The DeFi ecosystem that Arbitrum offers has been thriving recently, as seen by the proliferation of tokens derived from the native protocols of the network as well as an overall rise in usage. Nevertheless, rather than just releasing copy clones of existing DeFi brands, the dominant protocols on Arbitrum have their distinct value propositions. GMX, which operates in the margin trading area, and Lyra, which deals in options and was first launched on Optimism, are two instances.

Even in terms of TVL, Radiant Capital is now ahead of Aave and is on its way to becoming the most powerful participant in the money market sector on Arbitrum.

Radiant TVL

Source: Defillama

It is the mission of Radiant Capital to become a one-stop money market where consumers may deposit funds and borrow funds smoothly across numerous chains. While there are money markets similar to Aave on several other blockchains, these money markets do not have complete cross-chain capability.

Users are only eligible for loans on the blockchain that they have collateral posted to. They would need to go through several different transactions that bridged the capital between the two chains to be able to deposit money on one chain and withdraw it from another. As a consequence of this, the liquidity of the money market is dispersed since it essentially exists in silos today.

Radiant Capital is committed to finding solutions to these problems.

Radiant v1, which was the first money market to connect with LayerZero, takes use of Stargate's dependable router interface. If a lender wants to retrieve their collateral, they will have the ability to choose which chain monies should be withdrawn from and what proportion of those assets should be delivered to each chain. At this time, cross-chain functionalities can only be used with USDC and USDT tokens.

Users have the ability to deposit either token on Arbitrum and borrow it on the same chain, or borrow it and transfer it to another chain via a single interface. Arbitrum is a decentralized digital asset exchange. One-click leveraged borrowing, which allows users to loop their loans to gain liquidity mining incentives, is another fascinating feature. Additional noteworthy features include these.

How Radiant’s Omnichain works

Omnichain is a blockchain-based technological architecture that enables disparate blockchain networks to communicate and seamlessly interoperate with one another. Building the first omnichain money market atop LayerZero implies, in the context of Radiant Capital, that the platform intends to establish a new sort of decentralized financial market that is capable of operating across different blockchain networks.

LayerZero is a technological infrastructure that has been developed to offer a high-performance and scalable solution for the construction of blockchain networks and decentralized applications (dApps). Radiant Capital intends to achieve its goal of developing a platform that is capable of supporting the fast and secure trading of a broad variety of digital assets by basing its money market on LayerZero. These digital assets will include insurance tokens and other financial products.

Radiant Capital is in the process of developing an omnichain money market, which will provide a novel form of decentralized financial infrastructure. This infrastructure will be able to support a variety of distinct blockchain networks and digital assets, in addition to offering features such as low transaction fees and transparent pricing.

The current state

This year has been remarkable for Radiant's rise in traction. The most borrowing was done during the third quarter of the previous year, but the pace of borrowing has dramatically ramped up since the beginning of 2023. This year, the total amount of outstanding loans is grown by more than 350%.

As compared to more recent money markets like Morpho and Euler, daily active addresses have also been quite high. This might be due to the fact that gas costs on Arbitrum are far lower than those on Ethereum, or it could simply be due to the rising popularity of Arbitrum as a DeFi ecosystem.

Radient daily active users

Source: Token terminal

Only Aave, which is a substantially bigger and more established money market, has a higher count of daily active addresses than any of the other money markets that are represented in the chart that is presented below.

Almost two hundred thousand distinct wallets have communicated with the protocol since its creation. For a more recent money market like Radiant, this is a significant amount. In particular, throughout the most recent month, there has been a discernible rise in the number of wallets that have been returned.

Radiant seems to be cultivating a loyal user base, which is encouraging news for the business' financial trajectory as well as its future growth potential. Yet, this behavior is not entirely natural and may in part be ascribed to the token incentives that have been provided.

Token emissions are now being used to support financial activities like lending and borrowing. This has also resulted in interest rates that are higher than the norm for the market. For instance, the cost of borrowing $10,000 carries an annual interest rate of 10%. Yet, the vast majority of the cost of borrowing is covered by RDNT emissions to the tune of around 16%. This indicates that the user will get a 6% interest payment for the usage of borrowed funds.

It takes a total of 28 days for incentives from liquidity mining to become fully vested, and users are responsible for initiating this process themselves. Users have the option after the vesting period has been activated, to either make a claim immediately and forfeit 50% of their rewards as a penalty or wait until the vesting period of 28 days has passed to get the full amount of emissions that are due to them.

As can be observed from current data on borrowing and emission rates, the pace of borrowing is around half that of emission rates. This suggests that the lag period and the 50% penalty have already been included in the interest rates offered by money markets, give or take one or two percent.

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RDNT Token

Since the RDNT token plays such an important role in Radiant's economy, the development team has spent a significant amount of effort on improving its functionality in Radiant v2. For the time being, those that own RDNT may gain in two different ways from having it.

