An explainer of money market protocols & Kamino’s emergence at the heart of Solana DeFi
The financial system is immense, with a lot of “trillions” as you look across asset markets: real estate is valued at $630 tn, netted derivatives markets at $600 tn, and the global bond market around $130 tn. The US M2 money supply exceeds $89 trillion. DeFi remains a ways’ off its first “trillion”, with a total value locked (TVL) of $81.2 billion as of October 2024.
The Introduction
Within DeFi, two use cases that have found product market fit are stablecoins and money markets. To learn more about stablecoins, read our article about asset tokenization here: https://medium.com/rockaway-blockchain/asset-tokenisation-landscape-outlook-2024-82a85b80873e”
Money markets serve two functions within crypto: yield generation and leverage. The majority of crypto use cases nowadays continue to be closely tied to leverage trading, and yield maximization strategies, to which crypto money markets cater perfectly. TVL of Money Market protocols is reaching $30.4 billion, which is 37% of the entire DeFi TVL.
Since the current use of lending markets is closely tied to trading, it experiences similar (albeit muted) volatility tied to the overall industry cycles. Floating-rate lending markets dominate — as financial markets heat up, users flock into lending markets for leverage, borrowing costs programmatically growing, incentivizing lenders to provide more liquidity until the cycle turns.
Apart from leverage, lending markets provide additional use for crypto natives — borrowing stablecoins against their native crypto assets. For example via dapps like Spark, crypto users can borrow stablecoins against their crypto holdings at low LTV (”loan-to-value”) ratios, off-ramp these, and utilize them for traditional purchases, all while keeping their crypto asset positions unchanged.
Looping (circularly depositing and borrowing against your position to develop leveraged position) and flashloans (borrowing uncollateralized with the restriction of repaying the borrowed amount within the same block), despite being more related to trading and yield maximization, are important defi-native innovations in the system. Looping, currently offered by the likes of Gearbox, Contango, and others, allows for low-cost leveraged yield opportunities and flashloans are often used in arbitrage opportunities, improving the efficiency of the financial system on-chain.
Stepping back, crypto money markets took off during the “DeFi Summer” of 2020 and the subsequent crypto market expansion. Due to the pseudo-anonymous nature of the space, overcollateralized, variable-rate lending protocols were dominant, supplying leverage power to traders and high yield to lenders in an otherwise virtually zero-rate TradFi (”traditional finance”) environment. After the collapse of LUNA which caused market havoc resulting in falls of CeFi (”centralized finance”) lenders like Celsius, Genesis and overleveraged hedge fund managers like 3AC, the lending markets froze until a renewed interest appeared in late 2023. As trading volumes recovered, demand for leverage climbs, pushing deposit yields on lending protocols higher and incentivizing new deposits — translating to higher lending market TVL.
The Market
Overcollateralized lending currently makes up around 37% of total DeFi TVL, up 3x from the lows of 2023 but still 41% down from its 2021 peak (of $51 billion).
In terms of chain dominance, Ethereum (mainnet alone) continues to dominate, making up approximately 50% of total lending TVL. Solana’s money markets experienced a massive resurgence in 2024, growing from 0.6% to 6.3% of the total lending TVL.
Solana
In the past months, during which Solana DEXs have been the launch spot of choice for surging meme coins, Solana DeFi is in full swing, and once dominant money market protocols fell apart while new winners emerged. By far the most dominant lending market on Solana is Kamino Finance, which managed to amass over $1.5bn in TVL in a year. Key contenders — Solend (now Save) and Marginfi — failed the war for users and other numerous players such as Port Finance, Francium, Apricot, Mango Market, Jet Protocol, Larix, Acumen never reached an inflection point.
The Players
The 2024 resurgence of Solana DeFi activity saw 3 potential winners — Save, Marginfi, or Kamino.
Save (Solend rebrand) has been around since 2021 and is considered the OG Solana lending protocol. As FTX unfolded, Save accumulated bad debt of about $6 million, was hacked for $1.3 million due to faulty oracle, shut down for several months and the team never managed to fully recover. Lenders are highly risk-averse and the protocol failed them.
