What is Radiant Capital?
Radiant Capital aims to become the first and leading omnichain money market that allows users to supply and borrow assets across chains, unifying fragmented capital across DeFi. It has rapidly become the most prominent lending protocol within the Arbitrum ecosystem and has its sights on cross-chain expansion.
Key Takeaways
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Radiant Capital plans to become DeFi’s leading omnichain money market, unifying liquidity across DeFi and solving the problem of fragmented capital.
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Radiant Capital introduces progressive tokenomics with increased game theory encouraging participant behavior to align with the protocol’s long-term vision and disincentivizing mercenary farming.
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Radiant Capital promises what it calls DeFi 3.0, which includes real yield paid out to users, true community governance through progressive decentralization, and long-term sustainability.
DeFi enters a new era defined by harsher wintry market conditions. As funding and liquidity dry up, a new type of protocol emerges. Protocols grounded in sustainability and, more importantly, a concept relatively foreign to DeFi, profitability. Additionally, the advent of Layer 2 scaling solutions drastically reducing gas fees has enabled the introduction of services that would be prohibitively expensive for users on Ethereum.
This article dives into Radiant Capital, a protocol born in the bear market with the ambition to onboard the next hundred million users into DeFi.
Money Markets – DeFi Lending Protocols
In their most basic functionality, decentralized money markets, or DeFi lending protocols, provide a scaffolding for users with surplus capital to generate returns via lending it to those who desire capital. Lending protocols are a web of smart contracts and liquidity pools that rely on over-collateralization to facilitate permissionless loans, and because collateral secures these loans, they are instant.
Credit checks do not exist without centralized actors, and loans originated in DeFi as well as being transparent – fully visible on-chain – and accessible globally, are far more flexible with supply-driven interest rates, a more faithful representation of free market economics. They also have the glaring advantage of being self-custodial; investors retain full autonomy over their funds.
Fragmented Liquidity and the Multichain Future
To grasp the significance of an omnichain lending protocol it is necessary to understand the problems posed by the current liquidity distribution in DeFi.
Source: https://defillama.com/chains
Nearly two hundred discrete blockchains make up DeFi, and liquidity sprinkled across these chains cannot easily jump to other chains without ‘crossing zones of sovereignty.’ Despite advances in the underlying code, bridges remain highly risky and prone to exploitation.
Liquidity is essentially siloed because blockchain networks cannot interact with each other, with assets being restricted to their native environments. Financial services run on liquidity, with deeper liquidity optimizing services and a lack of liquidity jeopardizing services. Roll these three facts into one, and it becomes clear that there is a dire need for protocols that allow interaction across multiple chains, facilitating deeper and more interconnected liquidity.
But the central aim of omnichain protocols can often be overlooked by crypto users who have become desensitized to how poor the contemporary user experience is in DeFi. These protocols look into the future and at the next generation of users. And bluntly put, DeFi’s current UX is not suitable for becoming an alternative financial system used by billions.
Radiant Capital hinges on the thesis that the future will be multichain. Arguments rest on both sides, and it is beyond the scope of the article to discuss them in detail. An extreme view would be that only Layer 1 bagholders perpetuate the multichain thesis, and the rise of EigenLayer will see Ethereum consolidate market share, moving toward a quasi-monochain future. A moderate view from the other side would be that diverse use cases require diverse solutions, and more chains will be required as adoption increases.
The reality is that general-purpose Layer 1 blockchains create gravity wells. With overwhelming network effects and entrenchment, the masses of liquidity that has remained on these EVM (Ethereum Virtual Machine) compatible and other monolithic chains is unlikely to migrate to a singular chain. Users like having options, and the rise of the vertical scaling narrative further fuels the growth of multichain solutions. In short, the underlying assumption of a multichain future is solid.
Source: https://docs.radiant.capital/radiant/other-info/branding
Radiant Capital Overview
Ethereum had Aave. Arbitrum has Radiant. Compared to its predecessor, Radiant’s central distinguishing characteristics are cross-chain borrowing functions, DAO governance, user experience, and its economic model. To summarize, Radiant Capital is a fork of Aave with cross-chain capabilities and a considerable overhaul to the protocol’s underlying economics.
The Arbitrum Avant-Garde
Radiant is a central player in The Arbitrum Avant-Garde. The Arbitrum Avant-Garde collectively refers to the new generation of protocols native to this Layer 2 that share several key characteristics: real yield, sustainable tokenomics, engaged DAO governance, and progressive decentralization. These protocols leverage low-cost transactions to introduce new services, and their central ideology is sustainability and profitability. An underappreciated element of this new generation is that they have access to a better tech stack than the last generations of dApps, and a wealth of knowledge from observation.
