In the previous article we introduced a based orderbook deployed on Ethereum as a based rollup, and an L1 lending protocol that acts as its risk engine for handling multiple collateral assets. In this piece we examine the lending protocol in depth and show how closer integration with the based orderbook can improve capital efficiency even further.

The end goal: Unified margin across Ethereum.

Collateralized Debt Position (CDP) underpins the largest lending and decentralized stablecoin protocols in DeFi. In a CDP, every debt position is overcollateralized by other assets.

Compared with undercollateralized or unbacked lending in the real world (think credit cards), CDPs are clearly less capital-efficient: you must own more to borrow less. That’s why efforts to bring undercollateralized lending onchain never stops, although Wildcat appears to be the only survivor so far.

The untold truth is, undercollateralized lending is never truly undercollateralized. Instead, it’s collateralized by intangible assets such as reputation, legally enforceable contracts, and social standing. Defaulting typically disqualifies you from future borrowing or limits what you can do in society, which is just another form of liquidation where your reputation or creditworthiness is consumed.

Trying to replicate undercollateralized lending onchain isn’t making the best use of blockchain, where technically everything can be tokenized and freely traded in one composable domain. Why not use everything as collateral? After all, this is how undercollateralized lending actually works in real life, and blockchain has the ability to trustlessly tokenize the intangible.

This direction has been explored in DeFi from two angles: enabling more assets as collateral, and looping/leveraged farming. Protocols pioneered by Rari Capital allow permissionless money markets, so that any asset can be used as collateral to borrow as long as there are willing lenders. Unsurprisingly, Rari Capital became the rookie camp for hackers and had been exploited on a monthly basis.

Looping/leveraged farming, on the other hand, has become mainstream with more yield-bearing assets emerging. Borrow against asset A, use the loan to buy more A, repeat the process, and you gain leveraged exposure to A and its yield. Some leveraged-farming protocols market themselves as “undercollateralized” because you can borrow more than your initial deposit, which mainly illustrates that undercollateralized lending is simply a natural use case of CDP.

Protocols like Morpho, Euler and Gearbox are trying to combine both: they enable as many collateral assets as possible by isolating markets thus risks and natively offer looping function, moving closer to permissionless spot leverage/margin trading.

Based orderbook introduces another asset type to Ethereum: perp positions. Orderbook-based perp DEXes aren’t new, but almost all run in their own execution environment (L1 or L2) and are siloed from existing ecosystems. By contrast, the composability of the based orderbook lets its perp positions be read and altered from Ethereum L1 in real time, making them feel more like native Ethereum assets.

In the Based Orderbook design there’s already an L1 CDP lending protocol that lets L1 users trade on the based orderbook with L1 collateral. So what if we also enable perp positions as collateral? For example, a user could deposit wstETH into the lending protocol, borrow USDC and deposit it to the based orderbook as margin to open a short ETH perp, then “deposit” that short position back into the lending protocol. After this flow, their lending protocol health factor improves, and they can borrow more USDC if desired.

The outcome of perp-as-collateral is similar to the portfolio margin mode available at CEXs, where a user’s whole portfolio (spot + derivatives) is assessed together and margin is set by portfolio risk. With CDP + based orderbook, users can use their entire L1 portfolio (including DeFi positions) to borrow stablecoin for perp trading, and let perps back the L1 borrowing. If the L1 portfolio falls but the user has unrealized perp gains, those gains can prevent a liquidation that would have occurred without perp-as-collateral. This unifies margin across L1 and L2, which upgrades the based orderbook into UMBO (Unified Margin Based Orderbook).

UMBO unlocks use cases that aren’t possible with existing designs:

• Any asset as collateral: Users can deposit preferred L1 assets into UMBO, borrow USDC and trade. Unified margin allows perp positions to count as collateral, so users don’t lose capital efficiency to overcollateralized borrowing.

• Leveraged basis trading: Delta-neutral basis trading positions (spot + short perp) can be used as collateral to borrow more and increase leverage on UMBO. Normally, to construct a $10,000 delta-neutral position to farm funding, one needs:

      With UMBO, the capital requirement can be reduced by 11x:

• Boosted leverage: Traders can effectively exceed a perp DEX’s leverage cap (e.g., 25x) by borrowing against perp positions or idle L1 assets to get extra margin and reach higher effective leverage on their original input (e.g., 30x).

Crucially, UMBO doesn’t require changes by perp DEX — the latter needs not to be aware of the existence of a lending protocol. That means UMBO can work with other non-native perp DEXs seamlessly as long as they are also synchronously composable with Ethereum L1 (and they can use LingLong stack to do so).

Ethereum is often described as the settlement layer and balance sheet, with rollups hosting applications. We haven’t fully realized that vision, and one shortcoming is clear: when assets become isolated inside rollups or apps (effectively “locked” on L1), we give up composability, one of blockchain’s biggest strengths.

UMBO addresses this. It makes rollup assets accessible to L1 logic and provides a margin engine that accepts assets across L1 and rollups, preserving cross-domain composability and maximizing capital efficiency. In effect, Ethereum becomes the prime broker, extending credit to users whose portfolios span L1 and rollups.

Practically, UMBO spins up an smart contract account for each user so they can interact with rollup apps (for example, a perp DEX) while enjoying portfolio margin that includes their L1 deposits. Using Ethereum with UMBO will feel different, and better.

