Tulip Protocol is a yield aggregation platform running on the Solana blockchain and offers three major yield products called Vault, Lending, and Leveraged Farming.
Blockchain natives and newbies are starting to realize that decentralization isn’t a guarantee of a secure platform. With web3 services now revealing their vulnerabilities from inside and outside exploitations, more initiatives should take place to better secure user assets. Fortunately, an increasing number of blockchain services are starting to add multiple layers of security to their services to cement their current users’ trust and court more investors in the future.
Tulip Protocol came from the foundations of SolFarm, a platform that started as an experimental protocol. It then evolved as decentralized finance (DeFi) powerhouse with 40 active vaults, lending, and leveraged farming services. The rebranding is a response to the growing opportunities presented by the project and serves as a symbolic new beginning in achieving new and bold DeFi goals.
What is Tulip Protocol?
Tulip Protocol is a yield aggregation platform running on the Solana blockchain and offers three major yield products called Vault, Lending, and Leveraged Farming. Its vault strategies consistently compound thanks to Solana’s fast-performing and low-cost network. Through these advantages, it can also offer “farmers” benefits such as bigger annual per yield (APY), smaller gas fees, and almost passive management.
The name “Tulip” was a nod from Holland’s infamous tulipmania, a market bubble that popped during the 1600s where speculations over Tulip bulbs have driven their prices to astounding heights. As a perspective, their prices have reached six times higher than an ordinary person’s yearly salary. Tulip is also a fitting name as the protocol handles speculative virtual assets, but unlike tulipmania, it aims to do better by providing benefits to its users and protecting them from crashes ー instead of leading them into it.
TULIP token is the platform’s native token that will soon transition as a governance token, allowing holders to vote on critical areas such as protocol enhancements, treasury allocations, platform fees, and more.
sTULIP is the platform’s governance token, which users can gain by staking their TULIP tokens. Users who intend to unstake their sTULIP will have to wait for two weeks before getting their TULIP back. During these 14 days, sTULIP wouldn’t gain any yields, and participants cannot use them for governance transactions. Users should also know that after the unstaking process, the system will automatically burn their sTULIP and forfeit their governance rights.
tuTokens serve as deposit receipts and users’ representation of their share in the pool. Tulip Protocol offers these tokens when users deposit on its lending pool. One important reminder here is that tuTokens are not 1:1 as they represent users’ percentage in the entire pool.
Tulip offers single-asset lending in which the system lends users’ deposits to leveraged yield farming (LYF) users. The system will then transfer the collected fees from LYF farmers to the users to pay their yields. The network’s user interface (UI) helps users check their current rewards and the number of tokens they can get.
On the economic side, the interest rates users’ can gain depends on utilization, meaning the higher the borrowing, the higher yield lenders can get. Users should also know that when the borrowing rate reaches 95%, the system will automatically disable additional loaning of tokens. Why? Because at 100%, Tulip can do nothing but stop all withdrawals and wait for new deposits or closed LYF positions, which will cause inconvenience for the entire platform.
Untimely liquidation is a risk that can happen on Tulip, where liquidation occurs, but funds are insufficient to pay complete fees to the lenders. As a response, the platform liquidates at 85% Loan To Value to provide itself with a 15% buffer, which, according to it, serves as enough protection for the said risk.
Furthermore, Tulip has established an insurance fund to immediately assist lenders in case of a “black swan liquidation,” an extremely rare event that may happen anytime. Despite the unlikeliness and rarity of this event, the network isn’t taking any chances and created an insurance fund derived from the 5% bounty when LYF farmers’ liquidation occurs.
Tulip offers a bigger APY compared to other platforms by compounding requests and boosting users’ equity. Its auto-compounding strategy functions every 30 minutes to 1 hour to offer users the highest possible returns. But users should know that this mechanism can be more effective for long-term Tulip farmers.
Furthermore, its APY relies on three significant aspects: Total Value Locked (TVL), Slot Heights or block times, and the token price. In other words, despite Tulip’s promise of higher returns, farmers’ rewards may differ, depending on these aspects’ current state. The risks users should watch out for are impermanent loss and the additional exposure that Tulip offers.
Leveraged Yield Farming
Leveraged Yield Farming allows users to farm by borrowing capital from lenders, providing them an opportunity to earn despite not having enough capital. This feature lets users deposit on just one asset and borrow other positions from the lenders.
The danger in leveraged yield is “directional risk,” which can trigger liquidations and cause a closed position for users. Furthermore, the system temporarily stops opening positions when a user borrows an asset with a 95% utilization rate.
Smart Contract Risks
Tulip’s code is currently in its experimental stage and the platform has advised all its current and would-be users to exercise caution when depositing their funds. Despite being peer-reviewed by the Solana Foundation and other developers, the platform made it clear that it’s not liable for the loss of funds caused by smart contract exploitations.
At some point, users might have to use additional Solana DeFi services when using Tulip Protocol to enhance their strategies further. While the platform will surely recommend reputable services, involving additional dApps in investing can increase users’ risk or “counterparty risk”. Investors should never forget this fact before adding another service when managing their funds.
Sec3 (Web3 Security)
Tulip has partnered with Sec3, a full-security audit firm, to bring additional protection to the yield aggregation platform. The 24/7 security helps the network detect cyber risks, including vulnerability recognition, false-positive handling, and more than 40 other types of exploitations. This partnership aims to assure Tulip farmers that its code is secure and consistently monitored to keep their assets as secure as possible.
Tulip Protocol has partnered with Chainlink, a decentralized oracle network, to access its advanced and tamper-proof financial market data, a crucial aspect for gaining leveraged yield farm positions. Through Chainlink Price Feeds, lenders and borrowers can ensure that Tulip will liquidate risky positions.
Chainlink is known for its capability to deliver full market coverage, which leads to fast delivery of data that reflects the current global market scenes. On top of these things, its platform can withstand major risks, including data manipulation attacks, market volatility, API downtime, and more.
While Tulip Finance’s DeFi services deserve praise, its most essential implementations are its security mechanisms and security-related partnerships. These initiatives ensure that users have peace of mind that robust safeguards are in place to protect their assets from imminent cyber risks.