To become legitimate, DeFi must facilitate the creation of credit, and provide mediums that connect lenders and borrowers. This hasn't been the case over the past few years, as many, and rightly so, have been unwilling to lend or borrow crypto, especially Bitcoin due to volatility. Venus attempts to be the first global stablecoin that provides liquidity to people worldwide, bringing a foundation to DeFi that hasn't yet been built.
What is it?
Venus created the stablecoin VAI which is based on Binance Smart Chain backed by a basket of other stablecoins that eliminates the volatility that has plagued crypto since inception. It works by users transferring their crypto onto the Binance Smart Chain for no fees. After this the crypto is supplied to the protocol, it is used as collateral for a loan in US dollars. Lastly, there is no credit checks, making it an outlet for crypto advocates who are not recognized by banks as safe. The protocol dictates what percentage of the collateral will be converted into loans depending on the coin, and it generally ranges from 40-70%. This collateral can also be used to mint stablecoins and participate in yield farming.
As the collateral that has been locked in is based on volatile cryptocurrency, if it falls below a certain level a liquidation event is triggered unless more collateral is put up. This feature makes it more sensible for the protocol to accept only stablecoins or prominent coins such as Bitcoin, which it does. There is also no monthly payments of interest, instead the interest is added to the final amount that has to be paid. As each contract has it's own nuances, the interest rate varies between each, and in each contract itself it varies. There is an inbuilt yield curve that varies depending on a variety of factors, such as the market prices and supply and demand.
Synthetic stablecoins
Synthetic stablecoins allow users to mint VAI coins from the previous collateral they have placed in the Venus protocol. They are pegged to US dollar 1:1 and are different in the way that they are backed by a basket of varying cryptocurrency. Think of it this way, if there are 5 different users, and they are place different coins into the protocol, then the coin itself becomes backed by 5 different coins. The amount of coins on offer is also continually changing, as when there is some minted the supply is increased, and when the user pays the money back, the coins are burnt. Unlike other coins, the interest rate for VAI is also set in the governance statement, providing stability. This peg is also encouraged to be maintained by the market, as the protocol has a series of parameters to change factors in supply and demand to reattach the peg.
Governance
Governance is controlled by the Venus community and covers a variety of issues. This can range from if there is a new coin to be added, market interest rate changes and VAI coin market rates. This is done through voting, which is active to users for three days, and then after that the issue is settled and the feature is either added or nothing changed. This makes it truly decentralized, vital for being a legitimate crypto project.
Supplying assets
Although I have vaguely covered this, I will attempt to further detail this part of the process. When a user adds crypto to the protocol they are either providing collateral for a loan or adding liquidity to the system where they earn interest for. The protocol connects borrowers and lenders, but there is far less intervention compared to traditional institutions. When a coin is supplied, they receive a token which is the only token that is that allows the user to redeem the underlying collateral. To simplify this, if I place one BTC into the system, I get the token vBTC in return. This can then be moved into cold storage (as long as it supports Binance Smart Chain, or there might be some slight difficulties), adding security.
Review
Venus is a platform that is vital in the development of DeFi. Although it may not be the be all end all of crypto bank, it does currently provide an innovative solution to the past, which was basically to accept that banks don't accept crypto as collateral. This wasn't the form of DeFi, so the solution has been provided. I am a bit wary of the way interest is paid, as it could lead to severe compounding of debts (good for the coin though). In short though, it brings the concept of zero trust needed to the next level and I look forward to seeing future developments of Venus. Perhaps it may go to the moon?