Marginfi on the other hand emerged from the post-FTX ashes as a new, shiny money market product and primarily innovated on their points program. Yet, the community outcry over user farming with no token airdrop in sight hampered the protocol, and Kamino claimed market share. To add insult to injury, Marginfi’s founding team split up over internal differences.
On to the winner — Kamino. Kamino’s founding team has deep ties in Solana DeFi, having formerly been behind the Hubble protocol — a stablecoin-issuer , which didn’t gain major traction, but gave the team battle-scars and new insights on what would come next. Kamino launched in 2022 as a DeFi platform optimizing LP (”liquidity provider”) provisioning within Solana’s DEXs (”decentralized exchanges”). In 2023, the team saw an open space in the Solana money market segment given the vacuum of credible and functioning lending protocols left in the wake of FTX and decided to add lending markets to their suite of products and create a holistic “one-stop-shop” DeFi platform for Solana ecosystem.
Today
Currently, Kamino Finance offers four products:
- Lending markets — Main market, JLP market, Ethena market, and Altcoins market (each offers different risk profiles and as such, although certain tokens can be found in each market, they offer different borrow and supply rates) to lend/borrow stablecoins or native assets
- Liquidity markets — LP provisioning with automatic rebalancing to generate yield on stablecoins or native assets
- Multiply product suite — a suite of automated products which are built on Kamino Lend utilizing looping (leverage) product on major LST (”liquid staking” like jitoSOL or mSOL) tokens and JLP token to increase yield
- Leverage (long/short) markets — directional leveraged exposure to offered tokens via flashloans
As of October 2024, Kamino accumulated over $1.6 billion in TVL with $1.48 billion in its lending markets and $0.2 billion in its liquidity provisioning. Kamino’s TVL makes up over 26% of total Solana TVL.
There are several reasons why Kamino became Solana’s key money market protocol:
- UX/UI — Kamino excels in creating easy to understand and seamless UX/UI. Providing simple UX is a staple of Solana dapps and Kamino is a clear example of how any complexities to financial decision making can be abstracted away. Users then enjoy returning to the platform and thanks to the portfolio management solution offered by Kamino team, keeping assets on the platform, tracking positions, PnL, and relative performance to other strategies develops moat.
- Collaborations — Kamino team is well-ingrained in the community and is able to capitalize on the community. In 2024, any token launch worth mentioning was accompanied by an incentivized (partner-token incentivized) liquidity provisioning via Kamino, which drove TVL of newly launched tokens to the platform.
- Multiply products — With the launch leverage products of Sanctum-based LSTs and JLP (LP) token, which can with relative safety provide significant return, TVL continues to climb up.
- Risk management — At the center of Kamino’s strategy is safety for depositors and fair treatment for borrowers. Marius, Mark, and Thomas are some of the most risk-cautious founders I have met in crypto, constantly considering what effect design choices, cap limits, and asset additions will have on the risk of the platform and their users. It is then no surprise that Kamino never accrued any bad debt and some of Kamino’s products (eg. Multiply) never experienced liquidations. Given Kamino’s target user profile and clear user behavior when trust is violated (eg. Solend hack), this founder trait gives Kamino a lasting edge.
- Token incentives — Kamino managed to incentivize user adoption with their ongoing and innovative token airdrop campaign, which introduced linear airdrop with loyalty multiplier to future incentive campaigns to the Solana ecosystem. Kamino’s timing was impeccable. The team launched their campaign with a promise of a swift airdrop in the middle of user outcry over Marginfi’s lack of token airdrop, which pushed users over to Kamino’s lending markets.
The Future
On September 3, 2024, Kamino announced their roadmap and v2. v2 aims to build on the battle-tested smart contracts of v1 but “modularizes” (splits its architecture into several layers and markets instead of one) the lending pools market layer to offer wider variety of risk-return profiles to users.
