In-depth Analysis of Loopscale: How to Reconstruct the Solana Decentralized Finance Lending Market?

Original title: "Loopscale: Order book lending on Solana"

Author: Castle Labs

Compiled by: Luiza, ChainCatcher

Although the total locked value (TVL) of Ethereum's DeFi is still far from the peak in 2021, Solana's TVL has seen significant growth and has now reached an all-time high.

The characteristics of the Solana ecosystem make it an ideal choice for lending protocols. Protocols like Solend are a testament to this—by 2021, the deposit scale of this protocol was close to $1 billion. Although the collapse of FTX severely impacted the development of the Solana lending ecosystem in the following years, the lending protocols on Solana have shown strong resilience and have spurred a new wave of growth.

In 2024, the TVL of lending protocols on the Solana chain was still less than 1 billion USD, but this figure has now surpassed 4 billion USD. Among them, Kamino leads with a TVL of over 3 billion USD, followed closely by Jupiter with a TVL of 750 million USD.

This study will first analyze the limitations of the pool-based lending model and the rise of alternative models. It will then delve into Loopscale's value proposition, unique features, and the practical benefits it brings to users. Finally, it will look forward to the future development trends of the lending market and raise several thought-provoking questions.

The evolution of the lending model ###

Mainstream lending protocols (such as Aave and Compound) generally adopt a liquidity pool model: users inject liquidity into the pool for others to borrow. The interest rate is dynamically adjusted by an algorithm based on the utilization rate (total borrowed amount / total deposited amount).

In the early stages, the design flexibility of such protocols was limited by the architecture of the Ethereum mainnet. Although the liquidity pool model has advantages in the initial phase and in ensuring the liquidity of collateral assets, it has obvious shortcomings:

• Liquidity fragmentation (new asset launch issue): Each new asset requires the establishment of a separate liquidity pool, a process that inevitably leads to liquidity fragmentation. Users managing multiple positions also face increased complexity, requiring more effort for active management.
• Rough risk pricing: The utilization curve is a "one-size-fits-all" pricing mechanism, which is inefficient and may ultimately lead to terms that are either overly aggressive (high risk) or overly conservative (low yield). In fact, the interest rates of liquidity pools often align with the collateral assets that carry the highest risk in the pool.
• Low capital utilization efficiency: In the lending market of capital pools, only the borrowed funds generate interest, but the interest income needs to be distributed among all deposit users. This means that the actual interest received by lenders is lower than the interest paid by borrowers, resulting in "deadweight capital." Additionally, idle funds in the capital pool that are awaiting borrowing also participate in interest distribution, further widening the aforementioned interest spread.

To alleviate these issues, protocols such as Euler, Kamino (V2), and Morpho (V1) have introduced curated vaults, where funds are allocated and interest rates are set by professional managers.

This pragmatic improvement can transform without the need for a complete reconstruction of the technology stack of lending protocols, while addressing some issues of the liquidity pool model. In the curated vault model, the vault is managed by selected "curators" who possess professional research and risk control capabilities, responsible for fund allocation, market selection, interest rate setting, and loan structure design. The advantages this model brings to users include:

• Users can independently choose different vault managers, with each vault designed for specific risk preferences, allowing users to avoid exposure to the risks of all assets supported by the fund pool.
• Easier position management: Managers can quickly allocate assets to new markets, thereby more efficiently guiding liquidity towards new assets and assisting in the launch of new asset pools.

However, the selected vaults also have defects:

Trust and alignment of interests issue: The treasury is operated by a third-party manager, and users need to trust them, while the alignment of interests between the manager and users is difficult to fully ensure.

Competition among managers and rising costs for borrowers: Managers are responsible for setting risk parameters, formulating strategies, and adjusting liquidity in pursuit of higher returns. During the process of adjusting liquidity, competition can arise between different strategies of managers, which adversely affects borrowers — as managers have the incentive to maintain a high utilization of funds to provide lenders with a considerable annual percentage yield (APY), this drives up borrowing rates and increases costs for borrowers.

The inherent flaws of the liquidity pool that even the selected vaults could not solve:

• The "value loss" caused by low-interest efficiency will still harm the capital efficiency of the lending market;
• The startup costs for the new market remain high;
• Liquidity is still dispersed across multiple independent markets;
• The volatility of interest rates is significant, making it difficult to meet the needs of institutional users;
• Lack of flexibility, supporting new assets or credit products requires governance voting and the creation of new independent funds.

Although the selected vault optimizes risk management by splitting liquidity, its essence remains a variant of the fund pool model. As the variety of supported assets and risk combinations continues to increase, the number of selected vaults is constantly growing, and its logic has approached the order book model—each lending quote is an "independent market" with specific terms, achieving extreme refinement.

Why is the order book model rising at this time?

The concept of order book lending has been recognized for some time, but in the past it was constrained by the high transaction costs of networks like Ethereum and technical limitations, making the deployment of the order book model often impractical, with obvious flaws in scalability and capital efficiency.

The rise of alternative public chains such as Solana has changed this situation - their low transaction costs and high throughput characteristics have finally made it possible to build scalable and efficient order book lending markets.

The liquidity pool model has supported the scaled development of lending protocols, but the order book model provides the much-needed flexibility for the market, especially suitable for institutional users and diverse asset types, such as interest-bearing RWA tokens (like OnRe's ONyc), AMM LP positions, JLP/MLP tokens, and LSTs (with a TVL exceeding $7 billion), allowing users to have full control over risk allocation.

Loopscale: Order book lending protocol on the Solana chain

Loopscale is an order book-based lending protocol on the Solana chain, with current deposit liquidity exceeding 100 million USD and an active loan size of 40 million USD.

