Introducing Dahlia: Permissionless, Lending, built with Royco

This is a Guest Post by the Dahlia Team. You can follow them on X, here

TL;DR 

1. Today, Dahlia is a permissionless lending protocol, currently live on Berachain. Dahlia leverages the Royco Protocol to optimize capital efficiency and liquidity across diverse assets, including long-tail tokens.

2. Dahlia addresses fragmented liquidity, improves borrower-lender matching, enhances scalability, and unlocks access to long-tail asset markets.

3. Key Features include Isolated & permissionless markets, modular risk management, liquidity aggregation, capital efficiency, and oracle-agnostic integration.

4. Directly Integrated with Royco Wrapped Vaults. This Allows assets to earn yield while participating in lending activities, ensuring continuous capital productivity.

5. Our Future Vision is to create a cross-chain credit facility and implement an orderbook-based lending model to improve efficiency, liquidity aggregation, and risk management.

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What is Dahlia today?

Dahlia is a permissionless lending protocol that leverages the Royco Protocol to evolve how we think about liquidity and risk management. With a focus on optimizing capital efficiency and broadening access to liquidity across diverse assets, including long-tail assets, Dahlia is the next generation of Decentralized Finance (DeFi) Lending. 

Why we built Dahlia

DeFi lending has revolutionized how users access liquidity and earn yields on their assets. However, despite its promise, DeFi lending still faces critical challenges that hinder its efficiency and adoption. Today’s lending markets suffer from over-concentration in a few dominant protocols (e.g., Aave, Compound), limiting capital efficiency and borrower-lender matching. Other platforms like Morpho optimize efficiency & enable new use cases but remain limited in liquidity depth. Dahlia uniquely integrates permissionless, modular markets with Royco’s vaults, solving both liquidity fragmentation and underutilized capital.

At Dahlia, we set out to solve these issues and create a lending protocol that is more efficient, scalable, and accessible.

Addressing Fragmented Liquidity

One of the biggest hurdles in DeFi lending is fragmented liquidity. Borrowers and lenders often face inefficiencies that lead to higher slippage and less favorable rates. Current lending platforms operate in isolated pools, limiting the available liquidity and causing unnecessary friction in transactions. Dahlia aims to provide options for allocating liquidity more effectively, ensuring better rates and a smoother experience for all users.

Improving Matching Efficiency

Matching borrowers with lenders in a decentralized environment can be challenging due to limited market depth. Inefficient matching mechanisms reduce transaction efficiency and increase costs. By leveraging advanced liquidity aggregation and smart matching algorithms, Dahlia optimizes borrower-lender pairings, minimizing inefficiencies and maximizing capital utilization.

Enhancing Scalability

Most DeFi lending protocols rely on active market-making strategies, which can limit their ability to scale. These strategies often require continuous monitoring and intervention, making expansion difficult. Dahlia is designed to overcome these limitations by implementing a more autonomous and adaptable framework, allowing for seamless growth without sacrificing efficiency.

Unlocking Long-Tail Asset Markets

Many DeFi platforms either exclude long-tail assets or expose users to excessive risk when trading them. These assets—typically low-cap or niche tokens—suffer from limited access to lending and borrowing markets. Dahlia seeks to create a more inclusive ecosystem where long-tail assets can be utilized safely, broadening opportunities for users while maintaining responsible risk management.

Core Features of Dahlia

At the heart of Dahlia are its markets, which are isolated and permissionless, offering flexibility. Users can initiate markets between any two ERC-20 tokens, facilitating enhanced liquidity and risk management for even the most niche DeFi assets. 

Modular Design

Dahlia’s infrastructure is highly adaptable, allowing users to efficiently manage risks associated with a broad spectrum of crypto lending activities. This modularity ensures that Dahlia remains agile and responsive to changes in the market or user needs.

Advanced Risk Control

Users can tailor their risk profiles according to their strategies, enhancing both the security and profitability of their lending operations. This personalized approach to risk management empowers users to safeguard their investments while optimizing returns.

Liquidity Aggregation

Through its integration with Royco's ERC-4626 WrappedVaults, Dahlia ensures that assets remain productive, accruing returns even amid fluctuating market conditions. This feature maximizes asset utilization, ensuring that every invested dollar works harder for its owner.

Capital Efficiency

Dahlia uniquely allows its markets to double as a liquidity source for limit orders within the Royco vaults ecosystem. This dual functionality maximizes capital efficiency, enhancing the financial performance of investments made within the platform.

Oracle-Agnostic Markets

The platform supports any oracle price feeds that conform to the IDahliaOracle interface, offering enhanced flexibility and broader integration options. This oracle-agnostic approach allows Dahlia to seamlessly adapt to various data sources, further enhancing its robustness and reliability.

