges
- Smart Contract Risks
- Market Risks
- Operational Risks
- Regulatory Challenges
Key Features
- Decentralized Operation: Root Finance operates on the Radix DLT, leveraging blockchain technology to ensure transparency and decentralization.
- Non-custodial Design: The protocol is designed to be non-custodial, eliminating the need for intermediaries or custodial control of user assets.
- Overcollateralization: Borrowers must provide collateral that exceeds the value of their loan, helping to secure the protocol against defaults.
- Liquidity Provision: Users can supply various cryptocurrencies to the protocol, earning interest on their deposits.
- Borrowing Facility: Users can borrow supported cryptocurrencies by using their deposited assets as collateral.
- Root Receipts: Depositors receive Root Receipts (e.g., rtxETH, rtxUSDC) representing their right to redeem supplied assets.
- Dynamic Interest Rates: The protocol uses an interest rate model that adjusts based on the utilization rate of the assets in the pool.
- Liquidation Mechanism: To maintain the protocol's solvency, positions may be liquidated if they fall below certain collateralization thresholds.
- Flash Loans: The protocol offers a flash loan feature, allowing users to borrow without collateral for a single transaction, provided the loan is repaid within the same transaction.
Root Finance aims to provide a user-centric platform for the Radix community, enhancing capital strategies through a simple yet comprehensive Lending & Borrowing Decentralized Application (Dapp). The protocol has undergone security audits to ensure the integrity and safety of the system, with its smart contracts being open-source and publicly available for review.
Protocol Overview
Root Finance is a decentralized money market protocol that operates on the Radix DLT. The protocol facilitates lending and borrowing of cryptocurrencies within an overcollateralized environment. This section provides an overview of the core functionality, supported assets, and unique features of the Root Finance protocol.
Core Functionality
The Root Finance protocol centers around two primary functions:
- Lending: Users can supply their assets to the Root Finance platform, becoming liquidity providers. The protocol aggregates these supplied assets into pools governed by smart contracts. Lenders earn passive income through interest generated from borrowers using these pools.
- Borrowing: Users can borrow supported cryptocurrencies by leveraging their deposited assets as collateral. The protocol ensures that all loans are overcollateralized, meaning the value of the collateral must exceed the value of the borrowed assets.
The protocol utilizes smart contracts to manage these functions, ensuring that all operations are transparent, secure, and automated.
Supported Assets
Root Finance supports a variety of cryptocurrencies for both lending and borrowing. As of the latest documentation, the supported assets include:
For Supply (Lending):
- $WBTC (Wrapped Bitcoin)
- $ETH (Ethereum)
- $XRD (Radix)
- $USDC (USD Coin)
- $USDT (Tether)
- $HUG
- $LSULP (upcoming)
For Borrowing:
- $WBTC
- $ETH
- $XRD
- $USDC
- $USDT
- $LSULP (upcoming)
Each asset has specific parameters such as maximum Loan to Value (LTV) ratios and Liquidation Thresholds, which govern how they can be used within the protocol.
Root Receipts
When users supply assets to the Root Finance protocol, they receive Root Receipts in return. These receipts (e.g., $rtxETH for Ethereum, $rtxUSDC for USD Coin) represent the user's right to redeem their supplied assets in the future.
Key features of Root Receipts include:
- Appreciation: The value of Root Receipts grows over time, reflecting the interest earned on the supplied assets.
- Fungibility: Root Receipts are fungible tokens, meaning they can be transferred or potentially used in other DeFi protocols.
- Interest Accrual: The appreciation of Root Receipts is determined by the interest rates on deposits, which are in turn influenced by the supply and demand dynamics of the assets within the protocol.
Interest Rate Model
Root Finance employs a dynamic interest rate model that adjusts based on the utilization rate of assets in the pool. This model aims to balance liquidity risk and maximize utilization:
- When capital is plentiful (low utilization), interest rates are set low to encourage borrowing.
- When capital is scarce (high utilization), interest rates increase to incentivize repayments and additional deposits.
The interest rate curve is segmented into two phases around an optimal utilization rate, with a steeper increase in rates beyond this optimal point to manage liquidity risk.
Liquidation Mechanism
To maintain the protocol's solvency and protect lenders, Root Finance implements a liquidation mechanism. Liquidations occur when an account's collateral value decreases or the borrowed amount increases relative to the collateral, causing the loan-to-value (LTV) ratio to meet or exceed the liquidation threshold.
During a liquidation:
- Up to 40% of the loan value can be liquidated.
- Liquidators receive an incentive, which includes an 8% liquidation fee.
- The liquidation process aims to restore the loan to a healthy level of collateralization.
This mechanism ensures that the protocol remains solvent and can continue to function even in volatile market conditions.