To borrow directly from Kamino’s introduction of their v2, key features will be:
- Unlimited asset combinations and vault configurations
- Risk oracles
- Collateral rehypothecation (yield on collateral)
- Customizable interest rate curve and fee parameters
- Automation features (looping, leverage, repay with collateral, collateral swaps, etc.)
- Margin calls, deleveraging
- Limit orders (target leverage, take profit, stop loss, deleverage, releverage)
Apart from allowing permissionless creation of lending markets (ie anyone can create a lending market for any asset), a new layer — the vault layer — will be created, professionally managed by vault creators, providing depositors with a simplified UX when selecting their preferred level of yield and associated market exposure. Vault layer will become the key component of the new design. As new markets come live, UX would deteriorate as depositors would be forced to undergo lengthy process of understanding the risks of depositing assets into particular markets. With curators though, which provide active vault management, the selection (on a side of a depositor) is reduced to a simple choice of an asset to deposit, required yield on its deposit, and curator quality.
Lastly, v2 will build and improve on the features offered in v1 by upgrading their liquidation engine, risk management architecture, and additional automation features such as auto-unstake, target leverage, or take-profit/stop-loss orders.
Under the team’s v2 vision and their roadmap to achieving $10 billion in TVL, Kamino plans to focus on 4 core pillars:
- Product — as discussed above, releasing a complete rework of their architecture to achieve more flexible, risk-return adjustable, modular design.
- Community — in essence, collaborating with and rewarding active community members while creating a cult-like moat around Kamino.
- KMNO — align KNNO utility with the success of the protocol so that KMNO holders are directly link to the value of the protocol.
- Revenue — ensure healthy longevity of the protocol by focusing on building a reliable monetization model.
The Value
Kamino launched its $KMNO token in early Q2 2024 with two basic utilities — governance and staking. Staking the tokens on the platform currently provides most utility to users, because it provides a loyalty boost to the platform’s ongoing points seasons. Users of the Kamino platform receive points for interacting with the platform with certain asset boosters, etc. and staking KMNO tokens adds a loyalty boost on the points, which directly translates to larger token allocations at the end of the airdrop seasons.
Governance, although not monetarily as useful as staking, is currently being established and the community will have more of a role to play in Kamino via the DAO setup.
The protocol, via its token, is currently valued at $940 million FDV (as of the time of writing) with 13.5% circulating supply and market capitalization of $127 million. The token is traded with around $4.2 million in 24H volume (3.3% of market cap traded daily) with the largest traded presence on Bybit. In comparison, AAVE (token of the money market protocol on Ethereum), has $2.2bn market cap with $140m 24H trading volume (6% of market cap traded daily). Now to the more interesting question — at what valuation should KMNO be trading at?
As mentioned previously, Kamino amassed $1.6 billion in TVL ($1.5 billion of which is lending, excluding borrows), growing at a staggering rate of 42% month-on-month on average since November 2023.
When we look at EVM-comparables, the top 5 protocols by TVL are: Aave, JustLend, Spark, Compound, and Venus. When we compare their TVL growth to Kamino (where we align growth not based on time but age of protocol), Kamino achieved by far the highest TVL growth with 3,457% month-on-month in month 1. In months 2+, Kamino, based on the available data, shows strength positioning itself in the middle of the pack, quite closely following the growth path of JustLend. Note that the absolute TVL at the time of measurement plays an important role to the magnitude of the change and should be taken into account, which is why we see growth tapering over time for all of the protocols.
Looking at the absolute TVL relative to FDV for the top EVM lending markets (note that Spark does not have a token and as such is excluded from the chart below), an interesting pattern emerges. It appears FDV decline is the driver of TVL decline in early stages of the protocol life. This is highly counterintuitive as one would expect FDV to reflect the changes in TVL (with some delay) not the other way around. The relationship can be explained through liquidity mining programs lending protocols employed in the early stages of their life cycle to incentivize TVL flows. Token incentives acted as additional yield to depositors, who could sell those into the market, creating sell pressure on the protocol’s FDV while simultaneously mining additional token rewards by leaving TVL in as long as the programs were live.