Integration with Royco Wrapped Vaults

Dahlia’s integration with Royco Wrapped Vaults is a standout feature that allows assets within Dahlia to continuously earn interest through Royco Vaults while simultaneously participating in market activities. This unique capability enables lenders to place limit orders while their funds are actively growing. It ensures that assets are never idle, continuously contributing to the financial goals of the users.

How Dahlia Works in Practice: A Users Example

Alice’s Lending Strategy with Dahlia

1. Initial Deposit & Passive Earnings
   Alice deposits 10,000 USDC into a Royco Vault, where she earns a stable 6% APY while exploring better yield opportunities within Dahlia.

2. Finding a Higher Yield
   As she searches for a more lucrative lending opportunity on Dahlia, her funds remain in the Royco Vault, continuously compounding interest at 6% APY.

3. Optimized Lending
   Once Alice finds a better opportunity on Dahlia offering 8% APY, she lends her USDC to take advantage of the opportunity 

4. Net Benefit
   Regardless of how long it takes to find a better rate, Alice is always earning a minimum of 6% APY, ensuring her capital is never idle.

What will Dahlia become? A Vision for the Future of Cross-Chain Credit

At Dahlia, we envision a future that goes beyond the current on-chain credit market, transforming into a cross-chain credit facility that maximizes the potential of the Royco ecosystem. This transformation will create a more interconnected and efficient DeFi environment, opening up new opportunities for users across multiple blockchain networks.

This is currently built but requires business development to see its full potential.

The Future of Dahlia: Orderbook-Based Lending

As part of our long-term roadmap, we plan to implement an orderbook-based lending model, introducing several key innovations that will reshape how borrowing and lending function in DeFi. Unlike traditional pooled lending, an orderbook-based model allows borrowers and lenders to set customized rates, reducing slippage and improving capital allocation. By combining this with Royco’s liquidity aggregation, Dahlia aims to build the first true cross-chain credit facility, enabling users to borrow seamlessly across Sonic, Base, and HyperEVM with unmatched efficiency.

Some key innovations include:

Efficient Matching of Borrowers and Lenders

Traditional liquidity pools often suffer from inefficiencies such as slippage and limited control over interest rates. An orderbook-based model will enable direct matching of borrowers and lenders, ensuring better liquidity utilization and reducing unnecessary inefficiencies.

Modular & Isolated Markets

Dahlia will introduce asset-specific lending markets with customizable governance models. This modular approach allows different risk parameters and interest rate models to be tailored for diverse assets, improving risk management and adaptability in various market conditions.

Liquidity Aggregation

By aggregating liquidity from multiple sources, Dahlia will ensure competitive interest rates for borrowers while providing optimal returns for lenders. This aggregation will enhance capital efficiency across different blockchain ecosystems, making DeFi lending more accessible and rewarding.

Enhanced, Updated Risk Controls

Security and stability are at the core of our vision. Dahlia will integrate advanced risk control mechanisms to protect both lenders and borrowers. These measures will include real-time monitoring, dynamic collateral management, and innovative liquidation models to mitigate systemic risks.

How Dahlia v2 Works in Practice: Two Users Examples

Bob’s Borrowing Strategy with Dahlia

1. Accessing Liquidity: Bob wants to borrow stablecoins while keeping his ETH holdings intact. Instead of selling, he deposits 50 ETH into a Royco Vault, using it as collateral.

2. Earning While Borrowing: While his ETH is locked as collateral, it continues to earn staking rewards within the Royco Vault ecosystem.

3. Borrowing USDC: Bob takes out a $50,000 USDC loan through Dahlia, with a competitive 5% interest rate.

4. Optimizing His Strategy: He reinvests the borrowed USDC into yield-generating strategies, earning an 8% return, making his borrowing cost-effective.

Sophia’s Lending Strategy with Dahlia’s Orderbook Model

1. Placing a Custom Lending Offer: Sophia wants to lend 50,000 USDC but prefers a 10% APY rather than the current market rate of 8%. Instead of accepting a fixed rate, she places a limit order on Dahlia’s orderbook-based lending system.

2. Earning While Waiting: While her offer waits to be matched, her USDC remains in a Royco Vault, passively earning 6% APY to ensure she’s always generating yield.

3. Order Gets Filled: A borrower looking for capital agrees to Sophia’s 10% APY offer, and her funds are automatically deployed to the borrower.

4. Optimized Lending: Now, Sophia is earning her desired 10% yield, with the confidence that she was never sitting on idle funds.

Dahlia’s Deployment & Expansion Roadmap

• Now Live on Berachain – Actively expanding partnerships and launching new pools.

• Upcoming Deployments on:

  • Sonic

  • HyperEVM

  • Base

• Dahlia will also target networks that Royco has deployed on to continue to build on that integration & partnership

Check out Dahlia.xyz to learn more

🔗 Website: Dahlia.xyz 📖 Docs: docs.dahlia.xyz 🐦 Twitter: @DahliaProtocol 💬 Telegram: Join the discussion 🔍 Audits: Review Security Reports Github: https://github.com/dahlia-xyz