Eigencloud is exploring the potential for composability in Ethereum DeFi. Recently, they launched a Cap AVS, which is quite interesting, attempting to attract some large institutions to participate. Previously, on-chain lending was viewed by some institutions as lacking sufficient security, making them hesitant to get involved. Eigen's Cap might change the situation:

A large institution has now come on board, called Flow Traders, which is one of the world's major market makers and is also listed on European exchanges. Market makers have significant liquidity and often need to borrow money to provide market-making services, thereby earning greater returns. Now, they can borrow directly on the Ethereum chain. So, the question arises: who dares to lend to them?

At this point, Eigen's Cap can play a role, which can be simply understood as "an on-chain bank for Ethereum." Users deposit money (like USDC) into the pool, and this on-chain money often comes from retail investors, funds, institutions, or DeFi projects looking to earn more interest. Therefore, when the returns are in place and insured, they are willing to lend to Flow Traders.

If Flow Traders, as a market maker, can provide returns on idle funds, the guarantors (like YieldNest, which is also operated by Eigen) provide insurance. YieldNests are willing to use their ETH as collateral. If Flow Traders fails to repay or mismanages the funds (spending recklessly or exceeding collateral ratios), then the lenders can seize the ETH collateralized by YieldNest through the contract and receive compensation.

So, what benefits do guarantors like YieldNest gain? Aren't they afraid of risks? The guarantors can also make money, and the risks are relatively controllable. The fees mainly come from charging guarantee fees (insurance fees). For example, if Flow Traders borrows 100 million USDC, they are willing to pay an additional "insurance/guarantee fee" to the guarantor (assuming the borrowing interest is 5%, they are now willing to pay 8%, with the extra 3% being pure profit for YieldNest and other guarantors). For YieldNest, using their ETH as collateral, they can earn millions or even tens of millions of dollars in guarantee fees annually (depending on the scale of lending). This portion of ETH is already staked in Eigenlayer, so providing guarantees effectively earns them a high amount of guarantee fees.

Regarding risks, YieldNest will consider the qualifications of Flow Traders (a regulated European listed company) and will lend corresponding guarantee amounts based on on-chain credit limits, not providing guarantees to all structures; additionally, in case of default, they will first receive warnings, and LTV exceeding limits will automatically trigger forced liquidation. When Flow Traders borrows money, they will establish a whitelist that prohibits transfers to other account addresses (any outflow will trigger an alert); they require the counterpart to collateralize their assets in the Cap protocol, not exceeding the agreed LTV collateral ratio; and they must submit data as required.

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