Unlike traditional lending platforms based on liquidity pools, Loopscale's core innovation lies in allowing lenders to create customized orders, setting their own loan structures and risk parameters. These quotes are "listed" on the order book based on interest rates and other terms, with lending matching completed by Loopscale's matching engine.

Core Advantages of the Loopscale Order Book Model

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①Automated Vault:

For users looking to further simplify operations, Loopscale achieves process automation through its "Curated Vaults". The liquidity injected into the vaults can be used across all markets approved by the managers, with each vault equipped with a risk manager responsible for setting unique risk preferences and strategies.

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This design has created a differentiated strategy system that can meet the risk needs of different users: for example, some users may be willing to take on reinsurance-related risks through the USDC OnRe treasury (via the ONyc token); while users with a conservative risk preference can choose to deposit funds into the USDC Genesis treasury—this treasury will carry out robust liquidity diversification across various markets in Loopscale.

②One-Click Leveraged Loop:

In addition to traditional lending, Loopscale also supports the "capital recycling" feature. Through this feature, users can leverage interest-bearing assets (including JLP, ALP, digitSOL, ONyc, etc.), and the specific principle is as follows:

The core logic of capital circulation is as follows: after depositing collateral assets, borrow the same assets as the collateral, allowing both the initial holding and the borrowed tokens to generate returns. The leverage ratio available to users depends on the market's loan-to-value ratio (LTV).

Taking liquid staking tokens (LST) as an example, the traditional capital circulation process is as follows:

1. Deposit wstETH (Wrapped Staked ETH);

2. Borrow ETH;

3. Exchange ETH for wstETH;

4. Borrow ETH again to obtain higher wstETH yields.

It is important to note that the capital circulation operation only yields actual profits when the yield rate of LST is higher than the annual borrowing interest rate.

On Loopscale, this process is simplified to a "one-click operation," allowing users to complete multiple steps without manual intervention.

By using the capital circulation feature, users can maximize the APR of interest-bearing tokens.

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In addition, leveraged capital circulation also allows users to conduct directional leveraged trading on assets such as stocks.

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③Solutions to the Defects of the Capital Pool Model

Liquidity Aggregation

The order book model can address the liquidity fragmentation issue of the liquidity pool market. Loopscale further resolves the liquidity fragmentation of the liquidity pool model and the problem of capital being difficult to reuse in the early order book model by creating a "virtual market." Lenders only need to perform one operation to synchronize orders across multiple markets, without being restricted to a single market or managing multiple positions.

Efficient Pricing

Each market on Loopscale is modular, with independent collateral asset types, lending rates, and terms. This means lenders can set rates specific to certain collateral assets and principal, no longer constrained by capital utilization. Ultimately, the rates for each asset will be dynamically adjusted based on market supply and demand in the order book (which may be influenced by factors such as asset volatility).

This design simultaneously achieves the following objectives: minimizing "ineffective funds" to the greatest extent; ensuring that the borrowing rate completely matches the deposit rate (in the fund pool model, "interest income must be distributed to all deposit users, resulting in the lender's income being lower than the borrower's cost," whereas in Loopscale, interest is only paid on funds that are actually utilized, achieving precise rate matching);

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In particular, it supports fixed-rate, fixed-term loans to meet the needs of institutional users - institutional users are usually reluctant to accept interest rates that fluctuate based on utilization in a liquidity pool model.

Optimize capital utilization

Loopscale leverages the "Optimized Yield" mechanism to reduce idle funds waiting for matching in the order book. Its operational logic is simple and straightforward: Loopscale directs this portion of idle liquidity to the MarginFi platform, ensuring that lenders can still "earn competitive yields" before the order matching is completed.

Expand asset support scope

The Loopscale team can easily integrate with other protocols and fully leverage Solana's asset composability to support assets that struggle to obtain liquidity in the liquidity pool market.

④The actual benefits brought to users

The aforementioned features provide users with tangible benefits: users can fully control loan terms, collateral assets, and the markets they participate in, achieving refined management; as competition in the lending market intensifies on the interest rate front, the Loopscale model has advantages over pricing methods based on capital pool utilization — by directly matching orders, interest rates can be precisely aligned, saving costs for borrowers while increasing returns for lenders.

) Future Outlook and Conclusion

Loopscale combines the flexibility of order books with a modular marketplace to directly address the inefficiencies of the pool funding model, providing users with customized interest rates, optimized collateral pricing, and risk management tools.

As DeFi expands towards institutional capital and RWA, the order book model will become an important infrastructure for scaling on-chain lending. Loopscale has supported various RWAs and exotic assets, and continues to expand partnerships. New markets only require an oracle and initial liquidity (which can be provided by the treasury or individual lenders), significantly lowering the threshold.

Currently, the Solana ecosystem is benefiting from the widespread adoption of new token prototypes, including LST worth billions of dollars, liquid staking derivatives (LRT), staked SOL (which accounts for 60% of the total SOL supply), liquidity positions, RWA assets, and more. In this context, lowering the access threshold for new assets as collateral is key to enhancing market efficiency. The feasibility of an order book lending model has been widely recognized in the market - protocols like Morpho have introduced similar designs in their V2 version.

Although Loopscale suffered a hacking attack in April 2025 (shortly after its launch), the team demonstrated strong resilience, and all funds have been recovered. It is important to note that handling complex collateral carries risks, and thorough risk assessment and management must be conducted from both an operational and user interface perspective. If these challenges can be properly addressed, Loopscale is expected to optimize its architecture with the help of Solana's technology stack and successfully promote the scaling development of the platform.