As Sentiment v2 prepares for launch, it's useful to explore what makes Sentiment appealing and how the team envisions the product beyond its basic protocol.

Obsessing Over the Borrower

Most lending markets today prioritize lender safety and risk monitoring. While this is critical for attracting capital, as the market becomes more competitive, security alone won't be enough to retain and expand capital. Capital retention and expansion require scalable, risk-adjusted yields independent of incentives. To achieve this, lending markets must focus on borrowers' needs and behaviors, as they are the core customers. Borrowers drive demand and set prices in lending markets, not lenders, making it essential to address borrowers’ needs. Ignoring this risks creating an imbalance where there's abundant supply but little demand. This supply-demand imbalance is one of the primary challenges facing most incumbent DeFi protocols today.

Modularity allows newer markets to better address borrowers' needs over time.

Operating Like a Credit Fund

Sentiment v2 can easily function like a skeuomorphic credit fund, and we encourage this approach for two reasons:

1. Flexibility in Borrowing Initiatives: The Sentiment team can explore high-potential borrowing initiatives without introducing excessive system risk.

2. Responsive External Risk Managers: External risk managers can quickly respond to market demands without cumbersome governance processes.

Credit funds add value to economies by taking underutilized assets and allocating them to initiatives where they can drive productive growth. Sentiment will perform a similar role for the on-chain economy.

A modular lending system offers many benefits, the most significant being its ability to list collateral assets seamlessly, allowing borrowers to access liquidity efficiently. The key advantage of Sentiment v2 over other lending markets is that borrowers are not limited to overcollateralized loans. The Sentiment Position Manager enables a range of expressive borrowing activities, creating an “on-chain credit card” experience. To truly be borrower-centric, the core protocol must provide the flexibility for borrowers to pursue actions beyond basic leverage. In time, we anticipate that even entire chains and apps will become significant borrowers on Sentiment, using our liquidity to fuel their own on-chain economies.

Scaling the On-Chain Economy

While passive lenders are vital to DeFi, the real force driving growth in the on-chain economy will be borrowers. In any local or global economy, credit growth—whether through mortgages, car loans, or education financing—is a key indicator of development. The same holds true for crypto, where liquidity is the metric we are all optimizing for. A lending market that wants to maintain and grow liquidity must always stay ahead of borrower demand.

Sentiment’s initial focus will be on supporting market-making activities, which currently demand the most liquidity in DeFi. In the medium term, it's reasonable to expect that borrowers will shift from individual DeFi users to protocols, DAOs and chains themselves, borrowing capital to stimulate their on-chain economies. The ultimate goal is to blur the lines between the on-chain and real-world economies.

Borrowers Are All You Need

A borrower-centric philosophy focuses on serving the “buyers” of liquidity. By maintaining close relationships with borrowers, a lending protocol can always provide an answer to the question, "Where does the yield come from?" With a modular stack, a sharp focus on borrowers, and a flexible architecture that enables on-chain capital growth, Sentiment, with the support of its borrowers, will help expand the on-chain economy.

The core protocol has undergone significant changes that necessitate a shift in brand identity, to be more aligned with the new direction.

Sentiment was originally a lending protocol that focused on providing leverage to esoteric collateral and long-tail assets. Sentiment V1 facilitated over $40M in loan volume in the short 3 months since its inception.

The Sentiment protocol has since gone through a complete rebuild, which makes it more performant and scalable, to achieve large ambitions of being the most efficient and secure lending protocol in DeFi.

Visual Identity

Sentiment’s new visual identity conveys 4 core pillars:

1. Novelty → People like new ways of doing things

2. Opportunity → Opportunity makes people optimistic about the future

3. Confidence → Supporters and users should feel empowered by the technology

4. Accessibility → Users should feel maximum benefit from open-sourced protocols

Colors

The color palette of Sentiment is evolving into a refined gradient of blues and grays that are appealing to the eye. This transition from the original dark blue and black scheme aims to broaden the brand's appeal, introducing a sense of sophistication and optimism.

Changing the Narrative

Sentiment’s new identity is made complete with a website and UI refresh. This is coupled with an updated main slogan that succinctly captures what Sentiment seeks to offer its users.

The Road Ahead

With Sentiment V2 around the corner, users can expect many updates before launch.

Refreshing the brand identity is just one of many steps necessary to bring Sentiment to fruition.

Features

Sentiment v2 improves upon many limitations of v1 namely; lack of adaptive risk management and high friction onboarding new collateral. Sentiment v2 solves these short-comings, with core features to the protocol:

• Adaptive risk management

  • Pools can be managed by 3rd parties, who can quickly adapt to market changes.

• Permissionless

  • New pools with different collateral types can be quickly and easily created.

• Isolated Pools

  • Pools only have exposure to specified collateral.

Given these features, we made several considerations of potential trade-offs: liquidity fragmentation and risk accounting.

• Liquidity Fragmentation → Super pools (more on this soon) are vaults built on top of lending pools that optimize liquidity distribution across lending pools.

• Risk → Risk engine manages accounting for borrower position, allowing for a single position to borrow from multiple markets.

Benefits for users

Lenders

• Lenders can earn passive yield with adaptive risk management. They could also manage risk on their own loans if they wish to.

Managers

• Managers can earn fees for managing risk and have flexibility with risk parameters.

Borrowers

• Borrowers benefit from a flexible margin system and capital-efficient collateralization across markets.

How we differ

Sentiment v2 will specialize in lending to complex portfolio types such as LP tokens of another DeFi protocol. The product is intended to have higher yields than money markets, since traders (borrowers) have greater flexibility with collateral types. Sentiment v2 differs from money markets or overcollateralized lending markets since borrowers can collateralize positions across different protocols and markets.

How liquidity pools work

Liquidity pools are erc4626 contracts that are managed lending pools. Managers’ have explicit ability to manage risk parameters such as LTV and liquidation thresholds on a liquidity pool. Managers ability to manage risk on lending pools are constrained as to mitigate malfeasance on behalf of lenders.

How risk is managed

Risk management happens at 2 levels in Sentiment v2. Initially, it happens at the base layer liquidity pool, where managers manage collateral-specific risks. Secondly risk happens at the aggregation layer for Super Pools, where vault creators aggregate a specific asset and distribute liquidity among liquidity pools within the core protocol.

Borrower Experience

Borrowing in v2 will differ from existing money markets since the debt assets are maintained within borrowers’ “positions”. Positions are contracts that maintain a user’s portfolio of assets, debt, and collateral, allowing for mutation of the position over its life cycle.

Borrowing flow

Borrowers are able to interact with any liquidity pool that accepts their assets as collateral. Given the permissionless nature, proliferation of pools and fragmentation of liquidity is expected. To remediate these issues, borrowers’ debt will be dynamically routed to give the lowest cost and lowest risk capital to borrowers. In addition to this, a debt position can be distributed over many pools using collateral that is globally accepted by the pools, adding capital efficiency for both lenders and borrowers.

Wen launch

Sentiment v2 is slated for spring 2024, until then we will continue to provide updates and insights gained ahead of launch. We have some exciting news on the horizon. Stay tuned!