Summary
Venus Protocol is an algorithm-driven money market system, running on the BNB Chain. Its goal is to allow its users to lend and borrow cryptocurrencies in a decentralized and secure way.
It's a permission-free protocol, so anyone can start using it by connecting to crypto wallets, like MetaMask. The Venus Protocol community owns and controls the protocol through its native governance token, XVS, which can be staked in the Venus Protocol Vault to earn token rewards.
Introduction
Decentralized finance (DeFi) has begun to offer an increasing number of services typically associated with traditional finance. With Venus Protocol, users can lend or borrow, permissionless, from a pool of assets, and collateral providers can benefit from passive funds.
However, instead of managing transactions through a centralized agent, the protocol automates the process with technologies such as smart contracts.
What is Venus Protocol and how does it work?
Venus Protocol is an algorithmic money market and synthetic stablecoin protocol. Traditionally, the money market is an essential part of the economy that deals with short-term borrowing needs.
Now, however, Venus makes decentralized finance (DeFi) lending and borrowing possible on BNB Chain. It also allows collateral providers to mint the platform's native synthetic stablecoin (VAI) by overcollateralizing positions (known as "overcollateralization").
Venus Protocol is a fork of Compound and MakerDAO, both built on Ethereum. The first is a protocol that functions as a money market and the second is a protocol for minting stablecoins. Venus integrates these functions into one and thus allows users to use the same guarantee within one ecosystem, regardless of the function they use.
You can think of Venus Protocol as a permission-free lending environment. First, it allows BNB Chain users with inactive cryptocurrencies to provide collateral to the network. Second, users who need more cryptocurrencies can pledge overcollateralized amounts of cryptocurrencies and take out loans. Lenders then receive interest rates compounded annually, while borrowers pay interest on their respective loans.
The protocol establishes interest rates for lending and borrowing based on a yield curve that varies depending on utilization. Interest rates are automatically adjusted according to the demands of the specific market, such as BNB or ETH. However, the protocol's governance process also sets minimum and maximum levels for interest rates.
The minting of synthetic stablecoins is carried out through vTokens, which are delivered by the collateral that users provide to Venus Protocol. vTokens represent the deposited collateral. For example, users receive vUSD for pledging USDT, which they can then redeem for the underlying collateral. With their vTokens, users can also request a loan of up to 50% of the value of the collateral they have in the protocol to mint VAI.
Venus Protocol does not determine interest rates for stablecoins in the same way as for interest rates on loans granted and loan applications. The interest rates for minting are fixed and only the protocol governance process is allowed to decrease or increase these rates.
The history of Venus Protocol
A project development team from Swipe, the global cryptocurrency credit card issuer, founded Venus Protocol and the launch of Venus (XVS) would later arrive in 2020. From the beginning, the goal was to function as a bridge between traditional finance and DeFi on BNB Chain in addition to providing users with an alternative application without the problems they experienced on Ethereum.
Although Swipe supported the development of Venus Protocol, there were no prior mining of the XVS token for the developers or founders. As such, XVS holders have full control over the protocol and token.
Venus Protocol redefines its rules according to the preferences of the community. For example, the Venus V2 update included increased penalties for VAI settlement. It also added commissions for minting VAI and making withdrawals from the platform, both of which were added to the Venus Reserves Treasury. Likewise, the update included an airdrop of the VRT token (Venus Reward Token) for XVS holders as a reward.
What can you do on Venus Protocol?
Venus Protocol enables users to lend and borrow, permissionless, from a pool of assets. Additionally, they can mint stablecoins (VAI) by overcollateralizing positions and participating in the governance of the protocol.
Grant loans
Users can grant loans and earn a variable return on the assets they contribute. Venus Protocol uses a smart contract to create pools with these borrowed cryptocurrencies and distributes vTokens to users periodically. In this way, the protocol unlocks unused value that is already on the BNB Chain, but lacks a lending market, as is the case in Bitcoin or Litecoin.
Apply for loans
Venus Protocol uses an overcollateralized lending system in which borrowers must pledge collateral before applying for a loan. For example, if ETH is 50% collateralized, users can borrow up to 50% of the value of their own ETH. They can then provide feedback regarding the collateral rate through the protocol's governance process.
However, according to the Venus Protocol whitepaper, the collateral value is usually between 40% and 75%. Users should be cautious, as if the collateral value drops too low, their positions will be liquidated.
Acuñar stablecoins
Minting and redemption of the VAI synthetic stablecoin is priced at $1, although this can fluctuate based on supply and demand.
Venus Protocol users can use the remainder of their collateral from previous vToken deposits to mint the stablecoin. Additionally, anyone can mint stablecoins without resorting to central authorities and use newly minted stablecoins for purposes such as generating returns on other DeFi projects.
Governance
Users can also influence the future of Venus Protocol. The community fully controls the protocol through XVS, its governance token, a BEP-20 token that can be used for voting.
Users can vote on a number of issues related to the protocol, including improvements, adding new tokens to the protocol, adjusting interest rates, and reserve distribution program delegations. Venus Protocol also plans to build a product called Venus Vault that will allow users to lock governance tokens to improve the protocol's anti-risk capability and distribute staking rewards.
What makes Venus Protocol unique?
Venus Protocol helps move normal financial lending services to decentralized protocols built on the blockchain, although it is not the first to do so; There are DeFi applications developed on Ethereum that have billions of dollars worth of assets locked in them.
However, these applications have their weaknesses, such as high costs, low network speed, and lack of cryptocurrencies from other blockchains (e.g., XRP and Litecoin). Venus Protocol is different from many other protocols that function as money markets, since it enables the use of the collateral provided not only to request loans, but also to mint stablecoins.
Additionally, users can earn returns on their minted tokens, while other protocols lock said tokens in smart contracts, without offering profits for the underlying assets. Venus Protocol eliminates the need to remove assets from a money market to mint stablecoins.
Unlike many prominent stablecoins, Venus Protocol's synthetic stablecoins are not backed by traditional or fiat financial assets, but rather by a basket of other cryptocurrencies. Likewise, BNB Chain performs fast, low-cost transactions while offering a network of wrapped tokens and liquidity.
Conclusions
Venus Protocol combines the money market and stablecoin generation within the same protocol, which can benefit the crypto ecosystem by unlocking guaranteed value. Additionally, BNB Chain's speed and low transaction costs enable these financial products for anyone who owns a cryptocurrency wallet. Now, people around the world can take out loans, earn interest and provide collateral, as well as mint stablecoins on demand.
Further reading
What is Qtum (QTUM)?
What is Band Protocol (BAND)?
What is NEXO (NEXO)?
What is BNB?