RDNT tokens are released into circulation (as rewards for liquidity mining) after a period of 28 days. RDNTs that are not yet vesting has the option of being locked for a predetermined time period of 28 days. Both locked and vesting RDNT get an equal portion of the protocol fees (the other half is paid out to lenders in the form of APY). The additional benefit of sharing in early departure penalties is possessed by locked RDNT.

In light of recent token performance, locked RDNT currently yields an enticing rate of 63% APY, which seems to have functioned as an efficient supply sink. Throughout the first two months of 2023, both the number of holders and the price of the token have seen significant growth. RDNT is up more than 600% year to date.

Radiant v2

The release of Radiant v2 is expected to take place in the next weeks. This is a step in the direction of real omnichain capability as well as a more balanced token economy, both of which seek to incentivize dedicated users of the protocol.

As part of the update, the team will add collateral support for over 20 additional assets and increase cross-chain capabilities to five main chains. Moreover, the team will be expanding the scope of the upgrade. In the end, the rising demand for borrowing assets will result in more income for Radiant, which will be generated by new collateral assets as well as new markets. Moving the ERC20 RDNT token to the LayerZero OFT (Omnichain Fungible Token) format is a priority for the team because it will enable quicker launches on other chains. This move also has the added benefits of more seamless cross-chain fee sharing and the ability to allow native ownership of bridging contracts rather than relying on third-party bridges.

The tokenomics of the Radiant v2 protocol is another area that is slated to get a significant overhaul. To begin, the timeframe for planned token emissions will be increased from a runway of two years to a span of five years, with the last event taking place in July 2027. This will make it possible for the protocol to boost liquidity and provide incentives for the onboarding of more users. The governance vote (RFP-8) that outlines these adjustments also provides the Radiant DAO with flexibility about the allocation of RDNT emissions to the various chains. The number of days required for rewards from liquidity mining to become vested will increase from 28 to 90, and early departure fines will no longer be paid out to stakers. Instead, these penalties will be remitted to the DAO in the proportion of 90% and burnt in the remaining 10%. In addition, vesting RDNT won't collect protocol fees as it did in version 1.

Radient RFP8

Source: Radiant capital

Moreover, Radiant is launching something called "Dynamic Liquidity." This means that borrowers and lenders who are not staking their Liquidity Provider (LP) tokens to the protocol will not be able to gain RDNT emissions from the network. In addition to making deposits, users are required to provide enough liquidity in the form of RDNT-ETH (dLP) transactions in order to earn RDNT emissions. In order to be eligible for liquidity mining incentives, the value of their LPs has to be at least 5% of the entire value of their deposits. This is all a part of Radiant's goal to incentivize loyal users of the protocol rather than mercenary farms and dumpers, so keep that in mind as you read on.

In spite of the fact that Radiant has the noble goal of developing a rewards program that can be maintained over time, there is a possibility that incentives will be underused. To begin, not all users are willing to accept the extra risk that comes along with supplying an LP position in addition to taking part in the typical activities associated with the money market. Second, the value of the rewards you get might be completely arbitrary depending on how and when the LP total is computed.

For instance, if a user stakes an LP position worth 7% of their deposit, owing to variations in the value of the LP position, that figure might easily and regularly drop below the 5% level. This is because the value of the LP position can fluctuate. This has the potential to become an issue and a cause for concern for users.

In order for the protocol to properly compensate users who are contributing to the provision of liquidity, LP locks will also replace single-sided locking. Users who have varying risk profiles and liquidity demands will be able to pick the lock term that is most comfortable for them since there will no longer be a set 28-day lock on LPs. Instead, locking durations will be variable. The income structure of Radiant will also be altered so that more borrow interest will be allocated to LP stakers and less will be distributed to lenders as annual percentage yield (APY). In the next paragraph, we will go into more detail on this topic.

Alterations to the Model Used to Distribute Fees

Radiant is throwing its support behind the questionable business model and token economy of the protocol in an effort to transform itself into a product that really generates value. Their business strategy is comparable to that of Aave, given that they are a fork of Aave. The manner in which Radiant and Aave divide up protocol fees is one of the key differences between the two.

For those who aren't already aware, the vast majority of Radiant's revenue comes from the interest they charge on loans that originated via their platform. On Radiant v1, a basic annual percentage yield (APY) equal to 50% of the protocol fees is paid out to lenders. The remaining fifty percent is referred to as the net interest margin (NIM), and it is shared among RDNT lockers and vesters. Nevertheless, the revenue split will shortly be altered in v2, and just 25% of the interest income will be distributed to lenders. This modification will take place soon. The other 60% will be sent to Dynamic Liquidity lockers, and the remaining fifteen percent will be placed in a DAO wallet to be used for operational expenditures like wages, exchange listings, and so on.

