Has following properties:
User centric design
Borrowers should not need to interact directly with markets
Users don't care what market they use. They have one single goal: Bringing a collateral and borrow another asset for the lowest possible rate. They don't care on what underlying market they are using as long as the risk in them is comparable.
Lenders should not need to interact directly with markets
Pure lenders are optimizing for the highest returns, it's not their task to move assets from market to market to get that.
Can help migrate users position to new markets
Existing positions should be migrated to new markets, collateral and borrowed asset should be changed anytime with the lowest amount of transactions possible and without the need to pay back and recreate them.
Risk Management
Risk is to isolate
While cross lending protocols have no isolated risk, I assume that this design is hindering overall growth. The bar of entry for new assets is high. Economically this makes sense, as a few assets have the far biggest share in the market, but in a world where on-chain lending markets are the norm, this model does not scale. I don't have numbers, but I suspect cross lending is not used that often either. And in a system where shifting position is easy the same kind of market could be achieved with isolated risk.
Has an insurance fund
Over-optimizing parameters for outliers who do happen only once a year at cost of capital efficiency and reputation risk is reducing the potential of lending markets. As nobody can see the future better to have optimistic parameters and use an insurance fund.
Gives you time to react
On deteriorating health of position the market gives the user time to react by either having reaction time and partial liquidation. Many users have the funds to back up their positions, but these funds should be automatically allocated if such a system exists.
Market Operations
Markets need to be curated
As no single entity is able to monitor risk and have the expertise in all assets. This is why we need market experts who have a deep understanding of the assets they curate. Curated markets also help to attract users as the curators are incentivized to attract new users.
Curators need skin in the game
If curators have no skin in the game, they will optimize for revenue and not for safety. In a risk embracing market no skin in the game is very dangerous.
Technical Parameters
LTV is adjusted to the volatility of the asset
Many lending markets set max Loan to Value value at the time of creation. Desired is a high, but still safe LTV, because the higher the LTV is the less capital is needed for the same size of borrowing. But markets change and volatility too. LTV should be lowered if volatility is growing.
IRM model should be adjustable
Interest Rate Model (IRM) should be simple, yet adjustable. Quality of assets changes over time and markets too. As liquidity is sticky adjust the IRM helps to react to changing market conditions over time.
Parameters should be adjusted to position size
Different assets have different target groups and distribution. The supply buffer in the IRM should be adjusted to that position size.
User Interface & Information
Inform users
Users should be informed by push communication on changing conditions on markets they use or positions with deteriorating health. To expect users to monitor their positions actively is not enough.
Inform users on asset risk
Asset risk and compounding asset risk should be shown in a clear metric which is easy to understand. These metrics need to be updated on changing market conditions and users informed
Historical positions
Users need to be able to see historical positions, their yield earned and paid interest. After liquidation events they should be able to see why they happened and how much they lost.
What you see is what you get
APY should be shown to the fact and APY calculation needs to be public, so anyone can recalculate them. Historical APY on assets should be shown to give the users a feeling what they can expect. Absolute yield earned and paid interest rate and a calculated average APY should be visible for every position.
