What is Venus Protocol?

Summary

Venus Protocol is an algorithmic money market system on BNB Chain. With this system, users can safely borrow and lend cryptocurrencies through a decentralized approach.

By linking with crypto wallets like MetaMask, anyone can start using this permissionless protocol. 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 offering more and more traditional financial services. With Venus Protocol, users can borrow and lend from asset pools without permission, and collateral providers can benefit from their idle funds.

However, the protocol does not process transactions by centralized participants but uses smart contracts and other technologies to automate the process.

Venus Protocol Concept and How It Works

Venus Protocol is an algorithmic money market and synthetic stablecoin protocol. Previously, money markets were an essential part of economies to meet short-term lending needs.

However, Venus is integrating decentralized finance (DeFi) lending into BNB Chain and allowing collateral providers to mint the platform’s native synthetic stablecoin (VAI) through over-collateralized positions.

Venus Protocol is a fork of Compound and MakerDAO, both based on Ethereum; the former is a money market protocol, and the latter is a stablecoin minting protocol. Venus combines these functions into one. Users can use the same collateral for any function within the same ecosystem.

We can view Venus Protocol as a permissionless lending environment. First, BNB Chain users with idle cryptocurrencies provide collateral to the network. Second, users with higher demand can borrow by over-collateralizing their crypto assets. Lenders earn a compound annual interest rate, while borrowers pay corresponding loan interest.

Interest rates are set by the protocol, and the yield curve varies based on utilization. Rates are automatically generated based on demand in specific markets like BNB or ETH. However, the governance process also sets minimum and maximum interest rate levels.

Synthetic stablecoins are minted using vTokens, which are collateral provided by users to Venus Protocol. vTokens represent deposited collateral. For example, after depositing USDT, users receive vUSDT, which can then be used to redeem the underlying collateral. Users can also borrow up to 50% of the collateral value they have in the protocol using their vTokens to mint VAI.

Venus Protocol determines stablecoin interest rates differently from lending interest rates. The minting rate is fixed, and only the governance process can lower or raise this rate.

Venus Protocol Development History

Venus Protocol was founded by the project development team of Swipe, a global crypto credit card issuer, and XVS was launched in 2020. From its inception, the protocol aimed to bridge the gap between traditional finance and DeFi on BNB Chain, providing alternative applications to address issues encountered on Ethereum.

Swipe supports the development of Venus Protocol but does not support pre-mining of XVS tokens by developers or founders. Therefore, XVS holders have full control over the protocol and tokens.

Venus Protocol redefines rules based on community preferences. For example, the Venus V2 upgrade includes increased VAI forced liquidation penalties and introduces fees for VAI minting and platform withdrawals, which will be added to the Venus reserve treasury. The upgrade also includes airdropping the native Venus Reward Token (VRT) to existing XVS holders as rewards.

What Are the Uses of Venus Protocol?

With Venus Protocol, users can borrow and lend from asset pools without permission. Users can also mint stablecoins (VAI) using over-collateralized positions and participate in protocol governance.

Lending

Users can lend reserve assets and earn various yields. Venus Protocol creates lending pools of cryptocurrencies via smart contracts and periodically distributes vTokens to users. This approach unlocks unused value already present on BNB Chain, though these assets are less favored in lending markets compared to Bitcoin and Litecoin.

Borrowing

Venus Protocol uses an over-collateralized lending system, requiring borrowers to pledge collateral before borrowing. For example, if the collateral value of Ethereum is 50%, users can borrow up to 50% of their ETH value. They can then participate in the protocol’s governance to influence collateral ratios.

However, according to the Venus Protocol whitepaper, collateral values typically range from around 40% to 75%. Users must act cautiously; if collateral value drops sharply, their positions will be subject to forced liquidation.

Minting Stablecoins

Synthetic stablecoin VAI’s minting and redemption are fixed at 1 USD, but prices can fluctuate based on supply and demand.

Venus Protocol users can mint stablecoins using remaining collateral from previous vToken deposits. Moreover, anyone can mint stablecoins without central intervention and use the newly minted stablecoins to earn yields from other DeFi projects.

Governance

Users can also influence the future development of Venus Protocol. Through the governance token XVS, the protocol is fully community-controlled, and XVS is a BEP-20 token used for voting.

Users can vote on many protocol-related issues, including making improvements, adding new tokens, adjusting interest rates, and allocating reserve time. Venus Protocol also plans to build a product called “Venus Vault,” where users can lock governance tokens to enhance the protocol’s resilience and distribute staking rewards.

What Makes Venus Protocol Unique?

Venus Protocol helps integrate traditional financial lending services into blockchain decentralized protocols. This is not entirely new, as Ethereum-based DeFi applications already lock assets worth billions of dollars.

However, these applications have pain points such as high costs, low network speeds, and lack of cryptocurrencies from other blockchains (like XRP and Litecoin). Unlike many other money market protocols, Venus Protocol not only enables borrowing and lending with provided collateral but also allows minting stablecoins.

Additionally, users can earn yields from the minted tokens. In contrast, other protocols lock such tokens in smart contracts, preventing users from earning from the underlying assets. With Venus Protocol, users do not need to transfer their assets out of the money market to mint stablecoins.

Unlike many mainstream stablecoins, Venus Protocol’s synthetic stablecoins are not backed by traditional financial assets or fiat currencies but are backed by a basket of other cryptocurrencies. Moreover, BNB Chain ensures fast, low-cost transactions and offers a network with wrapped tokens and liquidity.

Summary

Venus Protocol combines money markets and stablecoin generation into a single protocol, unlocking collateral and benefiting the crypto ecosystem. Additionally, BNB Chain leverages its speed and low transaction costs to offer these financial products to anyone with a crypto wallet. Today, people worldwide can borrow, earn interest, provide collateral, and mint stablecoins on demand using collateral. ()**$VELODROME **