Decentralized lending protocol Silo has unveiled its latest upgrade, Silo V3, introducing a new liquidation mechanism designed to handle undercollateralized loans while improving protection for lenders.
The key feature of Silo V3 is a protocol-level insolvency protection mechanism that reduces reliance on decentralized exchange (DEX) liquidity. Instead of depending solely on selling collateral in the market, the protocol can absorb pledged collateral into the loan asset at a discount, ensuring lenders are repaid even when external liquidity is insufficient or delayed.
Silo argues that traditional DeFi lending models assume collateral can always be liquidated on DEXs when positions fall below required thresholds. However, this assumption often breaks down during periods of market stress, when liquidity becomes fragmented or thin.
“We’ve redesigned the lending model so solvency no longer hinges on perfect market liquidity,” Silo stated, adding that lenders are compensated through liquidation discounts and fees, shifting the risk balance in their favor.
Silo V3 introduces two liquidation routes:
If a position remains above the “DEX Liquidation Threshold,” it is liquidated through standard DEX mechanisms
If it crosses the “Collateral-Debt Swap Threshold,” the protocol activates an alternative path, absorbing collateral at a discount
The protective mechanism is only triggered when DEX liquidity is insufficient.
Expanding collateral options
Silo emphasized that the upgrade is not about supporting low-quality assets, but about enabling a broader range of fundamentally valuable assets that currently lack deep onchain liquidity.
Examples include structured LP tokens, liquid staking and restaking assets, time-locked tokenized strategies, and CeDeFi assets with off-chain redemption paths. These assets are often excluded from lending markets due to limited accessibility on DEXs.
Silo believes Silo V3 represents a structural evolution in onchain credit, expanding collateral eligibility while making lending markets more resilient by design.