- The XRP Ledger’s XLS-65 offers both public and private vault options, with flexible withdrawal policies and compliance features like freezing and clawback.
- XLS-66 enables on-chain uncollateralized loans with fixed terms, utilizing pooled liquidity and off-chain credit assessments.
XRP Ledger’s (XRPL) two latest specifications, XLS-65 and XLS-66, aim at furthering decentralized finance (DeFi) functionalities. These updates have the potential to revolutionize liquid management and lending protocols on XRP Ledger, which has witnessed growing demand in recent times, as mentioned in our previous report.
Key Features Of XRP Ledger’s XLS-65 Innovation
The XLS-65 introduces the Single Asset Vault, an innovative feature that aggregates assets from various accounts. The pooled liquidity structure improves interoperability with other protocols in the XRPL ecosystem, such as lending platforms. The Vault simplifies asset management and enhances flexibility by separating liquidity provisioning from core protocol operations.
There are entries in the ledger that represent the Vaults. Management of this is taken care of by a VaultOwner account. Depositors deposit their assets to the Vault and, based on their proportion of ownership, are granted proportional shares, which are the basis for withdrawals, following a defined withdrawal policy.
The current withdrawal system works on a First-Come, First-Serve basis, which works by processing in order of submission. Although the model works well, it might not be applicable to all DeFi use cases. Future implementations might introduce alternative withdrawal policies that align with different liquidity requirements.
Vaults can be classified as public or private. Public Vaults allow open deposits and withdrawals, while Private Vaults restrict deposits to authorized users via a Permissioned Domain mechanism. This access control ensures flexibility in accommodating various user needs within the XRP Ledger ecosystem.
Vault shares, issued directly by the Vault, can be made transferable or non-transferable. Transferable shares allow trading on the Decentralized Exchange (DEX) with access control if linked to a Permissioned Domain. Further, features for compliance like freezing and clawback are available for asset issuers to meet regulatory needs or mitigate risk efficiently.
XLS-66 Lending Protocol Characteristics
XLS-66, a native lending protocol introduced into the XRP Ledger, allows on-chain uncollateralized loans with fixed terms. Liquidity is drawn from pooled assets, while off-chain risk assessment ensures the borrower’s creditworthiness. A First-Loss Capital protection mechanism is integrated to protect Vault depositors in case of loan defaults.
Loans are formalized as on-chain agreements between the lender and borrower, with repayment schedules designed using amortization techniques. Payments are structured to include principal, interest, and a LoanBroker fee. Borrowers may also make early or additional payments, subject to specific terms that adjust loan balances or incur additional fees.
To mitigate risks, the protocol employs First-Loss Capital, wherein the LoanBroker sets aside a portion of funds to cover potential losses. In cases of loan defaults, this reserve is partially liquidated to compensate depositors. Additional measures, including loan impairments, temporarily restrict withdrawals to prevent disproportionate impacts on remaining depositors.
Issuer-based asset freezes could affect lending activities. Frozen accounts of borrowers will lead to loan defaults if payments continue to be pending after a grace period. Under such circumstances, the protocol facilitates lenders to hasten the process of defaulting.
The next steps for the protocol include a collateral mechanism to enhance security. Borrowers will pledge collateral with real-time valuation and dynamic collateral ratios, mitigating the effects of variations in market price. This will build confidence and strengthen the XRP Ledger lending ecosystem.
Amid the recent developments like the automated market maker (AMM) and RLUSD stablecoin launch, the XRP Ledger is seeing growing institutional demand, as previously mentioned in our report.
