YieldBlox Protocol Design Choices: Maximizing Capital Efficiency

4 min readMay 7, 2021


This blog post covers some of our protocol design choices that maximize YieldBlox’s capital efficiency. Capital efficiency is crucial to any DeFi protocol as it’s directly related to the value the protocol creates. In the case of lending protocols like YieldBlox, higher capital efficiency allows protocols to maximize the interest rates that lenders receive while minimizing borrowers’ interest rates.

Breaking Down Capital Efficiency in DeFi

Traditionally, capital efficiency measures how well a company utilizes assets to generate profits. Due to the liquidity of the DeFi ecosystem and the efficiency of the demand-based interest rate model, capital efficiency in DeFi is a measurement of how well a protocol allocates its assets to market areas that have demand for capital, or how “useful” a protocol’s capital is. The more useful a protocol’s capital is, the higher demand it has, and the higher the protocol’s yields become. This increase in yield results in an increase in supply as the protocol becomes a more attractive place for users to deposit funds. Once supply increases, demand-based interest rates make the protocol’s capital cheaper to use, so as long as the protocol’s capital is still useful, demand will again increase. This supply and demand flywheel continues until the protocol’s assets stop being useful. So to maximize capital efficiency, protocol architects must maximize the usefulness of protocol capital.

More Information on YieldBlox’s Demand-Based-Interest Rates:

Commentary on Interest Rates: https://docs.yieldblox.com/#/Whitepaper?id=loan-interest-rates

Commentary on tracking Utilization: https://docs.yieldblox.com/#/Whitepaper?id=utilization-feed

Equations: https://docs.yieldblox.com/#/Whitepaper?id=protocol-calculations

Capital Efficiency in YieldBlox

Lending Avenues

Lending avenues are the methods of lending supported by a protocol. The more lending avenues a protocol supports the more useful it’s capital becomes as the protocol can support more borrowing use cases. Since capital usefulness is the primary driver of protocol capital efficiency, we maximize YieldBlox’s capital efficiency by supporting as many lending avenues as possible. Eventually, YieldBlox will support standard lending, margin accounts that can trade on the Stellar DEX with up to 5x leverage, flash loans, and hopefully even some form of under-collateralized lending. Additionally, YieldBlox supports both fixed and floating interest rates, ensuring that its capital is useful for users that require either. Finally, we’re implementing a flexible asset support structure to ensure that any asset on the Stellar network can be lent with YieldBlox as long as the governance token holders deem the asset safe.

YieldBlox Protocol Asset Structure: https://docs.yieldblox.com/#/Whitepaper?id=protocol-tokens

Collateral Flexibility

Collateral flexibility serves as an extension of capital usefulness for lending protocols. Supporting a wide variety of collateral types ensures that as many borrowers as possible can borrow from YieldBlox. For example, a user with the majority of their capital deposited in a CAP-37/38 liquidity pool should still be able to use their pool shares as borrowing collateral. We plan to support the collateralization of liquidity pool shares and pool tokens from other DeFi protocols that may be developed on Stellar’s network in the future as long as YieldBlox governance token holders deem these pool tokens to be secure. This flexibility enhances YieldBlox’s capital usefulness by expanding its borrowing accessibility.

Circular Lending

Like most DeFi lending protocol’s, YieldBlox uses circular lending to ensure that collateral deposits remain useful. Assets deposited as collateral into the YieldBlox protocol are automatically converted into pool tokens so they can be lent to other borrowers. As a result, assets deposited as collateral retain their usefulness. This circular mechanism remains secure because all standard loans are overcollateralized, so the value of assets lent never exceeds the value of assets deposited.


While protocol usability isn’t technically a part of the core protocol design, it is almost as important to capital efficiency as capital usefulness. To put it concisely, usability builds the rails by which supply and demand reach a protocol. If a user wants to borrow YieldBlox’s capital but cannot figure out how to borrow from the protocol, the demand represented by the user’s desire to borrow will never reach YieldBlox. As a result, we are supporting YieldBlox with a user-friendly web-app, a well-maintained SDK, comprehensive documentation, and excellent educational content.

Other Updates

Script3 AMA

We’re hosting an AMA on https://www.reddit.com/r/Stellar/ this Sunday, 5/9/2021, starting at 11am ET. Stop by and ask any questions you have! We decided to whip up a $ScripTee NFT as a fun promotional campaign. You can redeem the token on our website and you’ll be sent a ScripT-Shirt. We minted 100 tokens and we’ll be distributing them during events over the next few months leading up to YieldBlox’s launch. We’ll be randomly selecting a few AMA participants to receive an NFT.

We’re Still Hiring!

We are currently hiring UX Design, Front-End Development, and Marketing positions. We’re considering both long-term positions and contracting work. Reach out by emailing us at markus@script3.io, and we’ll be happy to set up a meeting with you.

Join the Community

Remember to join our Keybase or Discord to ask us any questions or discuss our protocols!