TL;DR
Venus Protocol is an algorithm-based money market system on the BNB Chain. The goal is to allow users to offer and request cryptocurrency loans in a decentralized and secure manner.
The protocol is permissionless, so anyone can start using it by simply connecting crypto wallets like MetaMask. The Venus Protocol community owns and controls the protocol through its native governance token, XVS, which can be used for staking in the Venus Protocol Vault to earn token rewards.
Introduction
The decentralized finance (DeFi) sector has begun to offer an increasing number of services normally associated with traditional financial services. With Venus Protocol, users can offer or request permissionless loans from a pool of assets, and collateral providers can benefit from their passive funds.
However, in place of a centralized entity handling transactions, the protocol automates the process using technologies like smart contracts.
What is the 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 Protocol is bringing lending services to the decentralized finance (DeFi) sector on BNB Chain. It also allows collateral providers to create the platform's native synthetic stablecoins (VAI), providing over-collateralization of positions.
Venus Protocol is a fork of the Compound and MakerDAO projects. Both are based on Ethereum, with the first being a money market protocol and the second being a stablecoin issuance protocol. Venus integrates these functions into one, allowing users to utilize the same collateral within an ecosystem regardless of the function used.
We can think of Venus Protocol as a permissionless lending environment. Firstly, it allows BNB Chain users with idle cryptocurrencies to provide collateral (collateral) to the network. Secondly, users who need larger loan amounts can pledge (pledge) cryptocurrencies with an extra collateral value (overcollateralization). Therefore, lenders receive annual compound interest rates, while borrowers pay interest on their respective loans.
Interest rates for loans are set by the protocol on a yield curve that varies depending on usage. These fees are automated according to the demands of a specific market, such as BNB or ETH. However, the protocol's governance process also sets minimum and maximum levels for the interest rate.
The issuance of synthetic stablecoins occurs through the use of vTokens, based on the collateral values provided by users to Venus Protocol. vTokens represent deposited collateral — for example, users receive vUSDT for providing USDT, which can later be redeemed for the underlying collateral value. Users can also borrow up to 50% of the collateral value of the vTokens they hold in the protocol to issue VAI.
The Venus Protocol sets stablecoin interest rates in a different way than it sets loan interest rates. Interest rates for issuance are fixed and only the protocol governance process is capable of changing them.
The history of Venus Protocol
Venus Protocol was founded by a project development team from global crypto credit card issuer, Swipe, with the Venus (XVS) token being launched in 2020. From the beginning, the project aimed to bridge the gap between traditional finance and DeFi on BNB Chain and provide users with an alternative application, free from the problems present in Ethereum.
Although Swipe supported the development of Venus Protocol, there was no pre-mining of XVS tokens for developers or founders. Therefore, XVS holders have full control over the protocol and the token.
The Venus Protocol redefines its rules according to the community's preferences. For example, the Venus V2 update included higher penalties for VAI liquidation. It also introduced fees for issuing and withdrawing VAI from the platform, both of which are added to the project's treasury (Venus Reserves Treasury). Additionally, the update included, as a reward, an airdrop of the native Venus Reward Token (VRT) for current XVS holders.
What is possible on Venus Protocol?
The Venus Protocol allows users to offer or request permissionless loans from a pool of assets. Users can also issue stablecoins (VAI) with overcollateralized positions and participate in the governance of the protocol.
Loans
Users can offer loans and earn variable yield on the borrowed assets. Venus Protocol creates pools of borrowed cryptocurrencies using a smart contract and periodically distributes vTokens to these pools. In this way, the protocol unlocks unused value that is already on BNB Chain, but does not have a lending market as in the cases of Bitcoin and Litecoin.
Loan application
Venus Protocol utilizes an overcollateralized lending system, which requires borrowers to pledge collateral amounts before receiving loans. For example, if Ethereum has a 50% collateral, users can borrow up to 50% of their own ETH balance. Through the protocol's governance process, users can propose changes to collateral (collateral) fees.
However, according to the Venus Protocol whitepaper, the collateral value typically ranges from 40% to 75%. Users should be careful because if the collateral value drops too much, their positions will be liquidated.
Stablecoin issuance
Although its price may still fluctuate according to market supply and demand, the issuance and redemption of the synthetic stablecoin VAI has a fixed value of 1 USD.
Venus Protocol users can issue the stablecoin using collateral left over from previous vToken deposits. Furthermore, anyone can issue stablecoins (without central authorities) and use newly issued stablecoins for various purposes, such as generating income or use in other DeFi projects.
Governance
Users can also influence the future of Venus Protocol. The community has full control over the project through its governance token XVS, which is a BEP-20 token used for voting.
Users can vote on various issues related to the protocol, including improvements, adding new tokens, adjusting interest rates, and reserving distribution schedule delegations. Venus Protocol also plans to build a product called Venus Vault, which will allow users to lock governance tokens to improve the protocol's anti-risk features as well as the distribution of staking rewards.
What makes Venus Protocol unique?
Venus Protocol brings traditional lending services to decentralized protocols based on blockchain technology. However, it is not the first project to do so — there are Ethereum-based DeFi applications with billions of dollars in assets locked.
However, these applications have some problematic characteristics, such as high costs, low network speeds, and the absence of cryptocurrencies from other blockchains (e.g., XRP and Litecoin). Venus Protocol is different from other money market protocols in that it allows the use of provided collateral not only for lending but also for issuing stablecoins.
Furthermore, users can earn yields on the issued tokens, unlike other protocols that lock these tokens in smart contracts without offering benefits from underlying assets. Venus Protocol eliminates the need for a user to remove their own assets from a money market to issue stablecoins.
Unlike many prominent stablecoins, Venus Protocol's synthetic stablecoins are not backed by traditional financial assets or fiat, but by a basket ("basket") of other cryptocurrencies. Additionally, BNB Chain makes transactions fast and cheap while providing a network of wrapped tokens and liquidity.
Final considerations
The Venus Protocol combines the money market and stablecoin issuance into a single protocol, which benefits the crypto ecosystem with more options for unlocking collateral. Additionally, BNB Chain's speed and low transaction costs expand access to these financial products for anyone with a cryptocurrency wallet. Now, people around the world can apply for loans, earn interest, provide collateral, and issue stablecoins.
Further reading
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