Before the decentralized finance (DeFi) boom, borrowing funds was a rather tedious process.
Borrowers had to submit numerous documents to banks that performed credit checks, comprehensive risk analysis, and other forms of measures to verify that their clients had the necessary financial background to repay the principal amount along with interest.
However, with the rise of DeFi solutions – that offer open, democratic, and permissionless alternatives to traditional finance products –, users can now access decentralized lending services. As a result, they can borrow funds on their digital asset holdings instantly as well as without any credit checks and the participation of intermediaries like banks.
At the same time, users can deposit stablecoins and other cryptocurrencies on the platform, which are lent out to borrowers. In exchange, lenders collect interest after their coins, allowing them to generate a passive income that’s much higher than what banks typically offer. Furthermore, as their funds are held in smart contracts, DeFi lending services operate on a non-custodial basis that eliminates counterparty risks.
Also, crypto-backed lending on a reputable protocol is generally viewed as a low-risk activity as all loans on the platform are overcollateralized (e.g., borrowers can only borrow a maximum of $60 on $100 worth of collateral), so they are protected against non-paying users, defaults, and crypto volatility.
For these reasons, many DeFi lending projects (such as Compound Finance and Aave) have taken off in the crypto space. However, while they provide excellent value to users, most of these solutions run on top of Ethereum, which is infamous for its high gas fees.
As a result, alternative smart contract blockchains have recently gained some traction, attracting users with highly scalable platforms and low fees.
One of them is Binance Smart Chain (BSC). And today, we will explore Venus Protocol, the top crypto lending protocol within the BSC ecosystem that introduced additional functionality by allowing users to mint synthetic stablecoins on their cryptocurrency collateral.
What Is the Venus Protocol?
Venus Protocol is a synthetic stablecoin-powered decentralized money market system on top of Binance Smart Chain that offers crypto-backed lending and borrowing solutions to users without any third parties, custody over funds, or centralized entities exercising increased control over the protocol.
Simply put, borrowers on Venus can get instant loans in stablecoins after their cryptocurrency holdings. This allows them to access extra capital without selling their non-stablecoin digital assets. On the other hand, lenders can deposit stablecoins (along with some other cryptocurrencies) on the platform to achieve a passive income.
According to the project’s developers, Venus is a fork of the Ethereum-based money market protocols MakerDAO and Compound Finance.
In addition to combining the benefits of the above two protocols, what makes Venus unique is how it implements its own synthetic stablecoins – cryptocurrencies that maintain a stable long-term value without holding real-world reserves of the assets they are pegged to (e.g., via algorithms, ecosystem incentives, or using other forms of collateral) – into the ecosystem.
As a result, besides accessing extra capital in traditional stablecoins like USDC and USDT, borrowers on Venus can also use their crypto collateral to mint a native synthetic stablecoin like VAI that features a 1:1 value peg to the USD without the costs (called the stability fee) associated with competitor platforms.
Furthermore, as Venus runs on top of BSC, it leverages the excellent scalability of the blockchain to offer DeFi lending services to users with low gas fees.
Released in September 2020, Venus was launched as the project of the Binance-owned crypto credit card issuer Swipe. The project later decentralized its governance by handing control over the protocol to the community.
As of July 26, Venus has become not only the top crypto lending platform on BSC but also the second-largest DeFi protocol in the Binance Smart Chain ecosystem, with a $1.83 billion TVL (total value locked).
How Does the Venus Protocol Work?
Now that you know the basics about Venus let’s explore the most important components of the protocol to understand how it works.
One of the most essential features of Venus is synthetic stablecoins that allow users on the platform to mint USD-pegged tokens after depositing collateral.
According to the project, stablecoin minting on Venus is performed in a fully decentralized way. This contrasts with how wrapped assets like WBTC are created to achieve cross-chain interoperability or the issuance of centralized stablecoins like Tether (USDT).
While the latter two processes include centralized entities – the coin issuer (Tether) for USDT and custodians for WBTC –, minting the USD-pegged synthetic stablecoin VAI is conducted without any third parties.
Instead, Venus’ protocol utilizes smart contracts programmed to mint VAI from the locked vTokens of users. vTokens represent the various cryptocurrencies supplied to the platform based on BSC’s BEP-20 standard.
Basically, this means that instead of minting stablecoins from the collateral you have deposited, you use the coins that represent your collateral to create VAI on Venus. While this may sound complex at first, it allows users to mint VAI with a 50% loan-to-value (LTV) ratio (e.g., they can borrow up to $50 VAI with a $100 collateral) and generate yields after the coins they have deposited at the same time.
Furthermore, one interesting aspect of VAI is that it lacks the stability fees of protocols like Maker that users who mint DAI have to pay as interest. Currently, VAI minters on Venus are not even subject to any interest rates, only a 0.01% mint fee charged by the protocol after creating the synthetic stablecoins.