Key Features
Root Finance offers several key features that distinguish it in the decentralized finance (DeFi) ecosystem. These features are designed to provide a secure, efficient, and user-friendly platform for lending and borrowing cryptocurrencies.
Non-custodial Design
Root Finance is designed as a non-custodial platform, which means that users retain control of their assets at all times. Key aspects of this non-custodial design include:
- Users' assets are secured within immutable smart contracts.
- There's no need for intermediaries or custodial control.
- The smart contracts are open-source and publicly available for review, adhering to the principle of "don't trust, verify."
This design enhances security and aligns with the decentralized ethos of blockchain technology.
Decentralized Governance
While the documentation doesn't explicitly mention a governance system, the protocol operates on the Radix DLT, which suggests a degree of decentralization in its operation. The specific governance mechanisms, if any, are not detailed in the provided documents.
Interest Rate Model
Root Finance implements a sophisticated interest rate model designed to balance liquidity risk and maximize utilization. Key features of this model include:
- Dynamic adjustment based on the Utilization Rate (U) of the asset pool.
- A two-phase interest rate curve centered around an optimal utilization rate (Uoptimal).
- Gradual rate increase up to Uoptimal, followed by a significant increase beyond this point.
- Separate formulas for calculating borrow rates and deposit rates.
This model aims to incentivize optimal capital allocation within the protocol.
Liquidation Mechanism
To maintain the protocol's solvency, Root Finance employs a liquidation mechanism. Key aspects of this mechanism include:
- Liquidations are triggered when an account's loan-to-value (LTV) ratio meets or exceeds the liquidation threshold.
- Up to 40% of the loan value can be liquidated in a single event.
- Liquidators receive an incentive, including an 8% liquidation fee.
- The process aims to restore loans to healthy collateralization levels.
This mechanism helps protect lenders and maintain the overall health of the protocol.
Flash Loans
Root Finance offers a flash loan feature, as evidenced by the security audit report. Flash loans allow users to borrow assets without collateral, provided the loan is repaid within the same transaction. Key points about flash loans:
- They enable complex DeFi operations and arbitrage opportunities.
- The audit identified a critical vulnerability in the flash loan mechanism, which was subsequently fixed.
- The implementation details and current status of flash loans are not fully described in the provided documentation.
Security Measures
Root Finance places a strong emphasis on security, as evidenced by several measures:
- The protocol has undergone rigorous audits by reputable third-party firms.
- Smart contracts are open-source and publicly available for community review.
- The team adheres to best practices in blockchain industry development.
Root Points System
Root Finance implements a Root Points system to incentivize user engagement. Key features of this system include:
- Users earn points for interacting with the platform, such as supplying or borrowing assets.
- Additional points can be earned through specific quests, like following Root Finance on social media.
- A referral program allows users to earn bonus points.
- Points are calculated based on the value of assets supplied or borrowed, with different rates for different assets.
- A leaderboard displays top wallets based on their Root Points.
This system adds a gamification element to the protocol, potentially increasing user engagement and retention.
Technical Details
Root Finance is built on a complex technical infrastructure designed to ensure security, efficiency, and functionality. This section delves into the technical aspects of the protocol, including its smart contracts, security measures, and integration with the Radix DLT.
Smart Contracts
Root Finance's core functionality is implemented through a series of smart contracts. The main components, as identified in the audit report, include:
- Lending Market: The central contract managing lending and borrowing operations.
- Single Resource Pool: Handles individual asset pools.
- Internal Price Feed: Provides price data for assets within the system.
Key smart contract files and their functions include:
lending_market.rs
: Implements the main lending market functionalities.resources.rs
: Defines the resources used in the system.modules/cdp_data.rs
: Manages Collateralized Debt Position (CDP) data.modules/cdp_health_checker.rs
: Checks the health of CDPs.modules/interest_strategy.rs
: Implements the interest rate strategy.modules/liquidation_threshold.rs
: Defines liquidation thresholds.modules/pool_config.rs
: Configures individual asset pools.modules/pool_state.rs
: Manages the state of asset pools.
These contracts are written in Scrypto, a programming language designed for the Radix DLT.
Security Measures
Root Finance implements several security measures to protect user funds and ensure the integrity of the system:
- Non-custodial Design: User assets are secured within immutable smart contracts, eliminating the need for trust in intermediaries.
- Open Source Code: The smart contracts are entirely open-source and publicly available, allowing for community review and verification.
- Third-party Audits: The protocol has undergone rigorous audits by reputable third-party firms to ensure the integrity and safety of the system.
- Access Control: The system implements access control mechanisms to restrict certain functions to authorized users only.
- Decimal Precision Handling: The system uses the
Decimal
type for financial calculations, though the audit report notes that there's room for improvement in standardizing decimal precision handling.
