Venus: Money Market & Synthetic Stablecoin Protocol on BNB Chain

Key Insights

• Venus is simply a implicit algorithmic wealth marketplace protocol connected BNB Chain.
• Venus offers users the quality to deposit assets arsenic collateral for a loan, gain income from supplying liquidity, oregon mint VAI.
• Venus differentiates itself from different lending protocols done its revenue-sharing model.
• The proposed Venus V4 upgrade aims to optimize the protocol by introducing a stableness fee, isolated markets, unchangeable involvement rates, further terms feeds, and shortfall coverage.

Introduction to Venus Protocol

Decentralized wealth marketplace protocols are indispensable to the DeFi ecosystem due to the fact that they alteration users to lend and get crypto utilizing overcollateralized, self-custodied arrangements. Protocols specified arsenic Compound connected Ethereum oregon MakerDAO supply accelerated entree to superior without requiring recognition support oregon relying connected different forms of trust. However, the bulk of stablecoins injected into these markets are issued by centralized entities, specified arsenic Circle oregon Tether.

Building connected the occurrence of Compound and MakerDAO, Venus was launched successful 2020 arsenic a implicit algorithmic wealth marketplace protocol connected BNB Chain. In summation to facilitating lending and borrowing, Venus enables collateralized indebtedness positions (CDPs) to mint VAI, the protocol’s autochthonal synthetic stablecoin. By gathering connected the codebases of established protocols, Venus offers users a acquainted level for lending and borrowing connected BNB Chain.

How it works

Venus offers 3 main services to its users: depositing assets arsenic collateral for a loan, earning income from supplying liquidity, and minting VAI.

When a idiosyncratic deposits an asset, the protocol transfers the plus to the due marketplace and mints the corresponding "vToken" (such arsenic vBTC) to the user. These vTokens accrue involvement each block, based connected a complaint determined by proviso and demand. As involvement is accrued, the speech complaint betwixt the vToken and the underlying plus increases linearly. When a idiosyncratic withdraws from the protocol, the minted vTokens and the earned involvement are redeemed (burned) successful speech for the underlying asset.

As an further mode to gain income by supplying liquidity, users tin enactment arsenic liquidators. Whenever the worth of a indebtedness positive involvement exceeds the worth of its collateral, liquidators tin measurement successful to repay portion oregon each of the indebtedness to bring it to a affirmative balance. In speech for their service, liquidators are rewarded with a information of the collateral. This overcollateralization exemplary reduces insolvency hazard by maintaining a steadfast loan-to-value ratio.

For borrowing connected Venus, users tin collateralize their assets and get up to 80% of the value, depending connected the circumstantial collateral origin for the asset. The borrowed assets tin beryllium transferred freely, but the collateral is locked until the indebtedness and accrued involvement are repaid. If the worth of the indebtedness positive involvement ever exceeds the worth of the collateral, the indebtedness is considered to beryllium "underwater" and taxable to liquidation.

Venus besides enables users to mint VAI, provided they conscionable the collateral requirements. VAI provides further inferior to the billions of dollars flowing done the protocol. It offers users entree to a USD-pegged asset, portion besides allowing them to gain involvement income connected the underlying collateral. However, the minting of VAI was paused past September owed to an oversupply contented that caused the terms to depeg from $1, contempt being overcollateralized. Minting is expected to resume with the merchandise of the proposed Venus V4 upgrade, which volition present a stableness interest mechanics for VAI.

Tokenomics

The Venus protocol is governed by the XVS token, which captures the superior worth of the platform. The full proviso of 30 cardinal tokens was initially distributed done Binance LaunchPool. There, users could involvement assorted tokens to gain a stock of 6 cardinal XVS tokens. The remaining XVS tokens were allocated 3 ways: a full of 23.1 cardinal tokens were reserved for liquidity incentives and rewards; 600,000 tokens were acceptable speech for Venus Governance to contented VIPs (Venus Improvement Proposals) connected behalf of the community; and 300,000 tokens were acceptable speech for ecosystem grants.

Under the existent organisation schedule, the Venus protocol releases ~3,460 XVS tokens (0.01% of the full supply) to the markets per day, positive a basal emanation complaint of 525 XVS per time to stakers successful the XVS Vault and 250 XVS to stakers successful the VAI Vault.

Holders of XVS tokens tin draught and ballot connected governance proposals. These proposals screen topics specified arsenic adding markets for caller tokens, adjusting organisation schedules and collateral factors, and directing caller merchandise updates.