However, while VAI minting on Venus clearly offers many benefits to users, it also has a downside.
Since VAI is a synthetic stablecoin, it lacks the real-world reserves as USDT or USDC. For that reason and due to the fact that the protocol lacks the sophisticated measures of, for example, Terra or Maker to ensure price stability, VAI couldn’t manage to maintain its peg to the USD since its launch (currently, it’s trading at $0.877).
In addition to that, VAI is subject to higher volatility than “standard” stablecoins, with its value moving between $0.87 and $0.942 in the last 30 days. While the price movements of the coin are less intensive than non-stablecoin cryptocurrencies’, it can negatively impact minters as it can lead to liquidations in some cases.
As a side note, Venus’ protocol aims to maintain VAI’s peg to the USD by creating a change in supply and demand via a mechanism called the Price Adjustment Module. Basically, this involves minting more VAI (if the token’s price is higher than the USD) or offering incentives for users to buy or mint VAI (to increase the demand in case the peg drops below the USD’s price).
Borrowing, Lending, and Staking
Since Venus is a DeFi protocol centered around crypto-backed loans, it’s important to discuss how borrowing and lending work on the platform.
For lending, the process goes like in the example below:
- The user deposits 100 DAI to a smart contract on Venus
- The protocol moves the coins of the user into a pool and lends them to borrowers
- At the same time, the protocol issues vTokens (vDAI) that represents the 100 DAI supplied by the user
- Calculating with a 10% APY, the user redeems his vDAI (which the protocol automatically burns) and gets back 110 DAI
In the case of borrowing funds, the borrower deposits collateral to the platform, which he utilizes to get a loan in stablecoins on Venus.
According to the project, the LTV for each coin ranges from 40% to 75% based on governance rules. After the user borrows funds, his collateral has to maintain the maximum LTV to avoid liquidation. If he fails to achieve that, the protocol will liquidate all or a portion of his collateral along with a penalty fee to protect the lender.
Unlike with VAI minting, borrowers have to pay an APY (e.g., 5%) after their borrowed funds, with the actual interest rates being determined by the supply and demand on the market.
Interestingly, as Venus was initially founded by Swipe, borrowers can also use the company’s crypto-backed card products to spend the funds they borrowed.
It’s also important to mention Venus’s Vault service, where users can stake VAI to generate a passive income on their synthetic stablecoins. While stakers have to lock up VAI, the protocol distributes rewards in the native XVS token.
As mentioned earlier – like many other DeFi projects – Venus started out with a rather centralized governance model, in which the core development team was responsible for managing the protocol.
However, later on, the project decentralized its governance process by letting the community and token holders decide on the changes, updates, and other important matters concerning the future of Venus.
To achieve the above, Venus implemented a fair-launch model, in which it distributed XVS to community members without allocating any tokens to the project’s team.
As part of the decentralized on-chain governance process, XVS holders can leverage their tokens to propose and vote on the matters related to Venus, such as:
- Integrating new cryptocurrencies
- Setting fixed interest rates for synthetic stablecoins
- Adjusting variable interest rates for borrowing and lending
- Deciding on new features, upgrades, and tweaks
What Is XVS and How Is it Different From VAI?
As mentioned earlier, Venus features two native cryptocurrencies: VAI and XVS. The major difference between the two is that VAI is a synthetic stablecoin pegged to the USD, while the other is a (non-stablecoin) token utilized mainly for governance.
In addition to governance, VAI’s primary functionalities include:
- Distributing rewards to borrowers and lenders as well as those who mint and stake VAI
- Boosting lending rewards by utilizing XVS
- Distributing Binance Smart Chain ecosystem grants
Apart from allocating 20% of the total supply to Binance Launchpool for farming and 1% for ecosystem grants, the remaining 79% of the XVS supply is distributed as rewards to liquidity miners throughout a period of nearly four years (from September 2020 to May 2024).
Based on the BEP-20 standard, XVS features a maximum supply of 30 million coins, with nearly 10.5 million XVS currently circulating on the market.
Now, let’s check out what has happened to the cryptocurrency’s price since January.
While XVS started 2021 at $3.51, its value surged up to $136.32 by May 18 during the crypto bull market. After the market crash, the token experienced a major correction.
But, even after that, it is trading at $24.17 on July 26, representing a nearly 590% year-to-date (YTD) ROI.
Venus: Powering DeFi Lending With Synthetic Stablecoins
In the DeFi space, many protocols within the same category feature similar functionalities. However, minor tweaks, changes, and some additional features can generate significant value for users in numerous cases.
And this is exactly the case with Venus.
By combining the benefits of Compound and Maker as well as leveraging synthetic stablecoins and BSC’s high scalability, Venus offers a convenient way for users to generate a passive income, borrow funds, or mint VAI without stability fees.
While VAI has some drawbacks in terms of its price stability, the project is expected to fix those in the near future by implementing various processes through community governance.