Loopscale is designed in response to the structural limitations of traditional, pool-based DeFi lending protocols. This page describes the key differences between Loopscale’s architecture and pool-based lending models and explains how Loopscale enables scalable credit markets.

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Limitations of Pool-Based Models

Most DeFi lending protocols rely on multi-asset liquidity pools. In this model, users deposit assets into a shared pool, and borrowers draw from that pool. Interest rates are set by a utilization curve: rates increase as more of the pool is borrowed. This model was developed under the constraints of early blockchain infrastructure (e.g., Ethereum) and when demand for onchain borrowing was uncertain.

While effective for bootstrapping early DeFi markets, the model introduces several structural inefficiencies:

  • Interest rate spread: Interest is paid only on borrowed funds but distributed across all liquidity (including idle capital), creating a persistent spread between borrow and supply rates.
  • Poor risk pricing: Rates are based on the utilization of the borrowed asset and do not reflect the volatility or quality of the collateral.
  • One-size-fits-all exposure: All lenders in a pool share the same risk exposure, with no ability to define individual risk preferences.
  • Limited flexibility: New collateral assets require governance approval and deep liquidity and pools typically support only open-ended, variable-rate loans, significantly limiting protocol extensibility.
  • Systemic risk: Multi-asset pools create shared exposure—volatility in one asset can impact the entire system.

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Loopscale’s Credit Order Book Model

Loopscale replaces the pooled model with an order book system called the Credit Order Book, where each market is created and priced independently. Loans are executed through direct matches between borrowers and lenders, with fixed rates and market-defined terms. This model solves the issues of pool-based models and unlocks entirely new financial products and markets.

  • More collateral assets: Support for staked assets, LP positions, and novel primitives like RWAs or restaking tokens.
  • Precise risk management: Each market is isolated, and lenders define risk parameters per asset and per offer.
  • Fixed rates: Fixed-rate loans avoid exposure to the volatility of variable, utilization-based rates.
  • Better rates: With order books, Without the need for idle liquidity buffers, more capital is actively earning. This improves lending yields and reduces borrowing costs.
  • Higher LTVs: Markets are not constrained by the riskiest asset in a pool. Each asset’s risk is priced independently.

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Solving Fragmentation and Usability

Historically, order book–based lending protocols have faced two primary challenges: liquidity fragmentation and complex user experience. Because each market in an order book is defined by a specific set of parameters, capital tends to fragment across many isolated opportunities, and lenders must manage each position manually.

Loopscale addresses these challenges with two key abstractions:

Virtual Markets: Rather than placing individual orders on every market, lenders create a ruleset defining acceptable terms (e.g., collateral, rate, duration). This ruleset is abstracted into Virtual Markets, which:

  • Present unified liquidity across markets matching the lender’s criteria
  • Concentrate liquidity around standardized, popular configurations
  • Support incremental refinement over time, enabling more granular markets as overall liquidity increases.

This balances short-term liquidity aggregation with long-term extensibility, allowing Loopscale to support both common borrowing use cases and more specialized products.

Loopscale Vaults: Users seeking a passive experience can deposit to Loopscale Vaults, lending strategies managed by third-party curators. These curators define and manage the ruleset on behalf of Vault participants, handling market selection and order placement. Vaults provide an accessible entry point for users who want to earn lending yield on Loopscale Markets without managing positions or understanding order book mechanics. Interest, risk, and performance are distributed among all Vault participants.

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Advantages of Orderbooks

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Interest Rates

Algorithmic risk pricing fails to efficiently allocate capital, leaving significant funds idle. This idle liquidity creates an inherent rate spread that dilutes returns. Direct matches via order book bypass the spread between borrow and supply rates found in pool models by instead directly matching parties. Consider the following example:

  1. Lenders supply $100 to the pool
  2. A borrower borrows $60. The borrow rate is defined by the protocol as 5% APY for a 60% utilization ratio.
  3. The idle liquidity leads to a Borrow APY of 5% and a Supply APY of 3% as calculated by:

Supply APY=Borrow APY×Utilization Ratio\text{Supply APY} = \text{Borrow APY} \times \text{Utilization Ratio}

3%=5%×601003\% = 5\% \times \frac{60}{100}

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Collateral Eligibility

A major disadvantage of pool-based lending models is their inability to price risk based on collateral quality.

A lender’s risk-return profile depends on the likelihood that the collateral will sufficiently cover the loan in the event of liquidation. This is primarily a function of the loan-to-value (LTV) ratio and the volatility of the collateral asset. Riskier collateral or higher LTVs should naturally command higher interest rates.

However, in pool-based models, interest rates are determined solely by the utilization of the borrowed asset—not the collateral securing the loan. This leads to several problems:

  • Uniform risk pricing: Volatile or illiquid assets are priced the same as stable collateral.
  • Cross-asset inefficiency: Risk introduced by a single asset affects rates for all borrowers in the pool.
  • Protocol constraints: To avoid these issues, protocols often restrict the types of assets that can be used as collateral or create separate pools, which fragments liquidity.

By contrast, Loopscale prices each market independently, allowing for per-asset risk differentiation. This ensures better rates for lower-risk collateral, enables support for novel asset types, and eliminates the need for restrictive eligibility or fragmented pools.

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Risk Management

Pool-based lending protocols expose users to shared, system-wide risk. Because multiple assets are aggregated into a single pool, parameters like LTV, liquidation thresholds, and interest rates must be conservative enough to accommodate the riskiest supported collateral. This results in:

  • One-size-fits-all parameters: Safer assets are unnecessarily constrained by rules designed for more volatile ones.
  • Systemic risk: Underperformance or volatility in a single asset can threaten the solvency of the entire pool.
  • Emergency interventions: Protocols may be forced to pause markets or change parameters globally in response to localized risk events.

Loopscale’s architecture avoids these issues through isolated, asset-specific markets that support both mature and emerging assets. Each market represents a single collateral-asset pair with independent, market-defined terms, enabling:

  • Per-market terms: Collateral-specific LTVs, rates, and durations tailored to the asset’s risk profile.
  • No cross-asset contagion: Volatility in one market has no effect on others.
  • Customizable exposure: Sophisticated lenders can set rates, durations, and collateral requirements based on individual risk appetite and market outlook.

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Supported Use Cases

Loopscale unlocks new onchain financial products and credit applications, including:

  • Leveraged yield strategies (e.g., JLP, LSTs)
  • Margin for market makers (e.g., Orca Whirlpools)
  • Passive fixed-rate lending via Vaults
  • Structured credit (e.g. undercollateralized loans, tranched lending, credit facilities)
  • Receivables and RWA financing with custom risk parameters