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Solana DeFi borrow and lending with marginfi's founders - Solfate Podcast #26

By Solfate

Published on 2023-07-05

Explore the future of DeFi on Solana with marginfi's founders as they discuss innovative lending protocols, market cycles, and the potential for new tokens in the ecosystem.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

The Genesis of marginfi

The story of marginfi begins with its founders, Edgar and Mac, who both hail from backgrounds in high finance and technology. Edgar started his career at Goldman Sachs, while Mac began at Morgan Stanley. Their experiences in these financial powerhouses provided them with invaluable insights into the workings of traditional finance and the potential for improvement through technology.

Edgar's journey into crypto started in 2017 when he was working at Uber in San Francisco. A colleague introduced him to Bitcoin from a technical perspective, which sparked a deep dive into blockchain technology. Edgar recalls spending hours curled up on his futon, engrossed in the technical architecture of Bitcoin:

"I remember the day I came home, started reading about it. One of my coworkers was like, 'You should check it out. You should really kind of get into it.' And four hours later, I was living in a 325-square-foot studio at the time. Absolutely broke, moved to San Francisco with no money, trying to break into an industry. And I'm curled up on my futon, because we used to sleep on this futon, because you could fold it up, have a little more space in the apartment. And it's been four hours. I haven't had any water. I haven't eaten it. And I'm just deep in technical architecture."

This intellectual stimulation led Edgar to evaluate the conceptual opportunities for blockchain technology to improve the world. As the tech industry evolved towards blockchain, Edgar saw the potential for innovation in decentralized finance (DeFi).

Mac's Path to Crypto

Mac's crypto journey began even earlier. He had been tracking Bitcoin since its inception and even wanted to invest in it as a young teenager:

"I remember looking at early Bitcoin, wanting to buy two of them. And I was like a young kid, basically. I was not able to make investment decisions at this point. That was the only investment my parents actually initially refused from me. I wanted to buy it. It was at like around like $180 at that time for Bitcoin."

Despite this early setback, Mac's interest in finance and technology continued to grow. He went on to manage a fund individually for several years, gaining valuable experience in investment strategies. After working with Morgan Stanley and a private equity firm, Mac founded a health tech company that operated in 20 countries, focusing on integrating various fitness and wellness apps and devices.

The Birth of marginfi

The paths of Edgar and Mac converged in Miami during Art Basel. A mutual friend, Ami, connected them, recognizing their shared passion for DeFi. Edgar recounts the moment:

"We met up, you know, I remember walking into the apartment. There was this golden glow, you know, falling down on Mac from the Miami sun. And he's in his glasses. He looks up at me just like full of vision and opportunity. And I said, this is the guy, you know, his love at first sight."

This meeting marked the beginning of marginfi. The founders aligned on two crucial aspects: their interest in solving challenging problems in the DeFi space and their shared cultural values for building an organization.

Why Solana?

The decision to build on Solana was a strategic one. Edgar and Mac identified Solana as the right infrastructure and ecosystem for their vision. They saw potential in Solana's high-speed, low-cost transactions, which are crucial for DeFi applications. The founders recognized that Solana could provide the scalability and efficiency needed to create innovative financial products.

The Evolution of marginfi's Products

Marginfi's journey began with a prime brokerage model, which was a groundbreaking development in the crypto space. Mac explains:

"The prime brokerage model, that was that still is that no one else has ever successfully incorporated universal margin across perpetuals across different decks in crypto. So that was the first when it came out. That was a huge win."

This model allowed traders to have unified liquidity, risk, and trading interface across various decentralized exchanges (DEXs). It was particularly useful for sophisticated traders who were arbitraging between different platforms.

However, the crypto landscape changed dramatically after the FTX implosion. Many DEXs paused or went offline, and liquidity shrank rapidly. This shift in the market forced marginfi to adapt its strategy.

Adapting to Market Changes

In response to the changing market conditions, marginfi pivoted to focus on over-collateralized borrowing and lending. Mac describes this transition:

"After the FTX implosion, a lot of these decks is paused when offline liquidity shrunk really quickly. And so the traders using our product like no longer there was no longer the capacity to perform the same strategies across the decks as we connected. And so when that happened, we're like, okay, you know, this is it's going to take a while for these decks is to pick back up liquidity, volume, etc. It's not going to be overnight."

