What is BENQI: Overview of Avalanche’s Biggest Lending & LSD Platform
29.07.2024
DeFi Explained
BENQI Finance is a decentralized finance (DeFi) protocol built on the Avalanche blockchain that allows users to engage in liquid staking, lending, and borrowing cryptocurrencies, as well as affordably start blockchains. Its innovative solutions have made it the biggest protocol on Avalanche in terms of total value locked and a significant player in the DeFi ecosystem. This article will guide you through understanding BENQI, its key features, and how it works.
Key Takeaways
- BENQI Finance is a DeFi platform built on the Avalanche blockchain.
- BENQI Markets is an on-chain lending and borrowing market.
- BENQI Liquid Staking tokenizes staked AVAX, Avalanche’s native token.
- BENQI Ignite allows users to launch Avalanche validators with minimal capital and affordably start blockchains through Subnets.
- The protocol operates autonomously using smart contracts.
- The native QI token plays a vital role in governance and rewards.
What is BENQI Finance?
BENQI Finance is a suite of autonomous protocols built on the Avalanche blockchain. It is permissionless, meaning anyone can access the tools provided without the need for verification or user identification. BENQI comprises three core elements: BENQI Markets, enabling users to lend and borrow cryptocurrencies on-chain; BENQI Liquid Staking, tokenizing staked AVAX and empowering users to leverage their locked-in capital; and Ignite, making it cheaper for users to launch Subnets on Avalanche.
Founded in 2021 by Rome Blockchain Labs Inc., a team of Avalanche OGs and pioneers, BENQI Finance has rapidly grown into the leading DeFi platform on the network. The protocol aimed to ease the overloading of the Ethereum network by providing Ethereum users with a less expensive and faster alternative. Thus, the first leading protocol on Avalanche was born. Shortly after its conception, the protocol moved to a distributed autonomous organization (DAO) governance model by introducing the QI governance token. This furthered the decentralization of the platform’s decision-making process and enhanced its community involvement.
How Does BENQI Finance Work?
Crypto Lending and Borrowing
BENQI Market automates the process of lending and borrowing money in the form of cryptocurrencies. Through the use of smart contracts deployed on the blockchain, the BENQI protocol offers a transparent, secure and efficient system that does not rely on a traditional financial intermediary such as a bank. To lend with BENQI, users only need to supply one of the supported cryptocurrencies such as USDC, AVAX, wETH, and wBTC into a shared on-chain liquidity market. By providing liquidity, lenders can earn yield set algorithmically by the supply and demand of the supplied crypto. The higher the demand for a certain asset, the higher the yield paid on it to stimulate lending. Conversely, the lower the demand, the smaller the interest paid on supplying it to the pool. When lenders put their crypto assets in the market, they receive so-called “yield-bearing assets,” which represent their share in the pool and accrue interest over time. Once a lender decides to get back their crypto and earnings, they can do so by returning the yield-bearing assets and the smart contract will programmatically execute payout.
Borrowing on BENQI requires first depositing collateral on the principle of over-collateralization. Borrowers can take loans with a lower value than the collateral they have locked in. This principle, employed throughout decentralized finance’s lending protocols such as Aave and Compound, minimizes the risk of lenders losing their assets and brings stability to the system. If market conditions or a failure by the borrower to pay accrued interest cause the value of the loan to go above a threshold set in the smart contract, a liquidation is automatically triggered.
Liquid Staking and sAVAX
BENQI Finance also offers liquid staking—an innovative method of tokenizing staked AVAX (Avalanche’s native token). Staking is an essential activity for any blockchain – it requires locking up an amount of the native network token which ensures the blockchain runs smoothly. Naturally, users locking in their capital receive rewards as incentives. With BENQI’s innovative liquid staking, when users stake their AVAX they receive sAVAX in return. sAVAX is an interest-bearing asset that represents the value of the staked AVAX and the accrued staking rewards over time. sAVAX can then be traded, used as collateral, or integrated into other DeFi applications. In this way, users earn staking rewards while maintaining liquidity they can build upon for additional income strategies. Generating interest with BENQI Liquid Staking provides a flexible way to earn passive income on your crypto assets and increases the efficiency of user capital.
Ignite on BENQI
Ignite is a unique initiative by BENQI designed to stimulate and enhance the growth of the Avalanche DeFi ecosystem. With Ignite, developers can lower the costs associated with running a Subnet on the network by ten times, thus addressing a serious CAPEX problem when building decentralized applications (dApps). A subnet is essential for any application that needs low network fees and high throughput. Therefore, lowering the capital entry barrier improves the attractiveness of Avalanche in the DeFi space and boosts innovation within the ecosystem.
How to Earn Yield on BENQI Finance
BENQI Finance offers attractive yields, but supplying liquidity to the protocol might prove too complex for some users. Return Finance offers the most streamlined way to start earning yield on BENQI via a mobile and web app. With just a few clicks, you can supply USDC to BENQI Markets and start reaping impressive returns on your savings. Learn more.
Governance and the Role of QI Tokens
Governance and the Role of QI Tokens
The QI token is central to BENQI’s governance model. QI holders can propose and vote on changes to the protocol on the BENQI DAO (distributed autonomous organization), influencing the platform’s future. Governance proposals are executable code, subject to community voting. If a proposal is passed, it takes effect after a waiting period, allowing users to adjust their positions. This decentralized approach ensures that the protocol evolves in a way that reflects the interests of its users. As an additional benefit of the QI token, holders can earn rewards by participating in the governance process, further incentivizing active involvement. Detailed information about QI token distribution and its use in governance can be found on BENQI’s official documentation.
Risks and Rewards of BENQI Finance
While BENQI offers numerous benefits, it also comes with certain risks. Market volatility can affect the value of collateral. As with any blockchain protocol, smart contract vulnerabilities could pose security risks. BENQI has adhered to industry best practices and has relied on several audits to ensure the security of its smart contracts. Additionally, liquidity providers face the risk of impermanent loss, and the interconnected nature of DeFi protocols can amplify risks related to composability and interdependency. However, the potential rewards, including earning interest and yield farming opportunities, make BENQI an attractive option for many users. Understanding the risks and rewards of using BENQI for crypto lending is crucial for making informed decisions.
Conclusion
BENQI Finance is a significant contributor to the adoption of decentralized finance by offering an innovative suite of solutions on the Avalanche network. Its unique features, attractive interest rates, and community-driven governance make it a standout platform in the DeFi space. Whether you’re a seasoned crypto investor or a beginner, BENQI provides a robust and flexible solution for managing your crypto assets. BENQI’s impact on the DeFi ecosystem continues to grow, reflecting its importance and innovation in the space.
About Return Finance
Return Finance streamlines the process of earning market-beating yields on your income through DeFi platforms like BENQI, MakerDAO, and Curve Finance. By offering a familiar and intuitive user experience, Return Finance lowers the steep learning curve associated with DeFi operations, making them accessible to everyone. Return Finance is an authorized Virtual Asset Service Provider in the EU and a member of the Financial Services Standards Association (VQF) of Switzerland.