As opposed to Aave and Compound, which provide the majority of their interest revenue to lenders, the distribution to lenders is a notable aspect of this platform. Consider, for instance, Aave's USDC and WBTC markets on Arbitrum. These markets both have a reserve factor of 10%, but they differ in that one of them also has a reserve factor of 20%. This indicates that the remaining 90% and 80% are divided up among the lenders that participated in the lending pool. In the case of Radiant v1, lenders that accept USDC or WBTC are rewarded with 50% of the overall interest paid by borrowers. In Radiant v2, the amount of money that is set aside for lenders will be cut down to 25% from its current level. In a sense, Radiant's lenders and borrowers are contributing to the cost of LP lockers by forgoing a significant portion of the interest money they would have otherwise received.

A lesser allocation to lenders may result in fewer deposits (less capital to share the smaller pot of interest revenue), which may lead to greater utilization, which in turn can result in higher borrowing costs. This may in turn discourage people from taking out loans. Radiant has to continue to give considerable token emissions in order to compensate for the expenses of borrowing if they want to ensure that lending and borrowing can continue to exist in the long term.

It could be appropriate to restrict deposits from those who wish to earn emissions in exchange for an LP share. Instead of going to some antiquated mercenary business, the tokens would be distributed to users who provide long-term liquidity. Nevertheless, in order for customers to be eligible for an attractive annual percentage yield (APY), they need to fulfill a number of requirements first (such as investing at least 5% of their notional value in dLP locks) (net of token emissions). This may in turn discourage people from using the service.

It is much too soon to say whether or not Radiant v2's plan will be successful at this point. Giving lenders such a little share seems to be a poor approach, particularly in the early stages of an organization's development, according to a surface-level examination. In the DeFi money markets, the majority of the risk is borne by lenders. It does not seem that being reimbursed with just 25 percent of the interest paid by borrowers would result in a positive outcome.

Together with the launch of the initial version of their liquidity mining program, Radiant's v1 revenue split seems to be successful so far, allocating 50% of earnings to RDNT lenders and the other 50% to RDNT lockers and vesters. Even after taking into account the value of the token incentives, the system continues to generate a profit, as can be shown by looking at its monthly net profits. At this time, however, prioritizing optimization for DAO income above expansion in the number of users may be regarded as shortsighted.

Radient earning

Source: Token Terminal

Taking into account all of the costs that Radiant has racked up since its beginning gives us a yearly fee total of $9.1 million that may be split between lenders and stakers. In light of this, RDNT has an anticipated income per token of $0.041, taking into account the total quantity in circulation. This compares to the current token price of $0.31.

When just the part of fees that accrue to RDNT lockers is considered, we get a P/E ratio that is around 15.3x when we use the same circulating supply. This indicates that staking all RDNT tokens in circulation would result in stakers receiving around 6.5% in fees on a yearly basis if the tokens were staked. Yet, Radiant's income is now being enhanced by token emissions, whilst some of the older money markets have far fewer or none at all when it comes to liquidity mining programs that are designed to boost revenue.

Radiant's price-to-sales ratio is lower than that of other borrow-lending procedures now available on the market, which gives the company a competitive advantage in terms of its value.

Conclusion

On Arbitrum, Radiant v1 has gained a lot of traction, however, it is important to keep in mind that these figures are most likely inflated by the liquidity mining awards that are being distributed. In spite of the fact that mercenary farmers are supposed to be prevented from participating, the possibility of trading 50% of one's token rewards gained in exchange for instant liquidity is more than enough to keep these players engaged.

Despite the fact that these apps would always exaggerate consumption figures, not all of them are harmful. The positive aspect of emissions is that they have the potential to play a pivotal role in the early liquidity bootstrapping process for new products. Large portions of the total addressable market are available for cross-chain financing. The ability for users to lend on one chain and effortlessly borrow on another chain would be valuable to users. The forthcoming update to Radiant is going to bring this concept to fruition.

The product's goal is excellent, however, the business model has certain flaws that need to be worked out. It is controversial to pay lenders just 25% of the gross interest when big firms like Aave and Compound pay lenders 80–90 percent of the interest. Lenders are the most essential party in the system.

Products that are still in the early stages of development should prioritize optimizing for one thing above all others: increased use and users. Since lenders are so important to the expansion of the protocol, imposing restrictions of this kind on their capacity to create yield calls into question the viability of the expansion narrative as a whole. If a product has established a solid reputation in its market and boasts decent user and use figures, focusing on income is more than appropriate; nevertheless, this should not be done before these milestones have been reached.

Therefore, the fundamental concept that drives Radiant Capital might potentially address a significant need in the market. Its development possibilities might be hampered, however, if the incentives for capital supply and usage do not correspond with those of the rest of the market.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Radiant Capital: A flaw in tokenomics?