Lending and Borrowing in DeFi Explained (A Case Study of Bencu Finance)
You’ve probably heard of people lending and borrowing assets in the Defi space. How? Where? Let’s cover it. I’ll try to be noob-friendly as much as possible.
Open Source Liquidity Protocol?
When we say Open Source, it simply means something that is publicly accessible, can be shared, modified, and is freely available to anyone.
Now, Liquidity simply refers to the ease at which crypto assets can be converted or swapped to/for other assets. And here, Liquidity can also be referred to as Money.
In crypto, Protocols are sets of rules or codes that govern a blockchain network. These codes are foundational layers that simply tell something how to function.
In summary, Open Source Liquidity Protocols are decentralized protocols that allow users, dapps, or wallets to lend or borrow crypto assets/money.
Types of liquidity protocol. To mention a few,
- AAVE — Aave is arguably the biggest non-custodial liquidity protocol built on the Ethereum Network. According to Decrypt, Aave is a Defi lending protocol that lets users lend and borrow cryptocurrency without having to go through a centralized intermediary.
Kraken also described Aave as a system of lending pools. Participants deposit funds they wish to lend, which are then collected into a liquidity pool. Borrowers may then draw from those pools when they take out a loan. These tokens can be traded or transferred as a lender wishes.
2. Abracadabra.Money — Founded by Daniele Sestagalli, Abracadabra.money is a cross-blockchain lending protocol that allows users to produce magic internet money ($MIM), a stable coin pegged to the US Dollar.
Here, users earn money by using their interest-bearing assets to provide collateral, then use the collateral to produce $MIM which can later be traded or swapped for other traditional stable coins.
3. Bencu Finance — The latest addition to these protocols is Bencu Finance. One thing that sets this project different is its innovative economic model. Bencu is a money market built on the Metis Andromeda Network and is the biggest liquidity protocol on there right now.
Since their Beta Liquidity Campaign, they had their TVL went as high as $17million. There are various options and pools available for users to participate in and earn profits, either you supply or borrow. More pools would be added after launch, and they partnered with the best and biggest protocols on Metis Andromeda already.
Why do People Utilize These Protocols?
- You won’t need to sell your tokens just because you need another asset. Just provide the ones you have as collateral, then borrow against them.
- When you deposit assets to these protocols, you earn interest on them. Bencu Finance offers the best of this.
- Bencu also stakes your $Metis and $USDC and gives room for additional earnings on your supplied assets.
- They are decentralized and don’t have any central entity in between. You are interacting with smart contracts.
- They are open source which allows anyone to interact with these protocols anytime any day.
Risks of These Protocols
- Liquidation Threshold — To be simple, this means the percentage you’re allowed to borrow against your collateral. For example, if you provide collateral worth $1,000, and the liquidation threshold for the asset you want to borrow is 70%, then you can only borrow an asset worth $700. I hope you understand in this simple manner. These measures are put in place because of the high volatility in the crypto market, and to protect borrowers from being liquidated.
- Loan Limit — This simply refers to the maximum amount a user can borrow based on the liquidity threshold after combining the value of all the assets in the account. This limit can be increased when users convert these deposits to collateral.
- Loan Utilization / Health — If the loan utilization ratio range up to 100%, then, liquidation is bound to happen. This happens due to the daily fluctuation in price. Bencu protocol has combated this by setting a safety line of 90%. The safety line is set across all assets.
- Liquidation Penalty — This happens when a user’s account is on pending liquidation. When this happens, anyone can buy the collateralized asset at a certain discount, which is a reward for the liquidator and also a penalty for the borrower. Different liquidation penalty applies though.
Liquidators can select and purchase an asset in the account but cannot purchase more than 50% of the total assets at a time. You can read up more about this on your own.
How to use These Protocols?
It’s so simple. You just need to set up your decentralized wallets like MetaMask or Trust Wallet and set them up by adding the blockchain network you want to work on. After that, then you can visit these protocols’ websites, then supply your preferred assets, and earn interest on them. Convert them to collateral if you would like to borrow other assets.
I hope this article explains what Open Source Liquidity Protocol is as friendly as it could. Don’t forget to Follow, Clap and comment if you have any question.