When considering how the market values lending protocols, there are 2 approaches market participants take. One utilizes FDV/TVL ratio across competitors and adjusts for market share, utilization rates, etc. and second, based on more fundamental metrics such as revenue and associated P/S ratios. Although TVL is often misleading, it actually works quite well for lending markets as it reflects 1) level of trust depositors have in the protocol and 2) the absolute size borrowers can hypothetically utilize. Revenue multiples then allow greater flexibility in establishing future expectations.
The Value — FDV to TVL approach
When we plot out FDV/TVL ratio for EVM lending protocols over time, we see major spikes in the early days of 2020 and 2021 before normalizing to a range of 0.05x to 0.40x. AAVE, Compound, and Venus generally trade in the 0.1x-0.3x range with JustLend continuously trading below the pack, though with incredible stability, at 0.05x.
Using FDV/TVL as the proxy metric to value Kamino, Kamino’s value should currently be in the range of $116 million to $1.8 billion if we consider the implied ratios of the company’s EVM parallels at the same stage of life as comparables. More so, it is important to consider the market leader premium and as such, Kamino should be rather aligned to Aave (Aave’s market share in the early stages of the protocol life was at 70%, same as current Kamino’s market share). When compared to Aave (the EVM leader), Kamino is actually 2x undervalued given its TVL and life stage.
However, FDV/TVL doesn’t consider the trust, sentiment, and activity on the protocol from the demand-side, which is a crucial piece to the valuation of the lending/borrowing equation. When we look at utilization (expressed as borrowed assets as % of TVL) over time, we see that utilization tends to hover between 25% and 45% most of the time. One exception would be JustLend utilization, which is consistently below 2%. Given JustLend’s FDV/TVL significantly below its peers, low utilization appears to play a factor in the valuation of lending protocols.
When we look at Kamino’s utilization rate, it tends to hover around 25% to 35%, close to Aave (and above where Aave was at this stage in its maturity), which would again place it closer to Aave-like valuation — arguably as a reflection of user’s trust and belief in it sstaying power.
The Value — Price to Sales approach
Using the second approach focused on revenue and P/S ratio, Kamino currently takes 2% weighted average yield on the borrower APY (”annual percentage yield”), which at $866 million borrows outstanding implies $17.3 million in annual revenue. Applying an average P/S multiple of 53x (average of EVM comparables), would place current valuation of the protocol at $921 million, in line with the current FDV of $940 million.
The Future Value
Given the wide range of valuation outcomes for FDV/TVL approach and an accurate results from P/S approach, it seems the market is favoring P/S to value Kamino. Looking into the future, assuming Solana will continue to grow its market share, we can expect Kamino to reach Aave-like size in the next couple years. At 7x growth, Kamino TVL will catch up to Aave. Making small adjustments to the borrow ratio to align with the wider market and expecting P/S multiples to decline as the overall industry matures, we can expect Kamino valuation to climb up to $3.9 billion, approximately 4.2x the current FDV.
The Wrap Up
To tie it all together, Kamino is well-positioned to take advantage of its premier position as the leading lending protocol on Solana. Lending markets have already proven product-market fit, and as Solana continues to grow its dominance, Kamino will rise with it. Applying reasonable growth assumptions, there is still plenty of upside, particularly when we factor in Kamino’s v2 architecture and roadmap, and its track-record at providing amazing UX/ UI to users.
References
https://gov.kamino.finance/t/kamino-road-to-10b/22
https://www.icmagroup.org/market-practice-and-regulatory-policy/secondary-markets/bond-market-size/
https://www.statista.com/outlook/fmo/real-estate/worldwide
https://gov.kamino.finance/t/introducing-kamino-lend-v2/58
https://blog.kamino.finance/kmno-launch-tokenomics-b19b8372b262
https://www.delta.exchange/blog/what-is-compound-liquidity-mining
https://thedefiant.io/news/defi/aave-liquidity-mining-catapults-lender-to-become-top-defi-protocol
Kamino Finance — 10.22.2024 Model.xlsx