Cross-Chain Borrowing
Radiant offers the typical lending and borrowing functions users expect to find in a lending protocol. But one of Radiant’s core features is the ability to borrow cross-chain, and the user experience is excellent; welcome borrow and bridge functionality.
Source: https://app.radiant.capital/#/markets
For example, user X keeps the bulk of their funds on Arbitrum but finds a project they want to interact with on Avalanche. Typically user X has to borrow the funds on Arbitrum and then bridge these to Avalanche, which involves multiple permissions and multiple transactions. Radiant’s borrow and bridge bundles all these actions into a single transaction. User X then repays the loan on the origin chain.
As a side note, looking into the future, more generally the bundling of transactions will increase in popularity. Users will be able to send instructions from one chain and transact on another chain with all the transaction fees, including gas on the other chain, bundled into a single transaction. This is the reason that account abstraction and smart contracts wallets have excited the community.
Source: https://docs.radiant.capital/radiant/other-info/radiant-dao-roadmap
Radiant is currently live on Arbitrum and Binance Smart Chain as origin chains – chains where users can deposit and originate loans. Radiant has plans to steadily expand to other EVM chains and steadily integrate more supported asset classes. Radiant is currently in V2, and its current roadmap details to V4. Radiant V3 will fully integrate LayerZero in lieu of Stargate and will likely allow users to deposit on one chain and repay on others. Based on its roadmap, Radiant indeed will be an omnichain money market.
Radiant and LayerZero
Radiant leverages LayerZero’s Stargate to achieve its cross-chain functionality. LayerZero is a communication protocol, and Stargate is the first dApp built on LayerZero. Typically bridges utilize a lock and mint stratagem – assets are locked on the source chain, and a synthetic asset is minted on the destination chain. Using these intermediary/ wrapped assets entails more smart contract risk and involves an additional swap on the destination chain.
In contrast, Stargate guarantees instant finality, leverages a single liquidity pool across multiple chains for deep liquidity, and swaps in native assets. LayerZero rests at the heart of omnichain interoperability, a low-level communication primitive that allows blockchains to pass messages between one another. It runs as an endpoint using the Ultra-Light Node – a messaging protocol – that any blockchain can support, creating a fully connected network of nodes. In layman’s terms, LayerZero is a translator between blockchains allowing them to speak to each other.
Source: https://app.radiant.capital/#/bridge
RDNT, the native token of Radiant Capital, is an OFT-20- a token standard from LayerZero. The OFT token standard rests at the forefront of multichain functionality and allows for hyper-market efficiency. To travel across chains, users burn tokens, receive a receipt, and then present this receipt to the destination chain. The total supply of tokens stays constant but the location of these tokens is fully elastic.
The OFT token standard allows money to go wherever at the most cost-efficient basis. Currently, in crypto, there is liquidity scattered around the ecosystem where it does not want to be due to the difficulty of moving it and all the third-party fees associated with its movement. The OFT standard introduces complete location flexibility, and markets can retain all this excess value.
Cross-Chain Versus Multichain
Although these terms are often used interchangeably, there is a distinction. Cross-chain involves blockchains communicating with each other. Multichain means functionality on multiple chains. Think of a translator versus a shared standard. Bridge and borrow is an example of the former, whereas RDNT is an example of the latter.
Radiant’s Economics
This is where things get exciting. Radiant not only aims to onboard the next hundred million users into DeFi but also aims to be the most profitable protocol in DeFi. V2 introduced a slew of upgrades to the economic model, which readers can find fully explained in the following Radiant DAO governance proposals: RFP-3, RFP-4, and RFP-5/6/7.
The key points to note are that RDNT migrated from an ERC-20 to an OFT-20 token, investors must have skin in the game to earn rewards, emissions were restructured to be more sustainable, and vesting periods changed along with reward distribution.
Understanding the Problem: Mercenary Capital
DeFi protocols need users, and they need liquidity. Incentives in the form of tokens have become the dominant methodology for protocols to bootstrap early economic activity. However, since Compound began distributing COMP in 2020, protocols have attempted to one-up each other to attract liquidity leading to capital arriving, farming, and dumping.
This inflationary model has proven highly unsustainable and has destroyed many DeFi protocols leaving them barren of liquidity. Early investors subsidize token emissions, but if they don’t keep pumping, people want to get rid of them in a cruel cycle that looks something like the following. Yields start to decline, capital abandons the project seeking better yield, the price of the token declines as adoption slows, this further decreases yield, and then at this point, everyone rushes to the exit, and the game is up. The term mercenary capital is somewhat unfair, as these participants are simply rational economic actors taking advantage of an opportunity.