Audits and Vulnerabilities
An independent security audit of Root Finance identified several issues:
- Critical: A vulnerability in the flashloan mechanism allowing unrestricted burning of
TransientResData
resources, which could be exploited to avoid repaying flashloans. This issue was fixed. - Medium:
- Lack of a liquidator badge revocation mechanism.
- Centralized price feed, introducing a single point of failure risk.
- Low:
- Potential for creation of empty Collateralized Debt Positions (CDPs).
- Inconsistent handling of decimal precision in financial calculations.
These issues were addressed or mitigated following the audit.
User Interaction
Root Finance provides a platform for users to engage in lending and borrowing activities. This section details the primary ways users can interact with the protocol, including supplying assets, borrowing, repaying loans, and the liquidation process.
Supplying Assets
Users can supply their assets to Root Finance to become liquidity providers. The process works as follows:
- Asset Selection: Users can supply various cryptocurrencies, including $WBTC, $ETH, $XRD, $USDC, $USDT, and $HUG.
- Deposit: Users deposit their chosen assets into the Root Finance protocol.
- Root Receipts: In return for their supplied assets, users receive Root Receipts (e.g., $rtxETH, $rtxUSDC). These receipts represent the user's right to redeem their supplied assets in the future.
- Interest Accrual: The value of Root Receipts grows over time, reflecting the interest rates on deposits determined by the supply and demand dynamics of the assets.
- Withdrawal: Users can withdraw their supplied assets at any time by redeeming their Root Receipts, subject to the available liquidity in the protocol.
Borrowing
Root Finance allows users to borrow assets by using their supplied assets as collateral. The borrowing process involves:
- Collateral: Users must first supply assets to use as collateral.
- Loan-to-Value (LTV) Ratio: Each asset has a specific LTV ratio, which determines the maximum amount that can be borrowed against it. The overall borrowing capacity is calculated based on the average of the LTV ratios of the supplied assets, weighted by their respective values.
- Borrowing: Users can borrow any of the supported cryptocurrencies up to their borrowing limit. Available assets for borrowing include $WBTC, $ETH, $XRD, $USDC, and $USDT.
- Interest Accrual: The borrowed amount accrues interest over time, based on the protocol's dynamic interest rate model.
- Risk Management: Users need to monitor the market value of their collateral and borrowed amount to maintain a healthy financial position and avoid liquidation.
Repaying Loans
Users can repay their borrowed funds at any time using the "Repay" feature. The repayment process includes:
- Flexible Repayment: Users can choose to make partial or full repayments of their loans.
- LTV Reduction: Repaying loans lowers the user's LTV ratio, which is crucial for avoiding liquidation.
- Collateral Release: As users repay their loans and their LTV decreases, they can withdraw a portion of their collateral. Full repayment allows for complete collateral withdrawal.
- Interest Savings: Prompt repayment helps users minimize interest accumulation, allowing for better debt management.
Liquidations
Liquidations are a crucial part of the Root Finance protocol, ensuring its overall solvency. The liquidation process works as follows:
- Triggering Conditions: Liquidations occur when an account's collateral value decreases or the borrowed amount increases relative to the collateral, causing the LTV ratio to meet or exceed the liquidation threshold.
- Liquidation Threshold: This is set at 5% above the Maximum LTV for each asset. For example, if an asset's Max LTV is 70%, its Liquidation Threshold would be 75%.
- Liquidation Process: When a position is flagged for liquidation, the protocol allows liquidation of up to 40% of the Loan Value.
- Liquidator Incentive: Liquidators receive an incentive for performing the liquidation. This includes a liquidation fee of 8% of the liquidation value.
- User Impact: For the user being liquidated, the liquidation results in a reduction of their debt, but also a loss of a portion of their collateral.
- Health Bar: Root Finance provides a Health Bar feature to help users monitor their position's health and proximity to the liquidation threshold.
Users are encouraged to actively manage their positions, monitor market conditions, and maintain healthy LTV ratios to avoid liquidation events.
Root Points System
The Root Points system is an incentive mechanism designed by Root Finance to reward users for interacting with the platform. This system encourages user engagement and loyalty by offering points for various activities within the protocol.
Earning Mechanisms
Users can earn Root Points through several methods:
- Asset Supply and Borrowing: For every $100 worth of assets supplied or borrowed, users automatically accumulate Root Points every 24 hours.
- Quests: Users can complete specific tasks to earn additional points.
- Referrals: Users can earn bonus points by referring new users to the platform.
The accumulation of points is based on snapshots of user positions taken at random times throughout each 24-hour period.
