Synonym Finance joins $22bn DeFi money market with Ethereum, Arbitrum, and Optimism launch

DeFi lending is a $22 billion market — almost half of DeFi’s total market size — but much of that liquidity is siloed in protocols native to different blockchains.

Synonym Finance launched on Tuesday and aims to solve just that.

While the end goal is universal DeFi money market liquidity, the cross-chain protocol says it will only link to “high-quality ecosystems.”

“We are launching on Ethereum, Arbitrum, and Optimism — all extremely high-quality ecosystems,” Synonym Finance’s pseudonymous founder, 0xbeachball, told DL News.

0xbeachball has previously contributed to LayerZero Labs, developers of the eponymous DeFi interoperability protocol and crypto lending app Notional Finance.

“Our thresholds for inclusion in our markets are extremely high — we won’t be connecting to subpar networks.”

—  0xbeachball, Synonym Finance co-founder

Ethereum, Arbitrum, and Optimism’s lending market size is $11.9 billion, more than half of the DeFi lending market. The bulk of that sum is on Ethereum.

Those three blockchains are also EVM networks. EVM stands for “Ethereum virtual machine” and describes a class of blockchains that use a smart contract logic similar to Ethereum’s.

0xbeachball, however, added that support for Solana is in the works.

This would let users secure loans with collateral on EVM chains and deliver USDC liquidity into DeFi protocols on Solana.

While cross-chain lending is relatively new to DeFi, Synonym Finance isn’t alone.

Lending giants like Aave and Compound have already launched new versions allowing cross-chain lending — borrowing crypto on one blockchain for collateral posted on a different network.

USDC gets the nod

For Synonym Finance, USDC liquidity migration is crucial to its focus on unifying DeFi liquidity. The protocol plans to achieve this goal via a bridged version of USDC called CCTP-enabled USDC.

The CCTP bridge lets users transfer tokens, in this case, USDC, across blockchains.

The USDC being sent is natively burned on the sender blockchain with an equivalent amount of USDC natively minted on the receiver blockchain.

“We’re planning to support blue chip assets and stablecoins like USDC moving forward that can provide higher quality assurances on stability and liquidity depth,” 0xbeachball said.

Security concerns

While the bulk of developer activity has gone multi-chain, user engagement last year was still mostly transactions on a single chain, according to a recent report by crypto intelligence firm Flipside Crypto.

Users who did cross-chain transactions mostly did so to position themselves for airdrop opportunities.

But while protocols like Synonym Finance are pushing users to do more cross-chain activity, the security risks of a mult-chain world are high.

Some of the industry’s largest hacks have occurred via exploits on different crypto bridges.

In 2022, for instance, Chainalysis reported that $2 billion had been lost to cross-chain bridge exploits. Heco Bridge was robbed of $86 million in 2023.

Cross-chain money market operations put even greater focus on transaction ordering, dynamic pricing, and interest rate re-balancing, which are essential for preventing bad debt on DeFi lending positions.

Crypto collateral is volatile, and price swings affect supply and demand.

Trading bots also target this volatility in search of arbitrage opportunities that can be exploited for profits through specially ordered transactions on the blockchain.

0xbeachball said current cross-chain lending protocol designs have failed to address these issues, but Synonym Finance has a solution.

“We’re built on a hub and spoke model with a hub that lives on Arbitrum,” 0xbeachball said. “All rate pairs, rebalancing, and ordering takes place on the hub and is subsequently communicated to the spokes.”

Since all operations occur on a single hub, coordination across the entire system is easier, 0xbeachball said.

No airdrop

Concerning airdrops, 0xbeachball said the project won’t take the well-worn route of bootstrapping user engagement via any airdrop rewards.

The protocol will pursue liquidity by encouraging users to lock their deposits on the protocol to earn yield.

“For us, early system liquidity and clear proof of the utility Synonym provides is better served by users that are engaged from day,” one0xbeachball said.

Osato Avan-Nomayo is our Nigeria-based DeFi correspondent. He covers DeFi and tech. To share tips or information about stories, please contact him at osato@dlnews.com.