Silo's isolated market design is all about keeping risk locked inside a single lending pair. If you deposit USDC and borrow ETH, your USDC is only exposed to the risk of ETH collateral. It will not be hurt if a meme coin crashes in another market. This structure makes Silo's liquidation and exit logic completely different from pooled protocols like Aave.
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How Isolated Markets Work
Each Silo market contains only two assets, forming two separate vaults: one holds collateral and one holds the borrowed asset. Take the yINJ/INJ market as an example. The collateral is yINJ and the borrowed asset is INJ. You can deposit yINJ as collateral to borrow INJ, or you can deposit INJ to earn interest. But you cannot do the reverse and use INJ to borrow yINJ.
Each market has its own oracle, interest rate model, and liquidation parameters. Once deployed, these parameters are permanently locked and cannot be changed. When a borrower's LTV exceeds the liquidation threshold, liquidation is triggered. Some or all of the collateral is sold to repay the debt.
As a lender, you deposit INJ to earn interest. Your risk is only tied to the yINJ collateral in this market. No matter what happens in other markets, it will not spread to you.
Two Liquidation Paths
Silo does not use a single liquidation mechanism. Two sets of logic exist at the same time.
DEX liquidation is the regular path. When a borrower's LTV goes above the threshold, a liquidator can sell the collateral on a DEX to repay the debt and earn a liquidation fee as a reward. This path depends on having enough liquidity on the DEX.
Collateral-Debt Swap (CDS) is a supplementary mechanism introduced in Silo V3. When DEX liquidity dries up and liquidation cannot be executed efficiently, the protocol directly writes off the borrower's debt and distributes the collateral to lenders proportionally. No on-chain swap happens in this process. Lenders receive share tokens of the collateral instead of the sold borrowed asset.
CDS distributes liquidation fees differently. Take a 20% liquidation fee as an example. Lenders receive the full debt plus 80% of the liquidation fee, while the liquidator only gets 20%. Liquidators do not need to perform a swap and take on less price risk, so the incentive can be lower.
The two paths have separate thresholds. The lower threshold triggers DEX liquidation, and the higher threshold triggers CDS. Both can exist in the same market at the same time.
What Lenders Are Actually Exposed To
Silo's isolated design means that choosing a market is like choosing to be an underwriter for that market's collateral. The interest you earn comes from borrowers, but the real risk you take is that the collateral could crash.
Oracle risk is a key area lenders need to watch. Silo relies on external price sources like Chainlink and Redstone. Oracle delays, errors, or outages can make a position that should be liquidated still look healthy, or the reverse: liquidate a healthy position by mistake. In the worst case, undervalued collateral creates bad debt, and overvalued collateral delays liquidation. Both hurt lenders.
Permissionless market risk comes from the fact that Silo allows anyone to deploy a market. Markets for low-liquidity tokens are easy targets for price manipulation attacks. An attacker can create a market, use a manipulatable oracle to inflate the collateral value, and then drain the pool. The Silo team does a technical review before putting a market on the official app, but that review does not assess the economic safety of the collateral.
Shared base asset risk deserves a separate look. If multiple markets use ETH or USDC as the borrowed asset, those markets share the same base asset. If the base asset itself has a problem, such as depegging or crashing, all related markets will be affected at the same time.
Exits
Lenders can withdraw deposits and accumulated interest at any time, as long as market utilization is not 100%. When utilization is full, lenders cannot get their money back until borrowers repay or new deposits come in. This is the intent of the interest rate model: high utilization pushes borrowing rates up, which attracts repayment and new deposits.
Borrowers who want to exit must repay all debt before they can withdraw their collateral. Partial repayment can lower LTV, but collateral can only be fully withdrawn after the debt reaches zero. If a position has already been liquidated, the state of remaining debt and collateral depends on how far the liquidation has progressed.
The exit decision for borrowers is simple: repay the debt and withdraw the collateral. If LTV is already close to the liquidation threshold, prioritize repayment over adding collateral to reduce the chance of being liquidated.
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References
- Silo Finance·Isolated Pairs, page published or updated: 2026-04-02; checked: 2026-10-07.
- Blockchain News·Silo Finance Launches Risk-Isolated Lending Markets on Injective, page published or updated: 2026-04-13; checked: 2026-10-07.
- Silo Finance·Lending Markets, page published or updated: 2026-04-02; checked: 2026-10-07.
- Silo Finance·Borrow, page published or updated: 2026-03-22; checked: 2026-10-07.
- Silo Finance·Liquidations, page published or updated: 2026-04-01; checked: 2026-10-07.
- Injective·Silo Finance, page has no update date; checked: 2026-10-07.
- Silo Finance·Risks, page published or updated: 2026-04-06; checked: 2026-10-07.
- Silo Finance·Supply, page published or updated: 2026-03-22; checked: 2026-10-07.
- Silo Finance·Withdraw (Silo V2), page published or updated: 2025-05-12; checked: 2026-10-07.
- Hindenrank·Is Silo Finance Safe?, page published or updated: 2026-02-18; checked: 2026-10-07.