But ideally, a protocol wants long-term users, sometimes referred to as sticky liquidity. Radiant V2 introduced mechanisms to fight off mercenary capital, lengthen its runway, and massively improve its business model.
Source: https://app.radiant.capital/#/markets
V2 Economics
Radiant Capital pays out 85% of generated protocol fees to users in hard assets (real yield), with 15% going to fund Operational Expenses. Fees come from interest on loans. 25% of interest payments go to the lenders supplying these assets and 60% to liquidity providers (users with locked dLP positions).
Note the two different deposit APYs in the above graphic. One is the base rate; the other is the RDNT incentivized rate. And here, the mechanics of V2 come into play. Radiant reserves emissions and the bulk of protocol revenue for users providing liquidity and value to the protocol; the skin in the game design quasi-forces users to give value to the protocol to be able to extract value.
Source: https://docs.radiant.capital/radiant/project-info/dlp/dlp-utility
RDNT and dLP
RDNT is the native token and the best way to gain exposure to the overall growth of the protocol. But it has no single-sided functionality in the ecosystem in V2. Users must vest RDNT over 90 days, with an option to exit early, incurring a 25%-90% linear penalty based on elapsed time. The exit penalty gets split between the Radiant DAO Reserve and the Radiant Starfleet Treasury (90%/10%). But users can exit early via ‘Zapping’ into dLP.
dLP (Dynamic Liquidity Provision) is a Balancer pool constituted of 80% RDNT and 20% ETH. dLP must be locked to earn protocol fees with locking periods of 1 month, 3 months, 6 months, and 12 months. At the time of writing, new 6 or 12 months locks are eligible for ARB airdrops (see RFP-18). Users who lock 5% of the value of their deposits in dLP gain eligibility to earn RDNT emissions that will be released over five years. And with current incentives, the protocol pays users to borrow.
Some readers may have realized there is a shortcut for the vesting period. Users can begin vesting, zap into dLP, and lock tokens for one month. Although a user must take on some impermanent loss risk, shortening the time duration risk from ninety days to thirty days seems worth it. Data collected by Radiant showed that nearly 90% of users employing the zap feature were only locking for one month compared to the standard lock duration of one year. Unfortunately or fortunately, depending on a user’s disposition, RFP-17 outlined this loophole, and the necessary steps to close it have already begun. Interestingly the vote shows a strong alignment between stakeholders (RDNT holders) and protocol sustainability.
In conclusion, Radiant’s V2 economics force investors to interact meaningfully with the protocol by introducing the 5% dLP threshold and changing the way the protocol distributes fees. This shake-up introduced better liquidity for RDNT, incentivized RDNT token ownership, reduced sell pressure, and dissuaded mercenary capital. This progressive model distributes all RDNT emissions to active holders and contributors, tipping the scales in favor of dLP lockers and prolonged economic viability.
Source: https://tokenterminal.com/terminal/projects/radiant-capital
Source: https://tokenterminal.com/terminal/projects/radiant-capital
Profitability
Radiant generates roughly $30,000 in supply-side fees daily for lenders and dLP lockers, all paid out in blue chip and stablecoins, making it one of the highest-earning lending protocols in DeFi. And the protocol has over $350 million of outstanding loans, showing solid product market fit.
Source: https://tokenterminal.com/terminal/projects/radiant-capital
Source: https://tokenterminal.com/terminal/projects/radiant-capital
The number of RDNT holders continues to grow while active users of the protocol decline. These metrics indicate that investors have accepted that Radiant will remain the leading lending protocol for Arbitrum and want to gain exposure through token ownership. The fact that outstanding loans have remained constant while users have declined further indicates Radiant’s success in deterring mercenary capital and attracting sticky liquidity.
P/F Ratio (Price to Fees Ratio) is a very similar metric to the P/E (Price to Earnings) ratio used in stock analysis. Radiant’s P/F Ratio is 11.73. To compare this against other lending protocols, Compound has a P/F Ratio of 11.3, and Aave has a P/F Ratio of 10.19.
