With the continuous improvement of blockchain technology, its application scenarios are also constantly enriched. Among them, the rapid development of the DeFi ecosystem has attracted more people and institutions to enter the market. According to the data of DeFi Llama, as of now, the total lock-up volume of the DeFi ecosystem has reached more than 190 billion US dollars, and it is mainly active in the Ethereum network ecosystem. After two or three years of exploration and development, a variety of financial innovations such as stablecoins, lending platforms, derivatives, insurance, and payment platforms have gradually been derived, which has continuously improved the financial ecosystem.

In the field of DeFi, currently well-developed application forms mainly include: pledged lending, decentralized exchanges (DEX), stable currency assets, payment transactions (including decentralized wallets, etc.), among which lending is the most popular form of DeFi applications. Wide range of application forms. According to DeFi Llama data, DeFi lending agreements account for a relatively large proportion of the entire DeFi ecosystem, with a total locked position of more than 43 billion US dollars. The business types of early lending projects were mainly based on basic lending and stable currency lending, and later turned to new businesses such as leveraged mining lending with targeted scenarios.

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What is a DeFi lending protocol?

Decentralized lending protocols (Lend protocols) are platforms that connect lenders and borrowers 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 depositors to deposit cryptocurrencies to the platform to earn interest. The entire lending process is executed without a middleman from start to finish.

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

When it comes to DeFi lending protocols, you should first think of Maker, the leader of DeFi lending protocols. Secondly, it also includes 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 Liquity, most of which are Ethereum-native projects.

The top-ranked mainstream DeFi lending agreement has developed and grown by virtue of its own unique advantages. Today, Zhenniu will mainly explain to you Maker, Aave and Compound, these three "heavyweight" DeFi lending agreements, to help you have a deeper understanding of different lending models.

1. Maker: Stablecoin Collateralized Loan

The Maker Protocol, one of the largest decentralized applications (dApps) on the Ethereum blockchain, allows users to generate DAI and borrow money against it. DAI is a stablecoin whose value is pegged to the U.S. dollar. The Maker Protocol is open to everyone, anywhere in the world, without any restrictions or requests for personal information.

2. Aave: Diversified loan pool

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Data source: Aave official website

3. Compound: Liquidity pool lending model

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Data source: Compound official website

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What are the common terminology in DeFi lending agreement?

1. Collateral

Collateral is what you use as collateral when you want to borrow money from different lending platforms. If you want to borrow some assets from the DeFi agreement, then you need to provide some assets as collateral to the agreement. Of course, the collateral in DeFi is generally encrypted assets; if you cannot repay the loan, the agreement will not return it to you collateral.

2. Mortgage rate

Due to the unstable price of digital cryptocurrencies, it is risky to use encrypted assets as collateral, because when the price of collateral falls, there may not be enough loans. The mortgage rate determines how much money can be borrowed based on the amount of collateral. For example, the mortgage factor (mortgage rate) of DAI and ETH on Compound is 75%. This means that the provided DAI or ETH can be lent up to 75% of its value in other tokens. Since the price stability of each encrypted asset is different, it is common practice to set collateralization ratios separately for different asset pairs.

3. Interest

The concept of interest in DeFi is the same as in traditional banking. There are generally two types of interest: simple interest and compound interest. However, the calculation of interest in DeFi is more complicated, because Ethereum transactions need to rely on external triggers, and DeFi protocols usually need to rely on user operations to calculate interest.

For example, Compound calculates interest for each block, but it does not automatically complete the calculation in the background, but relies on key user behaviors (such as deposits, loans, liquidations, etc.) to trigger the interest calculation process - if the user does not operate , then the DeFi protocol itself will not perform interest calculations.

4. Price Oracle

Price oracles are a common concept in DeFi protocols. When a DeFi protocol deals with different assets, it often needs to know the current prices of those assets, basically price oracles are used to provide asset prices to the DeFi protocol.

In the DeFi ecosystem, the price oracle is a key component, but DeFi users usually do not pay attention to the operating mechanism of the price oracle, but in fact, if the price oracle is not properly designed, it may cause serious security problems. In short, if the asset price is attacked, then the entire DeFi protocol fails.

At present, most DeFi protocols use their own price oracles. Before investing heavily in these protocols, it is necessary to check the implementation code of these price oracles and understand how they handle prices. However, Compound has released Open Oracle, which is a good start for industry-standardized solutions. It can replace the price oracles of different DeFi protocols, thereby removing the potential risks of these oracles.

5. Liquidation

Liquidation means that when the value of your collateral drops to close to the debt or even unable to support the debt, the DeFi protocol will let others buy your collateral. Generally speaking, DeFi protocols will provide incentives to liquidators to encourage timely liquidation, which is called liquidation bonus (Liquidation Bonus) or liquidation incentive (Liquidation Incentive). This is in the interest of the DeFi protocol, because it can be liquidated in time before the price of the collateral falls too much. It is worth pointing out that once the collateral price falls below the debt price, it no longer makes sense for the lender to repay the loan, and in this case the DeFi protocol will be unable to repay the debt.

6. Overcollateralization

The most common mode of operation in the DeFi market is to transfer asset value to tokens through overcollateralization (or full collateralization). In essence, this model is to mortgage assets through the system platform, so that the platform has the mechanism ability to realize credit transmission. This is similar to bank reserves, except that the bank reserve ratio in the real world is lower than 100%, and it is not over-collateralized. Overcollateralization is a smart contract protection mechanism. In order to avoid excessive fluctuations in the cryptocurrency mortgaged by the borrower, which often touches the liquidation standard, setting the value of the collateral to be greater than the loan amount will reduce the probability of the liquidation process.

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What are the future development trends of DeFi lending agreements?

With the vigorous development of the DeFi lending market, competition and opportunities coexist. In addition to the support of cutting-edge blockchain technology, more depends on the good operating mechanism of different DeFi lending protocols. Currently, liquidity, interest rates, and security are undoubtedly the focus of driving DeFi lending protocols forward. In the future, the DeFi lending protocol will make breakthroughs in these three aspects and break down the existing barriers. At the same time, innovate around various financial tools, improve the existing financial system, and move closer to the real decentralized financial world, so as to provide users with smoother, safer and more efficient financial services.