August 18, 2023
Decentralized blockchain-based lending protocols have become increasingly adopted. Decentralized lending lets you lend and borrow digital assets directly, without intermediaries or traditional financial institutions. The typical users of DeFi lending protocols are anyone who wants to earn interest on their crypto. Borrowers who need to access liquidity quickly and easily also use these protocols.
DeFi lending protocols offer a lot of benefits over traditional lending platforms. First, they offer much lower interest rates. Second, they don’t require credit checks, so borrowers can access loans quickly. Third, they're more transparent, as all transactions are recorded on-chain.
Today, we’ll take a look at three prominent DeFi lending protocols that are supported by Amberdata: Aave, Compound, and MakerDAO.
Aave
Aave is one of the most popular DeFi lending protocols. It supports a wide range of assets, including ETH, DAI, USDC, and LINK. Aave also offers a variety of loans, including fixed-rate loans, variable-rate loans, and flash loans. Flash loans are a type of uncollateralized loan that must be repaid within a single blockchain transaction block. Aave is fully decentralized.
Aave is an open-source protocol. It is secured by a network of validators who stake AAVE tokens. AAVE tokens confer governance voting rights, and they also entitle holders to a share of the fees the Aave protocol generates. Aave is attractive to users who want to lend a wide range of assets and are looking for a decentralized and transparent lending platform.
Aave recently launched its long-awaited algorithmic U. S. dollar-pegged stablecoin, GHO. It was launched on the Ethereum mainnet, and $2+ million were quickly minted. Aave describes the new stablecoin GHO as a “decentralized, over-collateralized” asset; it's backed by a variety of digital assets including ETH and Aave’s native token, AAVE.
Compound
Compound is another popular blockchain lending protocol. It's known for its simple user interface and transparent pricing. Compound supports a limited number of assets, but it offers competitive interest rates.
Compound's simple user interface and transparent pricing make it attractive to users who are new to blockchain lending. It offers fixed-rate loans, variable-rate loans, and flash loans.
The cToken
Compound supports different digital assets via its cToken system. cTokens are the primary means of interacting with the Compound Protocol. When a user mints, redeems, borrows, repays a borrow, liquidates a borrow, or transfers cTokens, he does so using the cToken contract.
Each asset supported by the Compound protocol is integrated through a cToken contract, which is an EIP-20 compliant representation of balances supplied to the protocol. By minting cTokens, users earn interest through the cToken’s exchange rate, which increases in value relative to the underlying asset, and gain the ability to use cTokens as collateral.
Compound's cToken model is a way of representing lending positions on the Compound protocol. When you lend an asset on Compound, you receive a cToken in return. (cTokens are issued for each asset that is supported by Compound. For example, if you lend ETH on Compound, you will receive cETH in return.)
This cToken represents your ownership of the underlying asset, as well as your right to earn interest on it. cTokens are ERC-20 tokens, which means that they can be transferred, traded, and used in other DeFi applications. This makes them a more liquid and versatile way to represent lending positions than traditional lending platforms. The interest rate on cTokens is variable and is determined by the market. cTokens can be redeemed for the underlying asset at any time.
Advantages
The cToken model has many advantages over traditional lending platforms. First, as mentioned previously, cTokens can be transferred, traded, and used in other DeFi applications, which makes them more accessible to users. Second, it's more transparent. All transactions on Compound are recorded on the blockchain, which makes it easy to track your lending positions and earnings. Third, it's more secure because it is decentralized.
Compound is a good option for traders looking for simplicity and transparency. It also offers competitive interest rates, which makes it a good option for borrowers.
MakerDAO
MakerDAO is a unique lending protocol known for its stablecoin system and collateralized debt positions (CDPs). MakerDAO is a decentralized autonomous organization (DAO) that issues the DAI stablecoin. DAI is collateralized by ETH, and it can be used to borrow other assets on the Maker platform. MakerDAO is known for its strong security and decentralized governance.
MakerDAO is open-source. The protocol is secured by a network of validators who stake MKR tokens. MKR tokens can be used to vote on changes to the protocol, and they also give holders a share of the protocol's fees.
The DAI Stablecoin
The DAI stablecoin is pegged to the U.S. dollar. It is collateralized by ETH. The DAI system uses a system of smart contracts to manage the collateralization of DAI. When a user mints DAI, they must deposit ETH as collateral.
If the price of ETH falls below a certain threshold, MakerDAO liquidates the ETH that is backing DAI. This helps ensure that DAI’s value remains stable. The system is self-reinforcing -- as the price of ETH falls, more DAI is minted, which increases demand for ETH and pushes ETH’s price back up.
The collateralization ratio is the amount of ETH that is required as collateral for each DAI token. The current collateralization ratio is 150 percent. The Stability Fee is the fee that's charged to users who mint DAI. The Stability Fee is used to pay for the costs of the MakerDAO system and to maintain the stability of DAI. The Emergency Shutdown Threshold is the price of ETH below which the MakerDAO system will liquidate the ETH that is backing DAI. The current Emergency Shutdown Threshold is $100.
Borrowing on MakerDAO
To borrow on MakerDAO, you need to first deposit ETH as collateral. The amount of ETH that you need to deposit depends on the amount of DAI you want to borrow. Once you've deposited ETH as collateral, you can then borrow DAI. Your interest rate will depend on the amount of collateral you deposit.
MakerDAO is a good option if you want a secure and decentralized lending platform that offers a wide range of supported assets and competitive interest rates.
Collateral Requirements for Each Platform
Aave requires users to put up assets as collateral before they can borrow. The specific amount depends on the asset being used and is expressed as a loan-to-value (LTV) ratio. For example, at an LTV ratio of 75 percent, for every 1.0 ETH worth of collateral, borrowers can borrow 0.75 ETH worth of the corresponding currency.
Compound allows users to deposit collateral and borrow against the value of those collective assets as per specific ratios. The collateralization rate for ETH is 150 percent; for DAI and USDC it's 100 percent. Many other large cap coins can be offered as collateral, each with its own specific ratio.
MakerDAO requires users to collateralize other cryptocurrencies to borrow DAI stablecoin. Specific collateral requirements vary depending on the asset being used and are expressed as an LTV ratio.
Conclusion
DeFi lending protocols are a relatively new and innovative way to lend and borrow cryptocurrency assets. These protocols offer a number of benefits over traditional lending platforms, such as lower interest rates, more accessibility, and greater transparency.
Today, we compared three of the most popular blockchain lending protocols: Aave, Compound, and MakerDAO. Ultimately, the best lending protocol for you will depend on your individual needs and preferences.
Amberdata can help you make that choice by providing access to extensive Defi data, lending protocol data, liquidity provider, and return analytics. Our DeFi lending data can be used for multiple use-cases including research (historical data), understanding the current state of borrowing/lending in a protocol or specific pool (latest data), backtesting strategies (historical data), and others.
The Amberdata API Lending endpoints provide the essential data from every lending protocol supported, including borrow/lend rates, TVL, protocol name and version, borrowStable rate (where applicable), and more. We currently support the largest lending protocols with new protocols being added as they become relevant.
To learn more about Amberdata, please contact us to book a demo, hear how our products can help your business, or receive pricing information.