Quests and Bonuses
Root Finance offers several quests and bonuses for users to earn additional Root Points:
- Social Media Engagement:
- Follow Root Finance on X (formerly Twitter): +10 Root Points (one-time bonus)
- Join the Root Finance Telegram: +10 Root Points daily
- Asset Deposit:
- Deposit at least $200 USD worth of assets: Earn Root Points daily based on the value deposited
- Asset Borrowing:
- Borrow at least $100 USD worth of assets: Accumulate Root Points daily based on the value borrowed
- Referral Program:
- Invite a friend to join Root Finance: Earn an additional 10% of the Root Points they accumulate every 24 hours
Point Calculation
The number of Root Points earned depends on the type and amount of assets supplied or borrowed:
- Supply Bonus:
- For every $100 worth of $XRD, $WBTC, $ETH and $LSU: 1 Root Point every 24 hours
- For every $100 worth of $USDC and $USDT: 2 Root Points every 24 hours
- For every $100 worth of $HUG: 3 Root Points every 24 hours
- Borrow Bonus:
- For every $100 worth of $USDC, $USDT, $XRD, $WBTC, $ETH and $LSU: 3 Root Points every 24 hours
Verification Process
To ensure fair distribution of points, Root Finance employs a verification process:
- Snapshots of users' positions are taken at random intervals throughout the 24-hour period.
- Assets must remain in place during the day to ensure eligibility for the points earned.
- If a user's balance changes or falls below the required threshold, their points for that day may be affected.
Leaderboard
Root Finance maintains a leaderboard that displays the top wallets based on their Root Points. This feature adds a competitive element to the points system, potentially driving further engagement with the platform.
Future Utility
While the current documentation doesn't specify the future utility of Root Points, such point systems in DeFi protocols are often used for:
- Governance participation
- Access to exclusive features or products
- Discounts on protocol fees
- Potential token airdrops
However, it's important to note that these are speculative uses and not confirmed features of the Root Points system.
Risks and Challenges
As with any decentralized finance (DeFi) protocol, Root Finance faces various risks and challenges. Understanding these is crucial for users, developers, and stakeholders involved with the platform.
Smart Contract Risks
Smart contract vulnerabilities pose significant risks to DeFi protocols. For Root Finance, several issues were identified in a security audit:
- Critical Vulnerability: A flaw in the flashloan mechanism was discovered that could allow unrestricted burning of
TransientResData
resources, potentially enabling users to avoid repaying flashloans. This issue was reported as fixed after the audit. - Access Control: The audit revealed a lack of a liquidator badge revocation mechanism. This could potentially lead to security issues if a liquidator's rights need to be revoked.
- Empty CDP Creation: The potential for creating empty Collateralized Debt Positions (CDPs) was identified as a low-risk issue.
- Decimal Precision: Inconsistent handling of decimal precision in financial calculations was noted, which could lead to small discrepancies that may accumulate over time.
While these issues were addressed or mitigated following the audit, the existence of such vulnerabilities highlights the ongoing challenge of maintaining secure smart contracts.
Market Risks
Market risks are inherent to any financial system, particularly in the volatile cryptocurrency market:
- Price Volatility: Rapid price fluctuations in cryptocurrencies can lead to sudden changes in collateral values, potentially triggering liquidations.
- Liquidity Risk: In periods of high market stress, there might be insufficient liquidity for users to withdraw their assets or for liquidations to occur efficiently.
- Interest Rate Fluctuations: The dynamic interest rate model used by Root Finance, while designed to balance supply and demand, could lead to rapid changes in borrowing costs or lending yields.
Operational Risks
Several operational risks were identified or can be inferred from the provided documentation:
- Centralized Price Feed: The audit report noted a centralized price feed as a medium-severity issue. This introduces a single point of failure risk, where inaccurate price data could potentially disrupt the entire system.
- Radix DLT Dependence: As Root Finance is built on the Radix DLT, it is exposed to any potential issues or limitations of this underlying blockchain platform.
- Liquidation Mechanism: While designed to maintain system solvency, the liquidation process could potentially lead to significant losses for users if not managed properly or if market conditions are extremely volatile.
Regulatory Challenges
While not explicitly mentioned in the provided documentation, DeFi protocols like Root Finance often face regulatory challenges:
- Regulatory Uncertainty: The rapidly evolving nature of DeFi means that new regulations could potentially impact the operation of protocols like Root Finance.
- Cross-border Transactions: As a decentralized platform, Root Finance may facilitate transactions across different jurisdictions, potentially raising complex legal and regulatory questions.
- KYC/AML Compliance: The non-custodial and decentralized nature of the protocol may present challenges in complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, which are increasingly being applied to cryptocurrency platforms.
It's important to note that the specific regulatory challenges faced by Root Finance are not detailed in the provided documentation, and the actual impact of regulations may vary depending on the jurisdictions involved and the evolving regulatory landscape.