What is the Navi Protocol?

March 01, 2024 - 5 min read

An overview of the Navi Protocol, a leading money market protocol within the Sui ecosystem.

Introduction

With its focus on providing essential DeFi infrastructure, Navi is jockeying for position as a key mover in the Move Language ecosystem. Navi was the first Liquidity Protocol to launch on Sui. Users can easily participate in the DeFi movement as liquidity providers on the Sui ecosystem using Move. Navi users can earn yield for themselves from providing liquidity to the network, and others can leverage opportunities to utilize the same assets all across the platform.

More specifically, liquidity providers (LPs) supply assets to the market, earning passive income through yields, while borrowers can permissionlessly obtain loans where arbitrage opportunities may exist. Navi provides support for a wide variety of assets at different risk levels though their algos serve to protect user funds and mitigate systemic DeFi risks.

How Navi Protocol Works

First, Navi allows users to lend and borrow crypto assets without the need for intermediaries by leveraging a shared asset pool system. Navi’s liquidity pools cover a variety of asset pairs, and any regular user can deposit their assets into these pools to become an LP. Following this step, they receive LP tokens in return, which represent their share of the pool.

These LP tokens act as collateral to borrow other assets from the pool. The collateralization ratio determines the amount that can be borrowed, andis dynamically adjusted based on supply and demand. As for governance, token holders have the right to vote on proposals and any proposed changes to the protocol. This could include setting interest rates, adding new assets, or even adjusting the collateralization ratio for borrowers.

Interacting With Navi via the Sui Network

To interact with NAVI, you will need an SUI-compatible wallet. To get Tokens onto the SUI Network through the bridge,we can use Wormhole Connect. Essentially, it’s a widget that gives devs easy access to Wormhole-powered bridges directly from within a single platform. Alternatively, we can also buy tokens from centralized exchanges and withdraw them to our Sui-compatible wallets.

The amount of wallets which interact with the Sui ecosystem grows, and the process to do so is simple.

Once our smart contract wallets are connected, we can go on to the next step of supplying collateral to the liquidity network. Once the assets you control are confirmed to be staked on the network, we can begin to generate interest on our staked funds.

Liquidity providers of course share the interest payments derived from money market borrowers corresponding to their own funding and utilization rate. As a borrower’s utilization of collateralized funds grows, the higher interest rate they need to pay, and the higher the yield for LPs will be.

Liquidations for Borrowers on Navi

Withdrawals are simple to perform, yet may reduce our health score, decrease our utilization rate, and increase our risk of liquidation if things don’t go the right way. The health score represents a user’s deposited assets against the borrowed assets, their underlying value, and the overall likelihood of default on the loan or loans. The higher the health score, the safer the state of any given Navi user’s funds is against a liquidation scenario.

A Health Factor below 1 suggests that the collateral will enter the initial phases of liquidation. Liquidation might happen when the collateral decreases in value or the borrowed debt increases in value against the collateral. In such cases, up to 35% of a borrower’s debt is immediately repaid, and that value plus an additional liquidation fee is taken from the borrower’s available collateral.

In order to avoid our health score dropping and leading to liquidation, we can repay the loan or deposit more assets in order to bring up our score again. Notifi Network helps let users know when their health scores change and collateral needs to be added to maintain healthy levels. By pushing notifications to us via email, Telegram, and Discord.

Liquidation Mechanics for Whistleblowers

As a whistleblower, any user can openly call for the liquidation of a given loan on the books and collect a fee for doing so. In essence, this incentivizes third parties to participate in the health of the overall protocol by ensuring that loans are either sufficiently collateralized or liquidated accordingly.

The important caveat for consideration is whether or not the liquidation payout is worth the gas fees and the opportunity costs of operating a whistleblower node. After starting the process, liquidators repay up to 35% of the borrower’s outstanding balance while receiving a discounted amount of collateral in return as their liquidation “bonus.” Liquidators can then decide if they want to receive an equivalent amount of collateral tokens or underlying assets.

Liquid Staking for Liquidity Providers

Traditional AMM platforms allow users to deposit tokens into liquidity pools, returning LP tokens to them in exchange. Where Navi protocol deviates is that it enables users to borrow against these LP tokens so users can access untapped liquidity in their LP tokens and leverage them for yield farming and other arbitrage opportunities.

What’s more, Navi accepts Liquid Staked Derivative tokens as collateral for borrowing in their money markets. These tokens represent staked assets and can be used to obtain loans while still earning staking rewards on the derivative L1, increasing the capital efficiency and interoperability of the broader DeFi ecosystem.

Traditional money markets make it difficult for exotic assets to get listed on the platforms for a variety of reasons. However, by introducing Isolation Mode and risk management improvements like Debt Ceilings, Supply Limits, and Borrow Limits, exotic assets on the platform can be gradually added to the protocol without affecting solvency risks negatively.

The future of decentralized exchanges trading exotic assets is exciting to witness, as the process of its manifestation offers additional functionalities along the way. Navi protocol promises to be a platform to watch as DeFi adoption grows, but only time will tell.