Silo Introduces Silo v3, a New Class of Money Markets Designed to Remain Solvent Without Reliance on DEX Liquidity

Silo v3 replaces reliance on DEX liquidity with protocol-level insolvency protection, expanding onchain credit markets beyond highly liquid assets.

Silo, a decentralized finance lending protocol known for its isolated lending markets, has launched Silo v3-a new money market designed to address a core assumption in DeFi: that collateral must be liquidated into the loan asset immediately to keep lending markets solvent.

Silo v3 introduces a protocol-level mechanism that protects lenders even when collateral cannot be sold efficiently on decentralized exchanges. By decoupling solvency from real-time liquidation into the loan asset, Silo v3 allows lending markets to scale with asset fundamentals rather than liquidity constraints, marking a structural departure from the dominant design assumptions underlying most DeFi lending protocols today.

"Liquidity has been one of the biggest structural constraints in DeFi. Thousands of assets have real fundamental value, but without deep, instant onchain liquidity, they've been excluded from credit markets or introduced hidden risks for lenders.
With Silo v3, we remove that dependency. We've redesigned the lending model so solvency no longer hinges on perfect market liquidity, and lenders are compensated explicitly through liquidation discounts and fees. This shifts the risk balance in favor of lenders while unlocking access to entirely new categories of collateral.

We believe Silo v3 represents a structural evolution in onchain credit-expanding what assets can access lending markets while making those markets safer by design."
- Silo Founding Team

A Structural Problem in DeFi Lending

In most DeFi lending protocols, insolvency risk is addressed through forced asset sales. When a borrower's position becomes undercollateralized, the protocol attempts to sell collateral on a decentralized exchange to repay lenders in the loan asset.

In practice, that assumption frequently breaks down. Liquidity can become fragmented, uneconomic, or temporarily unavailable during periods of market stress, limiting lending markets' ability to function reliably as they scale.

How Silo v3 Changes the Model

In cases where liquidation through markets is infeasible or unprofitable, Silo v3 repays lenders by swapping the collateral asset itself into the loan asset (debt), thereby maintaining solvency.

Each Silo v3 market defines two immutable liquidation thresholds for the collateral asset. Above the DEX Liquidation Threshold, positions are liquidated through decentralized exchanges or redemption mechanisms. Above the Collateral-Debt Swap Threshold, the protocol activates an alternative path that swaps collateral into the loan asset at a discount-fully covering lenders even when external liquidity is insufficient, fragmented, or delayed.

Liquidations as a Source of Yield

Under Silo v3's design, liquidation events are not solely loss mitigation mechanisms. Most liquidation fees are paid to lenders, compensating them for the risk they assume during periods of market stress. As a result, liquidation events can serve as a second source of yield, in addition to interest.

Expanding the Scope of Onchain Credit

By removing the requirement that collateral be sold to repay lenders, Silo v3 enables lending markets to support a broader range of onchain assets whose value may not be continuously accessible through liquidity on decentralized exchanges. These include liquidity provider positions and structured LP tokens, liquid staking and restaking representations, time-locked vault receipts and tokenized strategies, and CEDEFI assets with offchain redemption paths.
Silo emphasizes that the protocol is not designed to make low-quality assets lendable and that asset quality remains determined by market participation rather than protocol enforcement.

Isolated Markets and Risk Transparency

Silo continues to operate isolated lending markets, where each market pairs a specific collateral asset with a loan asset. This design prevents risk contagion between markets and allows parameters to be tailored to the unique properties of each asset.

With Silo v3, this architecture is complemented by a new lending application that provides explicit risk scoring and full market-level disclosure. Users can clearly see liquidation paths, oracle dependencies, and how collateral is expected to behave under stress-bringing transparency to risks that are often implicit in other lending protocols.

For more information, visit:
https://silo.finance/
https://x.com/SiloFinance
https://discord.com/invite/silo-finance
https://t.me/silo_finance
https://github.com/silo-finance/silo-contracts-v3

About Silo

Silo is a decentralized lending protocol that operates isolated money markets and provides vault curation solutions across multiple blockchain networks.

Media contact:
Fabio Wehb Ferrari,
press@silo.finance

This release was published on openPR.