Fluid: Redefining the new benchmark for capital efficiency in DeFi lending and trading.

Author: Castle Labs

Compiled by: AididiaoJP, Foresight News

The currency market is at the core of DeFi, where users can utilize various strategies to gain exposure to specific assets. Over time, this vertical sector has seen growth in both Total Value Locked (TVL) and functionality. With the introduction of new protocols such as @MorphoLabs, @0xFluid, @eulerfinance, and @Dolomite_io, the range of functionalities that lending protocols can achieve has gradually expanded.

In this report, we focus on one of the protocols: Fluid.

Fluid has launched several features, the most interesting of which are smart debt and smart collateral. It cannot be regarded as a regular lending protocol, as it also incorporates its DEX functionality to provide users with more services.

Fluid has shown significant growth trajectories in both the DEX and lending verticals, with a total market size (measured by total deposits) exceeding 2.8 billion dollars.

Fluid market size, source: Dune, @dknugo

The Fluid market size represents the total deposits in the protocol. The reason for choosing this metric over TVL is that debt is a productive asset in the protocol and contributes to the liquidity of the exchange.

Overview of Fluid Components and Operation

This section briefly outlines the components of the Fluid Protocol and explains how it operates, emphasizing why it is a highly capital-efficient protocol.

Fluid adopts a unified liquidity model, allowing multiple protocols to share liquidity, including the Fluid lending protocol, Fluid Vaults, and DEX.

Fluid lending allows users to provide assets and earn interest. The assets provided here are used throughout the Fluid ecosystem, thereby enhancing their capital efficiency. It also opens up long-term yield opportunities, as the protocol continuously adapts to changes in market borrowers.

Fluid Vaults are single-asset, single-liability vaults. These vaults have extremely high capital efficiency because they allow for a high LTV (loan-to-value ratio), up to 95% of the collateral value. This figure determines the user's borrowing capacity in comparison to the deposited collateral.

In addition, Fluid employs a unique liquidation mechanism that reduces liquidation penalties to as low as 0.1%. The protocol only liquidates the necessary amount to restore the position to a healthy state. The liquidation process on Fluid is inspired by the design of Uniswap V3. It categorizes positions based on their LTV scale or range and executes batch liquidations when the collateral value reaches the liquidation price. The DEX aggregator then uses these batches as liquidity: liquidation penalties are converted into discounts for traders when they swap.

Fluid DEX generates trading fees from swaps, which earn extra returns for the liquidity layer, further reducing the interest on positions for borrowers while improving the capital efficiency of the entire protocol. Different DEX aggregators, such as KyberSwap and Paraswap, leverage Fluid DEX as a source of liquidity to achieve deeper liquidity and increase trading volume.

On Fluid, users can deposit their collateral into the DEX while earning lending fees and trading fees, making it a Smart Collateral.

If users wish to borrow against their collateral, they can borrow assets or take on smart debt positions to make the debt productive. For example, users can borrow from the ETH and USDC/USDT pools, where they can deposit ETH as collateral and borrow USDC/USDT. In exchange, they will receive USDC and USDT deposited into their wallet and can use them at will, while the trading fees earned from that liquidity pool are used to reduce the outstanding debt.

The latest developments and expansion of Fluid

According to the trading volume data from the past 7 days, Fluid DEX ranks 4th, behind @Uniswap, @Pancakeswap, and @AerodromeFi. The collaboration between Fluid and Jupiter Lend has gone live, and this feature has been in private testing since the beginning of this month, while Fluid DEX Lite has already been launched.

In addition, Fluid DEX v2 is about to be put into use.

DEX ranked by trading volume over 7 days, source: Dune, @hagaetc

In addition, the agreement is expected to involve token buybacks, as its annual revenue has exceeded 10 million dollars. Fluid recently also published related content on its governance forum; the post initiated a discussion about buybacks and proposed three methods.

