The Wild Tokens Crashing the Pool Party

These assets aren't as volatile as meme coins and other low-cap coins, but are nevertheless prone to price fluctuations that make them a potential hazard

Crypto might no longer be the Wild West but it’s still got its share of “wild” tokens: exotic assets whose volatility is a feature, not a bug. At the extreme end of the scale, there are meme coins that can live and die in a day, pulling triple-digit percentage gains and then hemorrhaging value just as fast. But even within the calmer waters of DeFi, there are a number of token types that warrant the “wild” moniker.

These assets aren’t as volatile as meme coins and other low-cap coins, but are nevertheless prone to price fluctuations that make them a potential hazard that must be handled with care. Liquidity providers may be reluctant to pool them in case they get hit by impermanent loss, while lending markets may balk at accepting them as deposits in case they cause positions to become undercollateralized.

There’s clearly a demand for these assets, but DeFi protocols need to handle them with kid gloves in case their shifting valuation causes systemic shock. So what’s the solution to integrating these exotic tokens into core DeFi primitives such as lending markets? And can they be suitably sandboxed to prevent widespread fallout?

The Wild Tokens Crashing the Pool Party

The introduction of highly volatile tokens into DeFi protocols is akin to a teenager cannonballing into a serene pool. One moment the seniors are sedately swimming lengths; the next they’re coughing up chlorine. It’s an impromptu pool party that no one ordered.

The definition of what constitutes a “wild” DeFi token is subject to interpretation, but Pendle’s Principal Tokens (PTs) – as well as many RWAs – fall into that bracket. They’re not tearaway tokens, but their integration into the sedate waters of DeFi platforms can still make one hell of a splash. Placing these assets into shared liquidity pools can unsettle lenders, exposing them to unpredictable risks and causing a headache for developers who need to factor in extreme scenarios when modeling token behaviors.

The solution to this challenge isn’t to prohibit these “wild” tokens from playing in the pool altogether. Rather, it’s to assign them their own pool – a containment zone where no matter how big the splash, other bathers are unaffected. We’re talking about isolated lending, to be clear, with a sprinkling of aquatic metaphors thrown in to illustrate the point.

The Ripple Effect of High-Energy Tokens

Decentralized finance is a broad tent that encompasses many assets, from the dull yet reliable – stablecoins – to the esoteric and capricious – think rebasing tokens or yield-bearing tokens whose value is programmed to increase in line with a base asset such as stETH/ETH. Pendle PTs are a good example of a token type that forms a DeFi staple and yet which skews towards the exotic end of the scale.

Pendle PTs represent the principal portion of yield-bearing assets, stripped of their yield and tradable at a discount until maturity. As a result they offer fixed yields but with inherent rate volatility. If a PT tied to a volatile asset like stETH (staked Ethereum) enters a pool with stable assets such as USDC, price swings – driven by market sentiment or underlying yield changes – can ripple through, increasing liquidation risks for all users.

PTs can move by as much as 20% in a day if yields shift – something which shared pools simply aren’t designed to accommodate. This places assets such as PTs and certain RWAs in a strange position: they’re clearly DeFi instruments with a tangible use case and yet they’re ill-suited to the shared-pool model on which the majority of decentralized finance, including popular lending platforms such as Aave, operates.

RWAs add another layer of complexity. Tokenized real-world assets spanning real estate, art, or U.S. Treasuries bring stability but also unique risks, like liquidity constraints or regulatory uncertainty. Most of the time, RWAs are pretty chill. But occasionally, real-world events – geo-political crises or hawkish Fed statements – can cause them to react sharply, having ramifications for DeFi protocols where they’re integrated.

Silo’s Solution: Isolated Markets as ‘Cannonballs-Only’ Pools

It’s clear that so-called “wild” tokens have a major role to play in DeFi. It’s also clear that they need to be treated differently to conventional assets such as ETH or stables. The solution that DeFi platforms such as Silo Finance have settled on is a pragmatic one, placing these wild tokens in isolated lending markets. Think of them as separate “cannonballs-only” pools where risk-tolerant users can dive in without splashing others.

Silo operates as a non-custodial DeFi marketplace, matching lenders and borrowers in two-asset pools designed to segregate each market’s risk. For Pendle PTs, Silo’s isolated markets allow lenders to deposit PTs paired with a bridge asset like ETH, containing volatility within that silo. Lenders choose their