Additionally, XVS stakers are entitled to a stock of the protocol's revenue. Depending connected a supported asset's "reserve factor," 10-25% of involvement income is retained by Venus arsenic a protocol interest for facilitating lending and borrowing. At the extremity of each quarter, 20% of this protocol gross is utilized to marketplace bargain XVS, which is past distributed regular to XVS Vault stakers successful the pursuing quarter.

Venus Prime

Venus Prime is simply a non-transferable "soulbound token" that volition beryllium claimable done the XVS Vault arsenic portion of the Venus V4 upgrade. Venus Prime tokens unlock entree to adaptable boosted yields done gross stock and are issued successful 2 forms: the Earned Revocable Token and the OG Irrevocable Token.

In summation to the staking output received from the XVS Vault, Prime tokens assistance users entree to boosted yields done the protocol's Qualified Value (QV) organisation system. Each Prime tier caps the magnitude of QV a holder tin proviso to oregon get from prime markets. The tiers besides find the share of the protocol gross each holder receives. A idiosyncratic whitethorn person further assets successful these markets, but they lone person boosted output based connected the QV of the eligible assets. This plan is akin to cashback rewards systems, wherever boosted output is paid successful the plus supplied/borrowed and tin beryllium claimed straight from the markets.

According to the initial design, Earned Revocable Prime tokens tin beryllium claimed erstwhile a idiosyncratic has staked a minimum of 1,000 XVS for 90 days. If a user's staked equilibrium falls beneath 1,000 XVS, the token volition beryllium revoked and the 90-day timepiece volition reset. Once issued, Prime tokens tin beryllium upgraded oregon downgraded to antithetic tiers based connected further amounts of XVS staked oregon withdrawn from the vault. Upgrades to a caller tier tin beryllium triggered aft an further 30 days of staked time.

OG Irrevocable Prime tokens volition beryllium issued to the apical 1,000 borrowers by transaction number implicit a rolling 12-month period. This number volition lone see get transactions of astatine slightest $1,000. The OG tokens volition automatically person the aforesaid qualifying balances arsenic the highest tier and volition beryllium irrevocable erstwhile claimed, arsenic their sanction implies.

Overall, Venus Prime aims to incentivize protocol loyalty. It volition supply further inferior for XVS and simultaneously turn the full worth locked successful the ecosystem. It is presently successful the plan signifier and taxable to alteration done assemblage governance. Holders of XVS tokens volition beryllium capable to draught and ballot connected governance proposals, including changes to the Venus Prime organisation and benefits.

Venus Reward Token (VRT)

The Venus Reward Token (VRT) is different ecosystem token that was airdropped to XVS holders past year. The information down VRT was to alteration XVS emissions without compromising connected liquidity incentives. Tokenholders received 1,000 VRT per 1 XVS. In March 2022, VRT Swap was launched. It is simply a conveyance that allows users to swap VRT for XVS astatine a ratio of 12,000:1, with the swap vesting linearly implicit 365 days. The 365-day vesting play tin beryllium initialized until the extremity of March 2023, aft which the inferior of VRT volition beryllium deprecated.

Traction

Venus is the 2nd largest protocol connected BNB Chain by full worth locked (TVL), with lone PancakeSwap up of it. In May 2021, the full worth of assets supplied to the protocol peaked astatine conscionable supra $15 billion, earlier falling to $3 cardinal by the extremity of the month. The crisp driblet was the effect of users withdrawing funds successful effect to a ample liquidation event. The lawsuit near the protocol with atrocious debt, which was further compounded by rapidly declining prices successful the broader market. Average TVL stayed astatine astir $3 cardinal until it fell arsenic debased arsenic $925 cardinal aft a terms provender contented mistakenly enabled undercollateralized loans to beryllium made against Terra (LUNA). Despite little marketplace prices, Venus’ TVL has since trended upward, signaling spot successful the team's imaginativeness and ability.

Risk

As with different lending platforms and accepted banks, Venus users are taxable to assorted risks, including protocol insolvency, liquidation risk, astute declaration risk, and terms oracle risk. Although Venus uses an overcollateralization exemplary to trim the hazard of insolvency,  this exemplary does not ever warrant that idiosyncratic assets are readily disposable for withdrawal.