Check different proposal methods here:

The buyback will begin on October 1, approved by the governance (after discussion), and will have a 6-month evaluation period.

Jupiter Lend: Fluid enters Solana

Fluid's expansion to Solana was completed in collaboration with @JupiterExchange.

Jupiter is the largest DEX aggregator on Solana, with a cumulative trading volume exceeding 97 billion dollars, and it is also the leading perpetual contract exchange and staking solution on Solana.

The TVL of Solana lending currently exceeds 3.5 billion USD, with @KaminoFinance being a major contributor. The lending vertical in Solana provides great potential for the growth of Fluid.

The public beta of @jup_lend has recently launched after a few days of private testing. Its TVL has now exceeded 250 million dollars, making it the second largest money market on the Solana blockchain, only behind Kamino.

Jupiter Lend, launched in collaboration with Fluid, offers similar features and efficiency, with smart collateral and smart debt expected to be introduced on the platform later this year.

In addition, 50% of the platform's revenue will be distributed to Fluid.

Iteration of Fluid DEX

Fluid has launched its DEX Lite and plans to release V2 soon. This section will cover both and explain how these iterations will help Fluid further develop.

Fluid DEX Lite

Fluid DEX Lite was launched in August as a credit layer on Fluid, enabling it to borrow directly from the Fluid liquidity layer. It has begun providing trading volume services for relevant trading pairs, starting with the USDC-USDT pair.

The gas efficiency of this version of Fluid DEX is very high, with the cost of exchanges reduced by about 60% compared to other versions. It was created to capture a larger share of the trading volume in relevant trading pairs, and Fluid is already the dominant protocol in this regard.

In the first week of its launch, Fluid Lite generated over $40 million in trading volume, with initial liquidity borrowed from the liquidity layer amounting to $5 million.

Fluid DEX Lite trading volume, source: Dune, @dknugo

Fluid DEX V2

Fluid DEX V1 was launched in October 2024, accumulating a trading volume of over $10 billion in just 100 days on Ethereum, surpassing any decentralized exchange in speed. To support this growth, Fluid is launching its V2 version, which is designed with modularity and permissionless scalability in mind, allowing users to create multiple custom strategies.

First, V2 will introduce four different types of DEX within the protocol, two of which are carried over from its V1. The types of DEX supported by Fluid will not be limited to these four, and more types can be deployed through governance.

The two new types introduced are smart collateral range orders and smart debt range orders. Both allow borrowers to help improve their capital efficiency.

The functionality of the range order for smart collateral is similar to Uniswap V3, where users can provide liquidity by depositing collateral within a specific price range while also earning an annual percentage rate (APR) on their loans.

The way smart debt range orders work is similar, allowing users to create range orders on the debt side by borrowing assets and earning an annual percentage rate (APR) on trades.

In addition, it also introduces features such as hooks (similar to Uniswap V4) for custom logic and automation, flash accounting to improve the fee efficiency of CEX-DEX arbitrage, and on-chain yield accumulation limit orders, which means that limit orders can earn lending annual percentage rates (APR) while waiting to be executed.

Conclusion

Fluid continues to grow and improve by offering a range of unique features to become more capital efficient.

Smart Collateral: The collateral deposited on the platform can be used to earn interest on loans and transaction fees.

Smart Debt: Smart debt reduces debt by using transaction fees generated from the debt to pay off part of the debt, making the debt borrowed by users productive.

Unified Liquidity Layer: Fluid's unified liquidity layer enhances the capital efficiency of the entire ecosystem by providing higher LTVs, advanced liquidation mechanisms, and automatic limits for better risk management.

Its recent expansion to Solana through collaboration with Jupiter has extended its market share in the lending category to non-EVM networks. At the same time, Fluid DEX Lite and DEX V2 aim to enhance the user experience on EVM chains and increase trading volume.

In addition, DEX V2 is expected to launch on Solana later this year, which will allow Fluid to venture into the lending and exchange verticals of Solana.