This pivot allowed marginfi to become a key player in Solana's DeFi ecosystem. They expanded the assets they supported, including Solana, USDT, and Liquid Staking Derivatives (LSDs) on Solana. The platform quickly became one of the most liquid places for various assets and consistently grew in terms of Total Value Locked (TVL) and daily active users.

Understanding Over-Collateralization

A key concept in marginfi's lending model is over-collateralization. Edgar provides a clear explanation of this concept:

"The difference between over collateralization and under collateralization simplified is really focused on the problem of figuring out how much capital is safe to lend, right?"

In an over-collateralized loan, the borrower provides collateral that is worth more than the amount they are borrowing. This excess collateral serves as a safety buffer for the lender, reducing the risk of loss if the borrower defaults.

Edgar uses a relatable analogy to explain the concept:

"You bring in the concept of collateral, right? And collateral is your friend borrowing money from you, and you like holding on to their phone or holding on to their bike, right? You're like, Hey, like, you know, I'll lend you this this money, right? But I'm going to hold on to your bike, your skateboard, right? Like a few books you own, right? And when you when you pay me back, I'll give you back your things, right?"

The Importance of Liquidation Mechanisms

While over-collateralization is crucial for safety, Edgar emphasizes that it's not sufficient on its own. The key additional component is the liquidation mechanism:

"The key additional piece to the over collateralization is the liquidation mechanism behind the seats, right? And I think this is when you see lending protocols across blockchain, like we didn't build the first over collateralized lending protocol to ever exist, like not by far, right? So you have to ask like, why have other over collateralized lending protocols blown up and lost lenders funds?"

Marginfi has developed a powerful risk engine that works in conjunction with the over-collateralization to ensure the safety of the protocol. This system includes incentives for liquidators to quickly act on under-collateralized positions, maintaining the overall health of the lending pool.

The Future of DeFi on Solana

Mac is particularly excited about the future of DeFi on Solana. He draws parallels between the current state of Solana and Ethereum's development in 2018:

"I think we're finally hitting the 2018 era of Ethereum here in 2023 on Solana, where again, the the Geto Camino Drift Cypher's eta squads, et cetera, margin fi are hitting that inflection point with their product."

He points out that many successful projects on Solana, including marginfi, don't yet have governance tokens associated with them. Mac believes this presents a significant opportunity for growth and community engagement in the Solana ecosystem.

The Role of Governance Tokens

Mac emphasizes the importance of governance tokens in DeFi protocols:

"A token is a necessity, not some sort of benefit, especially like when you dip into the realm of like DeFi, which is like decentralized finance, permissionless finance, which is like this community governed financial primitive. There needs to be an instrument for the community to govern it with, right?"

He argues that governance tokens are essential for true decentralization and community involvement in the direction of DeFi projects. These tokens allow users to have a say in the product creation, ideation, and roadmap of the protocols they use.

Marginfi's Points System

One of the exciting developments teased during the podcast is marginfi's upcoming points system. This system aims to quantify users' contributions to the protocol and make them visible. Mac hints at potential rewards tied to these points:

"We will be able to quantify your contribution to margin five. We're going to make that visible. And, and there will definitely be some like fun things tied up to the points you're accumulating."

This points system could potentially lead to a token distribution in the future, similar to what other successful DeFi projects have done. Mac draws comparisons to projects like Blur on Ethereum and Tensor on Solana, which used similar systems to great effect.

The Importance of User Education

While the founders are excited about the potential of new tokens and systems in the Solana ecosystem, they also emphasize the importance of user education. Mac advises:

"At any time you interact with margin by like, I want you to know what you're interacting with, I want you to know like what you're doing. And if you're, and if you don't, you know, hit our telegram or, you know, ask us some questions and we'll answer that."

This commitment to transparency and user education is crucial for building trust in the DeFi ecosystem and ensuring that users can make informed decisions about their financial activities.

The Broader Impact of DeFi

Edgar and Mac see DeFi as more than just a technological innovation; they view it as a tool for democratizing access to financial services. By removing intermediaries and creating permissionless systems, DeFi has the potential to provide financial opportunities to people who have been traditionally underserved by the banking system.

Challenges and Opportunities in the Current Market

The founders acknowledge that the current market conditions present both challenges and opportunities. While the bear market has reduced trading volumes and liquidity in some areas, it has also created space for building and refining products. Marginfi's ability to pivot and focus on essential services like borrowing and lending demonstrates the adaptability required to succeed in the fast-moving crypto space.

