Introduction

Surge Protocol is an innovative new money market where anyone can create a lending pool for any two ERC-20 assets. Surge lending pools uniquely operate around token supply and demand rather than token value.

In this novel approach that doesn’t rely at all on price feeds, Surge can support any asset as collateral without imposing absurd collateral ratios to do so. Although not launched yet, Surge has a private testnet live on Goerli and actively recruits new testers with frequent quizzes in the Surge Discord. It is expected to launch on Ethereum by the end of January or early February, and aiming to deploy on a new EVM chain every week after that.

The Problem

Today, a large majority of crypto assets cannot be lent or borrowed. This is because lending protocols generally have two major criteria for adding new assets: they cannot be extremely volatile and they must have a reliable price feed.

Why these criteria? Well, protocols enforce liquidations based on price volatility; borrowers are liquidated if the value of their collateral no longer covers the value of their debt.

Volatile assets with reliable price feeds that do manage to get listed still have limitations. To mitigate the risk of bad debt, many lending protocols subject volatile assets to extremely high collateral ratios (CRs). High CRs decrease the amount of value that borrowers can take out against their collateral, which makes borrowing against these assets unattractive as a whole.

The Goal

Surge is a marketplace that provides all the tools for borrowers and lenders to create their ideal lending markets. Anyone can create a lending pool for any two ERC-20 assets which do not require reliable price feeds and can be extremely volatile.

Rather than CRs that revolve around asset value, Surge CRs will determine the number of loan tokens that can be borrowed per collateral token. Surge CRs and other pool parameters will also change in response to supply and demand. With this design, Surge opens the floodgates for any asset to be borrowed and lent onchain.

How Does it Work?

Anyone who creates a pool can list any ERC-20 asset as the collateral token and any ERC-20 asset as the loan token. Creators can customize collateral ratios, interest rates, and how these parameters change at a certain utilization rate.

Surge collateral ratios are independent of asset prices. This means that borrowers are not limited based on their collateral value, but rather the number of collateral tokens they deposit. For example, let’s say someone creates a pool with wBTC as the collateral token and ETH as the loan token. The pool’s collateral ratio is 2:1. In this pool, borrowers can take out 2 ETH tokens for every 1 wBTC token they deposit as collateral.

Surge collateral ratios and interest rates are also dynamic, so they change based on the pool’s supply and demand. Supply and demand is measured by the pool’s utilization rate, which in this case is the number of tokens being borrowed relative to the number being supplied.

If asset prices go down, lenders should react by removing liquidity to prevent lending out more value than is collateralized. As lenders exit the pool and supply decreases, the pool’s utilization rate goes up. The utilization rate at which pool parameters change is known as the surge threshold. If a pool’s utilization rate rises above the surge threshold, the collateral ratio begins to fall (linearly) and interest rates rise.

Borrowers must respond to a falling CR by posting more collateral tokens to avoid liquidation. If the CR fell to 1:1 in the wBTC/ETH example, borrowers would need to ensure they have 1 wBTC deposited for every 1 ETH they have borrowed (rather than 1 wBTC for every 2 ETH borrowed). If a borrower does not post enough collateral tokens per token borrowed, then they can be liquidated.

Once a pool’s utilization rate drops back below the surge threshold, the CR begins slowly rising back to the pool’s maximum CR (linearly). If a pool’s CR falls to zero due to a prolonged Surge state, then all borrowers in the pool are liquidated. Anyone can pay off the debt of an under-collateralized borrower in exchange for their collateral, and Surge makes this extremely simple to do on the frontend.

Surge has ambitious plans post-launch as well. While each Surge pool is its own market with its own isolated liquidity, Surge will work on future vault deployments for aggregating liquidity across shared asset pairs. For example, a USDC vault would lend out vault deposits to top Surge USDC pools. This improves overall liquidity and offers a simplified UX for passive lenders.

Partnerships

Given Surge has not launched, it has not announced any official partnerships yet. The protocol plans to deploy first on Ethereum, then layer 2s, and finally non-EVM chains, which gives Surge plenty of room to grow its partnerships in these ecosystems.

Tokenomics

$SURGE (?) Price: N/A

Market Capitalization: N/A

Circulating Supply: N/A

Total Supply: N/A

Fully Diluted Valuation: N/A

There are no official details or extended tokenomics on the Surge token, and the $SURGE ticker above is not official either. It’s important to note that pool parameters are entirely customizable by creators and pool deployments are permissionless, so the protocol will have no governance (similar to Liquity). As such, it can be speculated the $SURGE will at least capture protocol fees to be distributed to stakers/lockers.

Conclusion

The incredibly unique approach that Surge is taking to a permissionless lending market could be revolutionary for DeFi. Its oracleless design opens up a world of possibilities and allows for all ERC-20 assets to be lent and borrowed.

Lending pools based around token supply and demand rather than token value are an exciting new concept, and this could ultimately inspire a further surge of innovation and composability in DeFi today.

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DISCLOSURE: I do not have any exposure to the Surge protocol, nor am I affiliated with Surge. I was not asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.