A vital aspect is that this is a fully diluted P/F Ratio. RDNT has a total supply of 1,000,000,000 and a circulating supply of 264,484,208. Napkin math reveals that Radiant’s current P/F ratio based on its circulating market cap is closer to 4.43, compared to Compound’s 7.74 and Aave’s 9.18. In simple terms, Radiant’s revenue generation is incredible, better than the other market-leading lenders by a significant margin. Given that Radiant distributes 85% of this revenue to holders, it is unsurprising to see the number of RDNT holders increasing, and dLP locking presents an excellent example of real yield.
Source: https://docs.radiant.capital/radiant/project-info/rdnt-tokenomics
Devil’s Advocate: Challenges Facing Radiant
Radiant Capital generates substantial revenue, but how sustainable will this be? Many users are willing to pay high borrowing APR due to RDNT incentives. For example, the borrowing cost of USDT is 10.67% but RDNT emissions total 14.57%. Therefore a net positive for lenders, but as emissions slow down, will Radiant be able to maintain this growth? Is this organic use of the protocol, or are people paying these high fees to farm RDNT? Has Radiant deterred mercenary capital? Or has Radiant Capital forced mercenary farmers to play the long game?
This problem will become more acute as emissions decrease. With 60% of fees going to dLP lockers, the non-boosted supply APYs will become unattractive on the open market. Radiant will struggle to attract capital when it only pays out 25% of fees to lenders, and protocols not diverting fees to token holders will have a significant advantage.
Source: https://debank.com/profile/0xaf0fdd39e5d92499b0ed9f68693da99c0ec1e92e
For example, this DeFi power user address has a dLP position just over the 5% threshold for RDNT emissions. They have deposited $12.6 million in USDC and borrowed $10.2 million, potentially using the loop function. This appears to be RDNT farming as opposed to organic lending activity. Time will tell as emissions slow down and RDNT incentives for borrowers decrease. How much revenue will Radiant generate in two years compared to today?
Source: https://app.radiant.capital/#/manage-radiant
Radiant Capital: The User Experience
As well as high RDNT emissions, one of the reasons Radiant has grown so rapidly is the user experience provided by the platform. The interface is sleek and easy to navigate. And the transaction bundling makes utilizing the protocol’s more advanced features straightforward.
The looping functionality is a prime example of a service that would be too expensive for most users on the Ethereum mainnet. Radiant’s loop function allows users to leverage up to 4X by repeatedly borrowing and depositing. The feature also automatically creates a locked dLP position for users to make them eligible for emissions, all bundled into one transaction. And this heightened UX represents another core feature of the Arbtirum Avant-Garde.
Source: https://app.radiant.capital/#/markets
Moving beyond the functionalities of the protocol the DAO structure has allowed users to play a highly active role in overseeing the protocol’s direction, which is at the kernel of the ‘‘DeFi 3.0’’ philosophy behind Radiant. The DAO has already passed measures integrating ARB and wstETH as supported assets and will vote on more asset and chain integrations in the future. The Starfleet Leaderboard, another DAO initiative, gives a weighted score to users based on protocol interactions such as locking length and dLP ratio, creating a mechanism to funnel more value to long-term protocol supporters.
Future Catalysts
The increasing adoption of LayerZero’s OFT token standard and the broader developing LayerZero narrative will benefit Radiant immensely. The integration of wstETH and the potential to add more LSD collaterals put Radiant squarely in the LSDFi narrative. Radiant DAO also received one of the largest ARB allocations (3,348,026 ARB tokens) and remains the most prominent dApp for single-sided yields on ARB.
The potential for Radiant to grow its TVL (Total Value Locked) also becomes apparent looking at the enormous volume of idle capital accruing low yields, especially in its competitor protocols, Aave and Compound. Then the 5% dLP threshold comes into play, incentivizing users to purchase $RDNT and lock it in dLP to earn emissions.
If RDNT drops in value, many users, due to locking up close to 5%, will have to purchase more RDNT to retain eligibility. This leads to natural dip buying pressure alleviating market psychology – never underestimate the importance of token price. The Bounties functionality further feeds this dip buying pressure by rewarding users who report other users receiving rewards when not eligible.
Radiant’s Future
Radiant’s P/F ratio and underlying revenue generation indicate that $RDNT remains undervalued compared to its rivals. The observable growing alignment between stakeholders and the protocol’s long-term sustainability similarly bodes well. With an ambitious roadmap to onboard 100 million users and become DeFi’s ‘Layer Zero’ for liquidity alongside a powerful existing flywheel, it appears that Radiant still possesses remarkable growth potential.
Kofi J has been active in DeFi since the 2020 summer explosion and has been rugged more times than he can remember. He hopes to make the decentralized economy a little bit more accessible through his prose. Follow the author on Twitter @k_pangolin
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