As an asset's utilization increases (i.e., an expanding stock of the proviso is being borrowed), the involvement complaint charged to each borrowers increases algorithmically. Higher rates tin origin borrowers to reassess the worth of their loans to spot whether the accrued outgo of superior is worthy the hazard of losing their collateral successful the lawsuit of a liquidation. As agelong arsenic the collateral holds its perceived value, this dynamic mostly leads to a earthy equilibrium betwixt proviso and demand.

When collateralized assets bash acquisition a crisp autumn successful terms comparative to the borrowed assets, the effect is simply a ample liquidation event. In specified cases, liquidated borrowers would person nary inducement to repay their outstanding debt, particularly if their collateral has already been seized and sold successful an effort to retrieve the worth of the loaned assets. The resulting atrocious indebtedness tin pb to a shortfall of assets disposable to repay lenders astatine afloat value.

In May 2021, terms manipulation connected Binance's speech caused the oracle-reported terms of XVS to surge from $80 to $145 successful 3 hours, earlier falling backmost to $80 4 hours later. This surge led to ample amounts of BTC and ETH being borrowed utilizing XVS arsenic collateral. However, arsenic the terms of XVS stabilized, implicit $200 cardinal of liquidations occurred, starring to the merchantability of liquidated collateral and a further driblet successful the terms of XVS. This near the protocol with astir $58 cardinal successful atrocious indebtedness astatine existent prices.

In May 2022, Venus experienced different atrocious indebtedness concern erstwhile the terms of Terra (LUNA) crashed. LUNA was enabled arsenic a collateral plus connected Venus and relied connected Chainlink terms feeds to person real-time pricing updates. The LUNA terms provender declaration had a hard-coded minimum worth of ~$0.10, arsenic good arsenic a circuit breaker that paused pricing updates astatine the minimum value. The existent marketplace terms of LUNA ended up falling good beneath the minimum worth to ~$0.01, but the Venus marketplace continued to grip transactions astatine ~$0.10. Before the Venus squad could intermission the protocol for information maintenance, users exploited the terms provender discrepancy to make astir $15 cardinal successful atrocious debt.

These events exemplify the risks associated with collateralizing autochthonal governance tokens and illiquid assets. They besides item the hazard of relying connected a azygous root of information without due information checks. According to a dashboard by Risk DAO, Venus' existent atrocious indebtedness is astir ~$53 million. The projected V4 upgrade introduces shortfall coverage, which volition beryllium utilized to marque users full and mitigate shortfalls successful the future.

Conclusion

Venus differentiates itself from different decentralized wealth marketplace protocols with its revenue-sharing exemplary and quality to mint synthetic USD-pegged stablecoins. Despite facing challenges, the squad has demonstrated its quality to accommodate and find caller ways to instrumentality worth to tokenholders. In bid to support its market-leading position, Venus volition request to absorption connected the pursuing solutions: bounds vulnerability to long-tail assets, instrumentality information fallback solutions, enactment VAI's peg and grow its utility, and bounds dilution from token emissions.

The protocol has taken steps to amended its hazard absorption and plans to proceed this trend. So far, it has capped the XVS governance token arsenic collateral, onboarded Gauntlet for further hazard management, and constricted the collateral origin for long-tail assets. In the future, Venus plans to usage the proposed instauration of isolated markets, cross-referenced terms feeds, and shortfall sum to further diversify hazard and trim the accidental of insolvency.

For VAI to scale, its terms indispensable stay unchangeable astir its $1 peg during marketplace volatility. The squad plans to instrumentality a stableness interest to fortify the peg. Once the stableness interest is successful spot and minting is resumed, Venus volition enactment to grow the inferior of VAI, fixed that implicit 80% of the proviso is presently staked successful the VAI Vault earning XVS emissions. Stablecoins are inactive successful a comparatively aboriginal stage, truthful enlargement tin beryllium achieved done innovative usage cases and partnerships with different projects.

Venus and its investors should besides see the dilution from token emissions. Although galore protocols administer token rewards to incentivize users, the resulting precocious emissions rates tin summation circulating proviso and negatively interaction price.

The Venus assemblage precocious passed a proposal to trim regular emissions awarded to suppliers and borrowers by 50%, showing a committedness to the semipermanent wellness of the protocol. In the astir 1 period since emissions were reduced, the full worth of assets supplied to Venus accrued by astir 3% and the full worth borrowed lone decreased by astir 3%. In different words, the reduced emissions person had little, if any, antagonistic interaction connected idiosyncratic behaviour frankincense far. With emissions reduced, a palmy V4 motorboat could further solidify Venus' presumption arsenic a DeFi behemoth connected the BNB Chain.