Isolated Lending Pools vs Cross-Margin Lending Pools

Specific advantage: Each pool is a self-contained risk silo. A depeg or default in one pool (e.g., a volatile LST) does not affect collateral in others (e.g., stablecoins). This matters for protocols listing long-tail or volatile assets where you need to limit systemic contagion.

Specific advantage: Each pool can have unique Loan-to-Value (LTV), liquidation thresholds, and oracle configurations. This matters for customizing risk for specific assets, like setting a conservative 60% LTV for a new memecoin while maintaining 80% for established blue-chips like wBTC.

Specific advantage: All deposited collateral is aggregated into a single, shared pool. This matters for leveraged traders and yield farmers who can use a diversified portfolio (e.g., ETH, stablecoins, LP tokens) as unified collateral to maximize borrowing power, similar to Aave or Compound's global pools.

Specific advantage: Users manage one collateral position and one debt position across all assets, avoiding the complexity of funding and monitoring multiple isolated vaults. This matters for retail DeFi users and protocols seeking a seamless, CeFi-like experience for margin trading or leveraged yield strategies.

Specific advantage: Risk is siloed to individual pools. A depeg or exploit in one pool (e.g., a volatile LST) does not cascade to others. This matters for integrating novel, high-yield, or volatile assets like new LSTs or RWA tokens, where you need to limit protocol-wide contagion.

Specific advantage: Each pool operates with its own, discrete set of parameters (LTV, liquidation threshold, oracle). This matters for protocols launching quickly or DAO governance, as adding a new asset doesn't require re-evaluating risk for the entire portfolio. Examples: Aave V3's 'isolation mode' for new assets, Radiant's multi-chain isolated markets.

Specific advantage: Collateral in one pool can secure borrowing across all supported assets. This matters for sophisticated users and institutions (e.g., hedge funds, DAO treasuries) who need to optimize leverage across a diverse portfolio without fragmenting capital. A user can post ETH as collateral to borrow stablecoins, altcoins, and more from a single health factor.

Specific advantage: Creates a unified, deep liquidity layer for all assets. This matters for maximizing Total Value Locked (TVL) and protocol revenue, as liquidity isn't fragmented. It benefits mainstream users seeking simple, one-stop borrowing. Examples: Compound v2's unified pool, MakerDAO's monolithic DAI minting vaults.

Default isolation: A failure in one pool (e.g., a volatile LST like stETH) does not affect others. This is critical for integrating new, experimental assets or for protocols like Aave V3 with its 'isolation mode' for high-risk listings. Risk parameters are set per pool.

Targeted risk management: Oracles and liquidation parameters are configured per asset pool, simplifying governance. Protocols like Compound v2 use this model, allowing for granular control. This reduces attack surface and complexity for protocols prioritizing security over efficiency.

Trapped collateral: A user's supplied collateral in Pool A cannot be used to borrow from Pool B. This leads to lower utilization rates and forces over-collateralization across positions. For users with diverse portfolios, this is a significant opportunity cost.

Unified collateral: All supplied assets back all borrowed positions, akin to a centralized margin account. This enables higher leverage and better capital utilization. Protocols like Euler Finance pioneered this model, allowing users to achieve complex, capital-efficient strategies with a single health factor.

Single liquidity layer: Creates a unified money market for the entire protocol, improving depth and reducing fragmentation. This is ideal for institutional users and sophisticated DAOs managing large, diversified portfolios who need to optimize yield across assets.

Contagion vulnerability: A sharp depeg or oracle failure on one asset can threaten the solvency of the entire pool, requiring aggressive global liquidation. This adds immense complexity to risk parameter design and emergency governance, as seen in past Euler and Iron Bank incidents.