Venus Protocol in Blockchain, Key Features, and How it Works

Venus Protocol

The BNB Smart Chain (BSC) serves as the primary operating platform for the Venus Protocol, an algorithmic money market protocol that is decentralized finance (DeFi). It became one of the biggest DeFi projects on BSC after its 2020 launch.

By fusing features from other well-known DeFi protocols, such as Compound (for lending/borrowing) and MakerDAO (for stablecoin minting), into a single, cohesive system, Venus Protocol essentially seeks to offer a complete platform for managing digital assets. Users can utilize the same collateral for many purposes inside a single ecosystem through this connectivity.

Key Features and How it Works:

Algorithmic Money Market:

• Lending (Supplying Assets): Customers can contribute (deposit) cryptocurrency that is accepted into Venus’ lending pools. They receive interest on their deposits in exchange, which borrowers pay. The user receives an equivalent quantity of “vTokens” (such as vUSDT for USDT), which are interest-bearing tokens that reflect their portion of the deposited assets, when an asset is placed. Higher demand for borrowing typically results in higher loan rates. The interest rates are algorithmic and dynamically adjust based on supply and demand (utilization rate) for each asset inside the protocol. At any moment, users can withdraw their initial deposits plus interest by redeeming their vTokens.
• Borrowing Assets: To borrow, users must first supply existing crypto assets as collateral. All loans on Venus are over-collateralized, meaning the value of the collateral provided must be greater than the value of the loan taken out (e.g., needing to deposit $150 worth of crypto to borrow $100). This mechanism ensures the protocol’s solvency without the need for credit checks. The amount a user can borrow is determined by the “collateral factor” of the supplied asset (e.g., if BNB has an 80% collateral factor, you can borrow up to 80% of its value). A “borrow limit” and “borrow limit used” percentage are displayed, indicating proximity to maximum borrowing capacity. Borrowers pay interest on their loans, which is also algorithmic and adjusts based on demand for the borrowed asset. Loans can be repaid at any time.

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Synthetic Stablecoin (VAI):

• VAI, Venus’s native decentralized stablecoin, is soft-pegged to the US dollar (1 VAI ≈ 1 USD), and users can mint (produce) it.
• Positions that are over-collateralized with a variety of supported crypto assets generate VAI. The VAI is backed by the system via vTokens, which stand in for provided collateral.
• With the goal of keeping it pegged to the USD, the interest rate for minting VAI has traditionally only been set and changed by governance votes.
• Users can obtain steady value liquidity through VAI mining without having to sell their underlying volatile cryptocurrency holdings, preventing taxable events and potential gains. VAI can thereafter be sold or utilized in other DeFi protocols. VAI is supported by a basket of other cryptocurrencies rather than cash or conventional financial assets, in contrast to several well-known stablecoins.

XVS Token (Governance and Utility):

• XVS is the Venus Protocol’s native governance token.
• Voting on Venus Improvement Proposals (VIPs) is one way that holders can take part in the decentralized governance by staking their tokens in the XVS Vault. Important choices including modifying collateral factors, creating new collateral kinds, allocating treasury funds, managing protocol upgrades, and modifying interest rates are all covered in these suggestions.
• Additionally, XVS can be obtained as compensation for lending money or supplying liquidity on the network, which encourages involvement. The Venus Prime initiative seeks to give dedicated XVS investors more return opportunities.

Low Fees and Fast Transactions:

• Because Venus is based on the BNB Smart Chain (BSC), it has advantages over Ethereum, including much cheaper transaction fees and faster block times (around 3 seconds). Interacting with the protocol becomes more economical and efficient as a result.

Permissionless and Decentralized:

• Being a permissionless protocol, Venus can be used by anybody without a central authority’s consent.
• It runs independently through smart contracts, carrying out stablecoin minting, lending, and borrowing operations without the need for middlemen.
• The development of the protocol is managed by the community through XVS governance. Because there were no XVS token pre-mines for founders or developers, XVS holders had total authority.

Supported Assets:

• Venus accepts a large number of cryptocurrencies that can be borrowed or pledged as security. Major assets like BNB, wrapped Bitcoin, wrapped Ethereum, other stablecoins (USDT, BUSD, USDC), and other well-known BEP-20 tokens are usually included in this category. Different cryptocurrencies can be deposited by users as collateral in a single pool.

Liquidation Process:

• A healthy collateralization ratio must be maintained by users. Their “borrow limit used” percentage will grow if the value of their collateral declines sharply (because to changes in market prices) or if the value of their borrowed assets rises.
• Depending on the asset’s liquidation threshold, their position may be eligible for liquidation if this proportion hits a key threshold, such as 100% or just above.
• It is beneficial for liquidators (other users) to keep the protocol solvent since they can pay back a portion of the borrower’s debt in exchange for a larger percentage of the borrower’s collateral as well as a bonus (liquidation incentive).
• Users must keep an eye on their positions and maintain a healthy collateral ratio by either adding more collateral or repaying a portion of their loan in the event that market conditions negatively shift. Venus doesn’t make “margin calls” like conventional banks do.

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Risks Associated with Venus Protocol (and DeFi):

While Venus Protocol offers attractive opportunities, it’s important to understand the inherent risks common to DeFi:

• Smart Contract Vulnerabilities: Although audited, smart contracts can have unforeseen bugs or be exploited, potentially leading to loss of funds. Venus has faced incidents in the past that were addressed through community efforts.
• Liquidation Risk: You may be subject to losses and a penalty if your assets are automatically liquidated if the value of your collateral drops below a predetermined threshold in relation to your loan.
• Oracle Risk: For real-time asset pricing, Venus depends on price oracles. Inaccurate data or compromised systems may result in improper liquidations or other problems.
• Stablecoin De-peg Risk: Although VAI is intended to be based on the USD, severe market circumstances or protocol problems may cause a brief or long-term “de-peg,” in which the value of VAI deviates from $1.
• Market Volatility: Due to the intrinsic volatility of cryptocurrency markets, the value of collateral and borrowed assets may change significantly, which could have an effect on the health of a loan.
• Governance Risk: Although decentralized governance has advantages, the protocol may suffer if ill-thought-out or malevolent ideas are approved.

Despite these risks, Venus Protocol has made a name for itself in the BNB Smart Chain lending and borrowing market by providing competitive rates and a wide range of features. Its community-driven governance is constantly striving to increase its functionality and resilience.

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