@Dolomite is not just an ordinary DeFi product. The innovation of the project lies in the integrated architecture instead of just 'cosmetic interface'. Instead of having users' assets separated between the lending market and the decentralized exchange (DEX), Dolomite allows the same deposit to accumulate interest, serve as collateral for loans, and also participate in providing liquidity in trading routes.
This means that instead of having to fragment assets across many separate protocols, investors can maintain yield while simultaneously supporting liquidity right when the market needs it. When trading demand decreases, capital automatically returns to the lending layer to continue earning interest.
#Dolomite specifies this through the RAIL Framework consisting of four components:
Routing: How transaction orders use the pumped liquidity assets.
Allocation: The ratio of capital temporarily rotated between the lending and trading layers.
Incentives: Rewards for liquidity at the exact point where the market is consuming.
Liquidations: Keeping the system safe by enforcing liquidations when risks exceed thresholds.
A counterintuitive view is: more liquidity is not necessarily better if liquidity is isolated in separate pools that do not support during market volatility, they become 'dead capital'. Dolomite aims to turn every idle dollar into capital that can be routed instantly with predictable liquidation mechanisms.
Why It Matters Right Now 📌
In DeFi, users often incur many hidden costs when:
Diversify capital for both lending and DEX.
Incurs gas fees to withdraw, reinvest when volatility occurs.
Must rebalance the portfolio independently when the market turns.
Dolomite directly addresses these frictions: deposits remain idle but simultaneously perform multiple tasks, reducing idle capital opportunities and saving operational costs.
While AMMs (automated market makers) and traditional money markets operate separately, Dolomite integrates both into a single governance loop. The result is:
Reduce slippage during volatile market conditions.
Increase the actual capital utilization rate during calm market periods.
Narrow the gap between nominal TVL and truly useful liquidity.
How It Works ⚙️
Capital Inflow → Users deposit assets into the lending market layer, beginning to earn interest while qualifying as collateral.
Monitor on-chain data → The system records balances, collateral asset ratios, and borrowing limits.
Increased trading demand → The governance machinery automatically allocates part of the idle capital to the DEX layer to increase liquidity depth.
Execute the transaction → Swap orders are processed quickly thanks to temporarily injected capital.
Capital Return → When demand decreases, capital returns to the lending layer to continue accumulating interest.
Incentives & Monitoring → Rewards are distributed based on actual usage levels; the system monitors and liquidates if risks exceed thresholds.
Illustrate the workflow: Deposit → Accumulate interest & serve as collateral → Increased demand → Allocate to DEX → Swap → Return to lending → Monitor & liquidate when necessary.
Risks and Considerations ⚠️
Technical: If the allocation algorithm is slow or skewed, it can cause local liquidity shortages and lead to unnecessary liquidations.
Economic: Need to fine-tune rewards; if rewards are allocated incorrectly, capital will flow to less useful places.
Legal: Combining lending and trading may face different legal requirements in each area.
Operation: Assets with vesting cycles, staking or multi-step payment chains may not align with liquidation schedules.
Early warning signs: Nominal TVL increases but depth does not improve, slippage increases during peak hours, high failure liquidation rates, slow rebalancing times.
Outlook and Scenarios 🧪
Base scenario: RAIL operates stably, reduces slippage, increases capital efficiency.
Positive scenario: Incentives are accurately refined, even long-term assets benefit, liquidation is more efficient, the system collects more fees without increasing risks.
Negative scenario: High volatility exposes allocation weaknesses, long-term liquidity struggles when liquidated, users leave to return to static pools.
Practical Lessons 🧰
Product integration team: Should test the capability to borrow and swap simultaneously, see if interest rates remain stable.
Risk management: Need to test liquidation routes with assets that have long reward schedules.
Trading strategy: Measure rebalancing speed and slippage in major liquidity pairs during volume spikes.
Suggested tracking metrics:
Capital utilization ratio (lending vs DEX).
Average slippage & 95% during peak hours.
Rebalancing time measured in seconds.
Successful liquidation rate and average discount.
Fee ratio collected versus trading volume.
Conclusion
Dolomite bets on a hybrid architecture that ensures capital is never idle. By integrating lending – trading – incentives – liquidation in a single loop, the project aims for a DeFi where liquidity is always useful, opportunity costs are reduced, and risks remain manageable. This could be a significant step as DeFi seeks to transition from discrete silos to truly integrated systems. $DOLO
