What is Venus protocol?

TL;DR

- Venus is a decentralized algorithmic money market and stablecoin protocol that enables borrowers and suppliers to access liquidity and earnings on demand.

- Venus Protocol allows users to lend, borrow, and mint assets.

- Users can borrow up to 50% of their remaining collateral to mint VAI.

- Venus is created and run on the Binance Smart Chain.

- Its token, XVS, is a BEP-20 token.

- Synthetic stablecoins of Venus protocol are not run by conventional financial assets or fiat but by various other cryptocurrencies.

- The community can vote on protocol proposals, assign fixed interest rates for synthetic stablecoins, and delegate protocol reserve schedules.




Introduction

Prior to the boom in decentralized finance (DeFi), borrowing funds was time-consuming. Borrowers had to provide numerous documents to banks that conducted credit checks, thorough risk analyses, and other checks to verify that their clients had the financial resources to repay the principal amount and interest.

However, with the emergence of DeFi solutions – that provide open, democratic, and permissionless alternatives to traditional financial products, users now enjoy decentralized lending services. As a result, they can instantly borrow money against the value of their digital asset holdings without having to check their credit or involve any intermediaries like banks.

Users could also deposit cryptocurrencies, including stablecoins, on the platform and, in return, receive interest after their coins, enabling them to generate a much higher passive income than banks offer.

Although the DeFi solutions have added excellent value to users, one of the challenges these solutions face is that most of them run on top of Ethereum, which is well-known for its high gas fees. As a result, alternative DeFi protocols have recently gained adoption, drawing in users with their highly scalable platforms and low fees.mOne of them is the Venus Protocol, the popular crypto lending protocol within the BSC ecosystem, which added new functionality by enabling users to mint synthetic stablecoins on their cryptocurrency collateral.


What is Venus Protocol?

Venus Protocol is an algorithmic-based system developed to bring a completely decentralized finance-based lending and credit system to the Binance Smart Chain.
At its core, Venus protocol enables lenders to supply loans and borrowers to collect loans. Borrowers can receive crypto-based loans at lower fees, and lenders are rewarded for offering loan services.

Venus protocol was founded and launched in 2020, by the Swipe project development team, under the direction of Joselito Lizarondo. Venus is aimed to fill the gap between conventional finance and DeFi on the BNB Chain and give users a different application free from the problems they had on Ethereum.


What Makes Venus Protocol Different?

Venus Protocol contributes to the expansion of standard financial lending services to blockchain-based decentralized protocols. There are already Ethereum-based DeFi systems with assets worth billions of dollars locked into them. The protocol covers up for some drawbacks to these DeFi systems, like high costs, sluggish network speeds, and a lack of cryptocurrencies from other blockchains.

Additionally, the Venus Protocol stands out from many other money market protocols in that it allows for the use of supplied collateral for both borrowing and the minting of stablecoins. Users can earn yield from minted tokens, unlike in other protocols where such tokens get locked up in smart contracts with no earnings from underlying assets.

In contrast to many well-known stablecoins, Venus Protocol's synthetic stablecoins are not backed by conventional financial assets or fiat but by various other cryptocurrencies. Binance Smart Chain supports the Venus protocol, offering such advantages as a network of wrapped tokens with liquidity and fast and inexpensive transactions.


How does Venus Work?

Supplying Assets
Venus allows users to participate as lenders while maintaining the protocol's collateral security.

Users can supply various supported cryptocurrencies or digital assets to the protocol, which can be channeled as collateral for loans, liquidity, earning an APY, or minting synthetic stablecoins.

All user assets are merged into smart contracts so users can retrieve their supply at any time as far as the protocol balance is positive. Users who supply their digital assets to Venus receive a vToken which is the only token used to retrieve the underlying collateral supplied.

This enables users to channel these tokens to hedge against other assets or transfer them into cold wallets that support Binance Smart Chain.

Borrowing Assets
To borrow any of the approved cryptocurrencies, stablecoins, or digital assets from Venus, users must offer collateral that will be stored on the protocol. These digital assets must be overcollateralized and will allow borrowing up to 75% of the value of the collateral. The protocol sets these collateral ratios, and the Governance process regulates them. Usually, collateral ratios are set between 40% and 75%. If a user's collateral value falls below 75%, or whichever collateral ratio percentage a specific asset has, it could lead to a Liquidation event. Users will not be required to make monthly payments and will only be charged a compound interest rate per block on these assets.

Synthetic Stablecoins
Through Venus Protocol, users can mint VAI (VAI), a synthetic stablecoin based on a $1 price, using the vTokens from the underlying collateral previously supplied to the protocol. Stablecoins on the Venus Protocol can be synthetically created through Governance and added as a proposal. The protocol's default stablecoin, VAI, is minted by collateral already pledged in Venus. The Governance process within the Venus Protocol also controls interest rates.

Community Governance
The Venus protocol was created to give the community power; as a result, individuals that mine Venus Tokens control the system.

The protocol's governance features allow for adding new cryptocurrencies or stablecoins.

Additionally, the community can vote on protocol proposals, set fixed interest rates for synthetic stablecoins, and delegate protocol reserve schedules.

Security
The protocol is secured by the Binance Smart Chain, which complies with the Ethereum Virtual Machine (EVM). Even when there are issues with or a breakdown of the Binance Chain, the protocol will continue to function.

Binance Smart Chain employs the proof-of-staked authority (POSA) algorithm to secure the protocol. Additionally, there are automatic liquidation mechanisms that will protect Venus's suppliers by immediately liquidating creditors' collateral when it falls below 75% of the loan's value.


About Venus Token (XVS)

XVS is the native token on the Venus platform and is used to manage the network. In addition to powering the protocol, the Venus Token functions as a governance token designed to ensure a fair launch distribution in the Venus community.

There are about 14,432,257 XVS in use out of a total of 30,000,000 XVS. Venus has a fixed supply of XVS tokens, meaning no new XVS will be minted after the existing supply is used up unless otherwise decided through democratized network governance. The fixed total supply acts as an anti-inflation mechanism and makes XVS a good long-term store of value.

Users can acquire the Venus token by participating in the Binance LaunchPool project or by providing liquidity to the protocol.


Conclusion

Venus is a relevant project in the emerging sector of decentralized finance. Venus has a competitive advantage in BSC money markets, being the first protocol to launch lending and borrowing. Venus also addresses issues of lengthy processes when taking out loans through a central authority. The platform's seamless services will gain the interest of many users, especially with the minting of XVS tokens to bootstrap liquidity.

Venus has the potential to develop into the foundation of any market or even exchange, rising as one of the most popular lending systems.



Author - M. Olatunji, Gate.io Researcher
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