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In the previous article we introduced a based orderbook deployed on Ethereum as a based rollup, and an L1 lending protocol that acts as its risk engine for handling multiple collateral assets. In this piece we examine the lending protocol in depth and show how closer integration with the based orderbook can improve capital efficiency even further.

The end goal: Unified margin across Ethereum.

Collateralized Debt Position (CDP) underpins the largest lending and decentralized stablecoin protocols in DeFi. In a CDP, every debt position is overcollateralized by other assets.

Compared with undercollateralized or unbacked lending in the real world (think credit cards), CDPs are clearly less capital-efficient: you must own more to borrow less. That’s why efforts to bring undercollateralized lending onchain never stops, although Wildcat appears to be the only survivor so far.

The untold truth is, undercollateralized lending is never truly undercollateralized. Instead, it’s collateralized by intangible assets such as reputation, legally enforceable contracts, and social standing. Defaulting typically disqualifies you from future borrowing or limits what you can do in society, which is just another form of liquidation where your reputation or creditworthiness is consumed.

Trying to replicate undercollateralized lending onchain isn’t making the best use of blockchain, where technically everything can be tokenized and freely traded in one composable domain. Why not use everything as collateral? After all, this is how undercollateralized lending actually works in real life, and blockchain has the ability to trustlessly tokenize the intangible.

This direction has been explored in DeFi from two angles: enabling more assets as collateral, and looping/leveraged farming. Protocols pioneered by Rari Capital allow permissionless money markets, so that any asset can be used as collateral to borrow as long as there are willing lenders. Unsurprisingly, Rari Capital became the rookie camp for hackers and had been exploited on a monthly basis.

Looping/leveraged farming, on the other hand, has become mainstream with more yield-bearing assets emerging. Borrow against asset A, use the loan to buy more A, repeat the process, and you gain leveraged exposure to A and its yield. Some leveraged-farming protocols market themselves as “undercollateralized” because you can borrow more than your initial deposit, which mainly illustrates that undercollateralized lending is simply a natural use case of CDP.

Protocols like Morpho, Euler and Gearbox are trying to combine both: they enable as many collateral assets as possible by isolating markets thus risks and natively offer looping function, moving closer to permissionless spot leverage/margin trading.

Based orderbook introduces another asset type to Ethereum: perp positions. Orderbook-based perp DEXes aren’t new, but almost all run in their own execution environment (L1 or L2) and are siloed from existing ecosystems. By contrast, the composability of the based orderbook lets its perp positions be read and altered from Ethereum L1 in real time, making them feel more like native Ethereum assets.

In the Based Orderbook design there’s already an L1 CDP lending protocol that lets L1 users trade on the based orderbook with L1 collateral. So what if we also enable perp positions as collateral? For example, a user could deposit wstETH into the lending protocol, borrow USDC and deposit it to the based orderbook as margin to open a short ETH perp, then “deposit” that short position back into the lending protocol. After this flow, their lending protocol health factor improves, and they can borrow more USDC if desired.

The outcome of perp-as-collateral is similar to the portfolio margin mode available at CEXs, where a user’s whole portfolio (spot + derivatives) is assessed together and margin is set by portfolio risk. With CDP + based orderbook, users can use their entire L1 portfolio (including DeFi positions) to borrow stablecoin for perp trading, and let perps back the L1 borrowing. If the L1 portfolio falls but the user has unrealized perp gains, those gains can prevent a liquidation that would have occurred without perp-as-collateral. This unifies margin across L1 and L2, which upgrades the based orderbook into UMBO (Unified Margin Based Orderbook).

UMBO unlocks use cases that aren’t possible with existing designs:

• Any asset as collateral: Users can deposit preferred L1 assets into UMBO, borrow USDC and trade. Unified margin allows perp positions to count as collateral, so users don’t lose capital efficiency to overcollateralized borrowing.

• Leveraged basis trading: Delta-neutral basis trading positions (spot + short perp) can be used as collateral to borrow more and increase leverage on UMBO. Normally, to construct a $10,000 delta-neutral position to farm funding, one needs:

      With UMBO, the capital requirement can be reduced by 11x:

• Boosted leverage: Traders can effectively exceed a perp DEX’s leverage cap (e.g., 25x) by borrowing against perp positions or idle L1 assets to get extra margin and reach higher effective leverage on their original input (e.g., 30x).

Crucially, UMBO doesn’t require changes by perp DEX — the latter needs not to be aware of the existence of a lending protocol. That means UMBO can work with other non-native perp DEXs seamlessly as long as they are also synchronously composable with Ethereum L1 (and they can use LingLong stack to do so).

Ethereum is often described as the settlement layer and balance sheet, with rollups hosting applications. We haven’t fully realized that vision, and one shortcoming is clear: when assets become isolated inside rollups or apps (effectively “locked” on L1), we give up composability, one of blockchain’s biggest strengths.

UMBO addresses this. It makes rollup assets accessible to L1 logic and provides a margin engine that accepts assets across L1 and rollups, preserving cross-domain composability and maximizing capital efficiency. In effect, Ethereum becomes the prime broker, extending credit to users whose portfolios span L1 and rollups.

Practically, UMBO spins up an smart contract account for each user so they can interact with rollup apps (for example, a perp DEX) while enjoying portfolio margin that includes their L1 deposits. Using Ethereum with UMBO will feel different, and better.

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