The Future of Marginfi

Looking ahead, marginfi plans to continue expanding its product offerings. While the details of their next major product were not fully revealed in the podcast, Mac hinted at some exciting developments:

"We are about to also unveil a much larger product expansion, thinking past just a borrow lend. And this is something really exciting. We're going to, we're going to introduce some firsts for crypto once again, like we did with our, our prime brokerage product."

This expansion suggests that marginfi is not content with simply being a lending protocol but aims to be a comprehensive DeFi platform on Solana.

The Importance of Community in DeFi

Throughout the discussion, both Edgar and Mac emphasized the crucial role that community plays in the success of DeFi projects. The planned points system and potential future token are ways of recognizing and rewarding the community members who contribute to the protocol's success.

This focus on community aligns with the broader ethos of decentralization in the crypto space. By giving users a stake in the protocol and a voice in its governance, marginfi aims to create a truly decentralized financial system.

Balancing Innovation with Risk Management

One of the key themes that emerged from the conversation was the need to balance innovation with robust risk management. While marginfi is pushing the boundaries of what's possible in DeFi, they are also deeply committed to ensuring the safety and stability of their protocol.

This balance is evident in their approach to over-collateralization and their sophisticated liquidation mechanisms. By prioritizing safety alongside innovation, marginfi is working to build a sustainable and trusted platform in the often volatile world of crypto.

The Role of Solana in the Future of Finance

The founders' decision to build on Solana reflects their belief in the network's potential to revolutionize finance. Solana's high-speed, low-cost transactions make it an ideal platform for DeFi applications that require frequent interactions and complex operations.

As more projects like marginfi build on Solana and attract users, the network's ecosystem is likely to grow and mature. This could potentially position Solana as a major player in the future of decentralized finance.

Lessons from Traditional Finance

Both Edgar and Mac's backgrounds in traditional finance have informed their approach to building marginfi. They've been able to take the best practices from the world of high finance and adapt them to the decentralized, permissionless environment of blockchain.

This fusion of traditional financial knowledge with cutting-edge technology is a powerful combination that could help bridge the gap between the old and new worlds of finance.

The Importance of Adaptability in Crypto

The story of marginfi's evolution from a prime brokerage model to a lending platform highlights the importance of adaptability in the crypto space. Market conditions, user needs, and technological capabilities can change rapidly, and successful projects need to be able to pivot quickly.

This adaptability extends beyond just product offerings. It also includes being responsive to community needs, staying ahead of regulatory changes, and continuously improving security measures.

Building for the Long Term

Despite the rapid pace of change in the crypto world, Edgar and Mac emphasize the importance of building for the long term. While they're responsive to current market conditions and user needs, they're also keeping their eyes on the bigger picture of where DeFi and blockchain technology are heading.

This long-term vision is crucial for creating sustainable projects that can weather the ups and downs of market cycles and continue to provide value to users over time.

The Power of Permissionless Systems

One of the key advantages of DeFi platforms like marginfi is their permissionless nature. Unlike traditional financial systems that often have high barriers to entry, DeFi protocols allow anyone with an internet connection to participate.

This opens up new possibilities for financial inclusion and innovation. It allows for the creation of financial products and services that might not be viable in traditional systems due to regulatory constraints or high operational costs.

The Road Ahead for Marginfi

As marginfi continues to grow and evolve, the founders are excited about the possibilities ahead. With their upcoming points system, planned product expansions, and potential future token, they're positioning the protocol to be a major player in the Solana DeFi ecosystem.

Their commitment to user education, community engagement, and robust risk management sets a strong foundation for future growth. As the DeFi space continues to mature, projects like marginfi that prioritize these elements are likely to play a crucial role in shaping the future of finance.

Conclusion

The conversation with Edgar and Mac of marginfi provides valuable insights into the current state and future potential of DeFi on Solana. Their journey from traditional finance to crypto innovators illustrates the transformative power of blockchain technology.

As marginfi continues to evolve and expand its offerings, it stands as a prime example of the innovation happening in the Solana ecosystem. With their focus on safety, user experience, and community engagement, marginfi is well-positioned to play a significant role in the future of decentralized finance.

The crypto space is known for its rapid pace of change, and projects like marginfi demonstrate the importance of adaptability, long-term vision, and a deep understanding of both traditional and decentralized finance. As the DeFi landscape continues to evolve, it will be exciting to see how marginfi and other Solana projects shape the future of finance.

