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Understand ZeroLend: L3 hyperchain lending protocol built on zkSync

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ZERO is about to be released. Is the largest lending protocol on zkSync ready?

Due to the nature of the oracle project, the Pyth network has received attention from various projects, which means that staking PYTH may potentially receive airdrops. As of February 14th, there are over 1 billion PYTH tokens staked, with over 175,000 staking addresses. ZeroLend is one of the contenders in the queue of PYTH stakers.

On January 30th, ZeroLend, a lending protocol based on zkSync, announced an airdrop to Pyth Network pledgers. Users are required to complete EVM address binding in advance on Pyth Network. ZeroLend will distribute PT points to users based on the amount of PYTH pledged, with 1 PT point allocated for every 1 PYTH pledged. The points will be tied to ZERO, the native token that ZeroLend is about to launch, which is expected to be released in the first quarter of 2024.

Recently, ZeroLend also completed a $3 million seed round financing with a valuation of $25 million on February 21st. Investors including Momentum 6, Blockchain Founders Fund, Morning Star Ventures, Banter Capital, Newman Capital, dVdT, Transform Capital, Cypher Capital, Bison Fund, Ozaru Ventures, iAngels, Krypital, Genblock, viaBTC, GBV, and Asteroid Capital participated in the financing. Click here for more information.

Since the announcement of the airdrop information, ZeroLend's TVL has been rising steadily. According to official website data, as of the time of writing, ZeroLend's total locked-in value (TVL) has exceeded 55.7 million US dollars.

According to official documentation, ZeroLend, as the largest lending protocol on zkSync, will offer opportunities for mining rewards to obtain the protocol itself, zkSync, and LayerZero airdrops, in addition to PYTH stakers being able to claim airdrops, as the coin launch approaches.

Building a Borrowing Protocol on zkSync and Manta

ZeroLend is a dynamic lending protocol, whose ecosystem consists of DeFi lending, stablecoin ONEZ, governance token ZERO, support for real-world assets, account abstraction, and privacy layer using zkStack. Among them, DeFi lending and account abstraction functions have been deployed, and the core product is a decentralized non-custodial liquidity market.

It is worth noting that ZeroLend is the only lending protocol on zkSync that has its own insurance fund. A certain proportion of the fees generated by the platform is allocated to the fund, ensuring its growth over time. In the event of major issues such as smart contract vulnerabilities or unforeseen system failures, the insurance fund can be used to compensate affected users.

Additionally, ZeroLend has integrated various native account abstraction features of zkSync.

Vitalik once abstractly described accounts as allowing Ethereum accounts to be controlled by smart contract code rather than private keys. His vision is that in the future, everyone will switch from current EOA wallets to smart contract-based wallets. If successful, managing crypto wallets will become as simple as managing email accounts.

In recent years, account abstraction has made significant progress and has permeated various parts of the Ethereum ecosystem, including applications, infrastructure, users, and developers. zkSync has also introduced a native account abstraction solution, while ZeroLend has integrated various zkSync native account abstraction features through Paymasters, social login and other identity verification options, and delegated transactions.

Among them, Paymasters allows protocol subsidies or allows users to pay transaction fees with ERC20 tokens, without the need to hold any ETH in the wallet. Social login and other identity verification options allow users to have a wallet that controls their secure enclave devices (face ID, fingerprint scanner, etc.). Delegated transactions allow users to authorize ZeroLend to perform limited operations on their behalf without losing custody of their funds.

Stablecoin lending

Due to ZeroLend being developed as a branch of the original Aave protocol, it is very similar to Aave V3. Its lending and borrowing also provide efficient mode and isolation mode, and the operation of the two modes can refer to "Aave V3 officially launched, a review of the four important features of the new version". On this basis, ZeroLend has added a credit delegation mode, which allows depositors to deposit funds into ZeroLend to earn interest, while delegating their borrowing capacity (credit) to other users. The loan terms are agreed upon by the depositor and borrower through smart contracts on the chain.

ZeroLend plans to launch its stablecoin ONEZ this year, which will be created by users providing selected assets such as ETH and USDC as collateral. ONEZ aims to generate native returns from lending protocols and has self-repayment capabilities. It is currently operating on the zkSync and Manta networks.

ONEZ will always be designed to be worth one US dollar. When the market value exceeds the peg, users can mint 1 ONEZ for $1 of debt and sell the remaining portion above the fixed value. This increases the supply of ONEZ and lowers the asset price. Conversely, if the market value falls below the peg, the minter can buy 1 ONEZ for less than $1, offsetting $1 of debt, contracting the supply of ONEZ, and raising the asset price.

ONEZ ensures that each token is backed by more than $1 of collateral through its over-collateralization model, with a collateral ratio designed at 150%, meaning that the value of the collateral must be 1.5 times the value of the loan or minted asset. This additional collateral is a safety measure to ensure that there is enough value to repay the loan in case the value of the collateral decreases.

Meanwhile, using the ONEZ stablecoin allows for mining on veSync, a community-driven ve(3,3) DEX built on zkSync. The core of veSync is the VS token, which users can exchange for veVS, vote on emissions, and receive rewards.

L3 Hyperlink and Ve Token Economics

As the first stage of the project launch, ZeroLend will introduce the ZERO token on zkSync, which will operate as the native currency of the chain and can also be used to pay transaction fees.

ZERO holders will manage Hyperchains. This is a highly scalable, interoperable custom zk chain that runs on L1 or L2 networks while maintaining a critical connection to the main chain (L1) to ensure security and finality. Hyperchains are the ZK version of OP Stacks' superchain, developed using ZkStack.

Hyperlinks can be strategically designed as L3 dApps, providing features such as unlimited scalability, faster message transmission between L1 to L2 to L3, and maintaining interoperability within the wider zkSync ecosystem. ZeroLend plans to introduce a hyperchain privacy layer in early 2025, prioritizing user-level privacy within ZeroLend.

Source: ZeroLend Document

The token economics of ve mentioned above is also applied to the economic structure of ZeroLend, divided into two modes: Single Stake and dLP (Dynamic Liquidity Provision).

By staking the native token ZERO, users can obtain veZERO, and the amount received is directly related to the duration of the token lock-up. The dL model is designed specifically for users who contribute to liquidity pools. When users stake dLP tokens, the value of their ZERO portion actually doubles for the purpose of staking.

Assuming that a user's dLP token is composed of 50% ZERO and 50% ETH, the weighting mechanism will consider the ZERO portion as a 100% contribution. In other words, when the staking is locked, the dLP weight of ZERO will be considered as twice the amount in the dLP token. Additionally, veZERO will also affect the secondary issuance of ZERO.

ZERO has a total supply of 100 billion and serves as both a utility and governance token in the ecosystem. The core of the ve-token economy is that participants lock ZERO tokens for a predetermined period of time and receive voting power (ve) tokens as a reward. These ve tokens not only represent the user's rights, but also increase their earnings proportionally based on the lock-up period.

Source: ZeroLend Document

The TGE is expected to start in the first quarter of 2024, during which a certain portion of ZERO supply will be released to the market and available for trading. Given that the initial FDV of the project is set at $25 million and the initial circulation of TGE is 18.8%, the initial circulating market value is approximately $4.7 million.

In order to ensure the long-term sustainability of the ZERO token economy, most of the inflation of ZERO tokens (from liquidity, finance, private placement, etc.) will end within the first year. By the end of the first year, approximately 78% of the token supply will be in circulation. After that, the annual emission will be reduced by half, and the remaining 22% will be released exponentially over time, and the design of the token economy will begin to be almost unaffected by inflation.