Venus Protocol Introduction:
Venus Protocol is an algorithmic money market and synthetic stablecoin protocol. Previously, money markets were an essential part of economic systems addressing short-term lending needs.
However, Venus is integrating decentralized finance (DeFi) lending into the BNB Chain, 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 of which are based on Ethereum, with Compound being a money market protocol and MakerDAO a stablecoin minting protocol. Venus combines these functions into one. Users can utilize the same collateral across the ecosystem, regardless of the function they use.
We can think of Venus Protocol as a permissionless lending environment. In this environment, BNB Chain users with idle cryptocurrencies provide collateral to the network. Users with greater needs can borrow by over-collateralizing cryptocurrencies. Lenders earn compound annual interest rates, while borrowers pay the corresponding loan interest.
The lending rates are set by the protocol, and the yield curve adjusts based on utilization. Rates are automatically generated based on the demand for specific markets such as BNB or ETH. However, the governance process of the protocol sets minimum and maximum rate levels.
Synthetic stablecoins are minted using vTokens, which represent the collateral provided to Venus Protocol. For example, if a user provides USDT, they will receive vUSDT, which can later be redeemed for the underlying collateral. Users can also borrow up to 50% of the collateral value in vTokens to mint VAI.
The way Venus Protocol determines stablecoin rates differs from how it determines lending rates. The minting rate is fixed, and only the governance process of the protocol can adjust this rate.
Development History of Venus Protocol
Venus Protocol was founded by the project development team of Swipe, a global cryptocurrency credit card issuer, and Venus (XVS) was launched in 2020. Since its inception, the protocol’s goal has been to bridge the gap between traditional finance and DeFi on BNB Chain, providing alternative applications that allow users to avoid the issues encountered on Ethereum.
Swipe supported the development of Venus Protocol but did not support pre-mining of XVS tokens by developers or founders. Therefore, XVS holders have full control over the protocol and tokens.
Venus Protocol redefined rules based on community preferences. For example, the Venus V2 upgrade included an increase in VAI liquidation penalties and introduced fees for VAI minting and platform withdrawals, both of which will be added to the Venus reserve fund. The upgrade also airdropped the native Venus Reward Token (VRT) to existing XVS holders as a reward.
Uses of Venus Protocol
With Venus Protocol, users can borrow from asset pools without permission. Users can also mint stablecoins (VAI) through over-collateralized positions and participate in protocol governance.
Lending:
Users can lend reserve assets and earn various rewards. Venus Protocol creates lending cryptocurrency pools via smart contracts and regularly distributes vTokens to users. In this way, the protocol unlocks unused value within the BNB Chain, which has not been as favored in the lending market compared to assets like Bitcoin and Litecoin.
Borrowing:
Venus Protocol uses an over-collateralized loan system, where borrowers must deposit collateral before borrowing. For example, if the collateral value for Ethereum is 50%, the user can borrow up to 50% of the value of their ETH. They then have a say in the collateral ratio through the governance process.
However, according to the Venus Protocol whitepaper, the collateral value typically ranges from 40% to 75%. Users must act cautiously, as a significant drop in collateral value may result in a forced liquidation of their positions.
Minting Stablecoins:
The minting and redemption of synthetic stablecoins (VAI) is fixed at 1 USD, though prices can fluctuate based on supply and demand.
Venus Protocol users can mint stablecoins by using remaining collateral from their vToken deposits. Additionally, no central authority is involved, meaning anyone can mint stablecoins and use the newly minted stablecoins to earn yield in other DeFi projects.
Governance:
Users can also influence the future development of Venus Protocol. Through the governance token XVS, the protocol is fully controlled by the community, and XVS is a BEP-20 token used for voting.
Users can vote on many protocol-related issues, such as making improvements, adding new tokens to the protocol, adjusting interest rates, and delegating reserve allocation. Venus Protocol also plans to create a product called “Venus Vault,” where users can lock governance tokens to enhance the protocol’s risk resilience and distribute staking rewards.
What Makes Venus Protocol Unique?
Venus Protocol helps integrate conventional financial lending services into blockchain decentralized protocols, which isn’t a groundbreaking innovation—DeFi applications based on Ethereum have locked billions of dollars in assets.
However, these applications have pain points, such as high costs, low network speed, and a lack of support for cryptocurrencies from other blockchains (such as XRP and Litecoin). Unlike many other money market protocols, Venus Protocol allows borrowing with provided collateral while also enabling the minting of stablecoins.
Furthermore, users can earn yield from minted tokens. In contrast, other protocols lock such tokens in smart contracts, preventing users from benefiting from the underlying assets. With Venus Protocol, users do not need to transfer their personal assets out of the money market to mint stablecoins.
Unlike many mainstream stablecoins, Venus Protocol’s synthetic stablecoin is not backed by traditional financial assets or fiat currencies but rather by a basket of other cryptocurrencies. Additionally, BNB Chain ensures fast and low-cost transactions while providing a network with wrapped tokens and liquidity.