Facts + Figures

  • Edgar started his career at Goldman Sachs, while Mac began at Morgan Stanley.
  • Edgar's deep dive into Bitcoin technology occurred in 2017 while working at Uber in San Francisco.
  • Mac wanted to invest in Bitcoin when it was around $180, but was unable to as a young teenager.
  • Marginfi was conceptualized during Art Basel in Miami when Edgar and Mac met through a mutual friend.
  • Marginfi's initial product was a prime brokerage model that incorporated universal margin across perpetuals on different decentralized exchanges.
  • After the FTX implosion, marginfi pivoted to focus on over-collateralized borrowing and lending.
  • Marginfi has become one of the most liquid places for various assets on Solana and has shown consistent growth in Total Value Locked (TVL) and daily active users.
  • The platform supports assets including Solana, USDT, and Liquid Staking Derivatives (LSDs) on Solana.
  • Marginfi has developed a powerful risk engine that works in conjunction with over-collateralization to ensure the safety of the protocol.
  • The founders draw parallels between the current state of Solana and Ethereum's development in 2018.
  • Marginfi is planning to launch a points system to quantify and reward user contributions to the protocol.
  • Many successful projects on Solana, including marginfi, don't yet have governance tokens associated with them.
  • Solana has over 70% of its network staked to validators, equivalent to about six billion US dollars.
  • Marginfi is preparing to unveil a larger product expansion beyond just borrowing and lending.

Questions Answered

What is marginfi?

Marginfi is a decentralized finance (DeFi) protocol built on the Solana blockchain. It initially started as a prime brokerage model that incorporated universal margin across perpetuals on different decentralized exchanges. After market changes, it pivoted to focus on over-collateralized borrowing and lending, becoming one of the most liquid platforms for various assets on Solana. Marginfi aims to provide innovative financial services while prioritizing safety and user experience.

Who are the founders of marginfi?

The founders of marginfi are Edgar and Mac. Edgar started his career at Goldman Sachs and later worked at Uber before diving into crypto. Mac began at Morgan Stanley and had early interests in Bitcoin and cryptocurrency. Both founders have backgrounds in high finance and technology, which they've leveraged to create innovative DeFi solutions on Solana.

Why did marginfi choose to build on Solana?

Marginfi chose to build on Solana because the founders identified it as the right infrastructure and ecosystem for their vision. Solana's high-speed, low-cost transactions are crucial for DeFi applications, providing the scalability and efficiency needed to create innovative financial products. The founders saw potential in Solana's growing ecosystem and believed it could support the complex operations required for their DeFi platform.

What is over-collateralization in DeFi lending?

Over-collateralization in DeFi lending is a safety mechanism where borrowers provide collateral that is worth more than the amount they are borrowing. This excess collateral serves as a buffer for the lender, reducing the risk of loss if the borrower defaults. In marginfi's case, over-collateralization is combined with a sophisticated liquidation mechanism to ensure the overall health and stability of the lending pool.

What new features is marginfi planning to introduce?

Marginfi is planning to introduce several new features. The most imminent is a points system that will quantify and make visible users' contributions to the protocol, with potential rewards tied to these points. Additionally, the founders hinted at a larger product expansion beyond just borrowing and lending, promising to introduce some "firsts for crypto." While specific details weren't revealed, these developments suggest marginfi is aiming to become a more comprehensive DeFi platform on Solana.

How does marginfi adapt to changing market conditions?

Marginfi demonstrates adaptability by pivoting its product offerings based on market conditions and user needs. For example, after the FTX implosion caused a decrease in liquidity and trading volumes on many decentralized exchanges, marginfi shifted its focus from its prime brokerage model to over-collateralized borrowing and lending. This flexibility allows the platform to continue providing value to users even as market conditions change.

What role do governance tokens play in DeFi, and why doesn't marginfi have one yet?

Governance tokens in DeFi allow users to have a say in the direction and decision-making of a protocol. They are seen as essential for true decentralization and community involvement. While marginfi doesn't currently have a governance token, the founders recognize their importance. The planned points system could potentially lead to a token distribution in the future, similar to what other successful DeFi projects have done.

How does marginfi ensure the safety of user funds?

Marginfi ensures the safety of user funds through several mechanisms. First, they use over-collateralization in their lending model, where borrowers must provide collateral worth more than their loan. Additionally, marginfi has developed a powerful risk engine that works in conjunction with the over-collateralization. This system includes incentives for liquidators to quickly act on under-collateralized positions, maintaining the overall health of the lending pool.

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