Loan Protocol

Over the past few years, the rise of Web3 technology has triggered a sea change in the financial industry. With decentralization, security, transparency and programmability as its core features, Web3 brings unprecedented opportunities and challenges to the lending field. With the help of technologies such as blockchain, smart contracts, and cryptocurrencies, the financial market is undergoing a transition from a traditional centralized model to a decentralized model.

Lending is the beginning and origin of everything in the financial market.

We can easily understand that the core of financial activities is based on trust between people. Trust allows people to lend funds or assets to each other, thereby achieving optimal allocation of resources.

Lending is a credit activity, which means that the lender (bank or other financial institution) lends monetary funds to the borrower (enterprise, individual or other organization) according to certain interest rates and conditions to meet its production or consumption needs. In lending activities, borrowers can increase their returns by enlarging their capital size, which is the role of leverage. However, leverage will also magnify the borrower's risk. If the borrower cannot repay on time, it will cause losses or even bankruptcy. In order to avoid or transfer this risk, people have invented various financial derivatives, such as futures, options, swaps, etc. These financial derivatives can be used to hedge or speculate on market fluctuations. It is no exaggeration to say that finance and financial derivatives are based on the underlying proposition of "lending".

Due to the inconveniences of centralized finance, people are turning their attention to blockchain, hoping to achieve more efficient, fairer and safer financial services through decentralization. Decentralized lending is one of the important application scenarios. It uses smart contracts to achieve functions such as matching borrowers and lenders, locking assets, calculating interest, and executing repayments without relying on any third-party institution or individual.

Whether it is decentralized lending based on blockchain technology or traditional lending based on financial institutions, their core components have certain similarities. No matter which lending method, there are factors such as borrower, lender, interest rate, term, collateral, etc. These elements constitute the basic logic and rules of lending, and also determine the risks and benefits of lending. In decentralized lending, various parameters are determined by the DAO, so a governance module is also added to the entire financial model. Specifically, it includes the following elements:

• Borrower: Borrower refers to the party who needs to borrow funds. They usually have financial needs, such as investment, consumption, emergency, etc. Borrowers need to make a loan request to the lender or platform and provide some necessary information and conditions, such as loan amount, term, interest rate, collateral, etc. After obtaining the loan, the borrower needs to return the principal and interest to the lender or platform in accordance with the agreed method and time.

• Lender: A lender is a party willing to lend funds. They usually have some idle funds and want to obtain a certain amount of income. Lenders need to provide their own funds to borrowers or platforms and accept some necessary information and conditions, such as loan amount, term, interest rate, risk, etc. After lending funds, the lender needs to recover the principal and interest according to the agreed method and time.

• Platform: Platform refers to a party that plays an intermediary or coordination role in the lending process. They can be centralized institutions, such as banks, credit unions, online loan platforms, etc., or they can be decentralized systems, such as blockchain. , smart contracts, DeFi platforms, etc. The main function of the platform is to provide borrowers and lenders with a credible and efficient lending market to achieve the matching and flow of funds. Platforms usually charge a certain fee or profit as compensation for the services they provide.

• Governor: In decentralized protocols, indicators such as interest rates, determination of mortgage assets, and LTV are all voted by the protocol governance tokens. Therefore, governors are an important role in participating in protocol decision-making. Governors typically need to hold or stake a certain number of governance tokens to obtain voting rights and governance rewards. Governors can influence the development direction and parameter settings of the protocol by proposing or supporting proposals.

What is a DeFi lending protocol?

Decentralized lending protocols (Lend protocols) are platforms that connect borrowers and lenders in a decentralized manner. On the one hand, it allows lenders to borrow cryptocurrencies from the platform and pay interest, and on the other hand it allows savers to deposit cryptocurrencies to the platform to earn interest. The entire lending process is performed without middlemen from start to finish.

In DeFi lending, transaction processes such as deposits, borrowings, and liquidations are all executed through the smart contract code on the chain. Once the conditions are met, the contract code will be automatically executed without any manual interaction approval and other processes, eliminating the cumbersome processes of the traditional financial market and any Anyone can quickly borrow money without revealing their identity to a third party, which also greatly improves operational efficiency.

What are the mainstream DeFi lending protocols and what are their advantages?

When it comes to DeFi lending protocols, the first thing that should come to mind is Maker, the leader of DeFi lending protocols. Secondly, it also includes the well-known Aave, Compound, etc. A variety of protocols meet the diverse needs of the market. According to DeFi Pulse data, currently, the top five DeFi lending protocols are: Maker, Aave, Compound, InstaDapp and Liquidity, most of which are native Ethereum projects. The top-ranked mainstream DeFi lending protocol has developed and grown with its own unique advantages. Maker, Aave and Compound, these three "heavyweight" DeFi lending protocols, help everyone have a deeper understanding of different lending models.

1. Maker: Stablecoin mortgage loan

The Maker Protocol is one of the largest decentralized applications (dApps) on the Ethereum blockchain, allowing users to generate DAI and borrow money through DAI. DAI is a stablecoin whose value is pegged to the U.S. dollar. The Maker Protocol is open to everyone around the world and is not subject to any restrictions or personal information requirements.

2.Aave: Diversified Loan Pool

Aave is another leading DeFi lending protocol. The Aave protocol is unique in that it tokenizes deposits into aTokens, which generate interest in real time, while it also has the ability to lend quickly. With over 10 different assets, the Aave protocol is a typical diverse lending pool in the Ethereum ecosystem. TUSD is one of the better-performing stablecoin assets, and the total locked position in the Aave ecosystem currently exceeds 100 million US dollars.

3.Compound: Liquidity pool lending model

Compound is an open source protocol on Ethereum that provides an algorithmically determined and efficient currency market, making the lending experience and process on the entire chain simpler and smoother. Interest rates on loans and borrowings are determined by the size of the pool's liquidity, which fluctuates by the ratio between the total amount of money supplied by lenders and the total amount demanded by borrowers. Currently, the amount of TUSD locked in the Compound lending pool reaches 88 million US dollars, and users can deposit TUSD to earn interest.

As of now, the total locked-up volume of the DeFi ecosystem has reached more than 190 billion US dollars, and it is mainly active within the Ethereum network ecosystem. After two or three years of exploration and development, a variety of innovative financial methods such as stable coins, lending platforms, derivatives, insurance, and payment platforms have gradually emerged, which has continuously improved the financial ecosystem. Among them, DeFi lending protocols account for the largest proportion in the entire DeFi ecosystem, with total locked positions reaching more than 43 billion US dollars.