Source: DeBank
Overview of Lending & Borrowing Protocols
5. Ether (ETH) 6. USD Coin (USDC) 7. Tether (USDT) 8. Uniswap (UNI)
9. Wrapped Bitcoin (WBTC)
Compound operates as a liquidity pool built on the Ethereum blockchain.
Suppliers supply assets to the liquidity pool to earn interest, while borrowers take a loan from the liquidity pool and pay interest on their debt. In essence, Compound bridges the gaps between lenders who wish to accrue interest from idle funds and borrowers who want to borrow funds for productive or investment use.
In Compound, interest rates are denoted in Annual Percentage Yield (APY), and the interest rates differ between assets. Compound derives the interest rates via algorithms that take into account the supply and demand of the assets.
Essentially, Compound lowers the friction for lending/borrowing by allowing suppliers/borrowers to interact directly with the protocol for interest rates without needing to negotiate loan terms (e.g., maturity, interest rate, counterparty, collaterals), thereby creating a more efficient money market.
Compound is the largest DeFi lending platform by borrowing volume, with a 56% market share (Debank, 1 April 2021). In June 2020, Compound introduced its governance token, Compound (COMP).
Maker
Maker is the oldest DeFi borrowing protocol. It enables over-collateralized loans by locking more than 30 tokens supported in a smart contract to mint DAI, a decentralized stablecoin pegged to the USD.16 Besides being a borrowing protocol, Maker also acts as a stablecoin issuer (DAI).
On 19 December 2017, Maker originally started with the Single Collateral DAI (SAI). It was minted using Ether (ETH) as the sole collateral. On 18 November 2019, Maker upgraded SAI to Multi-Collateral DAI (DAI), which can be minted with 29 different tokens as collateral.
Maker now even accepts USDC, a centralized stablecoin to help manage DAI price instability. Maker has made huge progress in bridging the gap with traditional finance by onboarding the first real-world asset as collateral through Centrifuge. On 21 April 2021, the company successfully executed its first MakerDAO loan for $181k with a house as collateral, effectively creating one of the first blockchain-based mortgages.
Unlike other lending protocols, users cannot lend assets to Maker. They can only borrow DAI by depositing collateral. DAI is the biggest decentralized stablecoin and has seen growing adoption in the DeFi ecosystem. We will look deeper into DAI in Chapter 6.
16 (2021, May 10). Introducing The Redesigned Oasis Borrow - Oasis Blog - Oasis.app.
Retrieved May 27, 2021, from https://blog.oasis.app/introducing-the-redesigned-oasis- borrow/
Aave
Aave is another prominent decentralized money market protocol similar to Compound. As of April 2021, users can lend and borrow 24 different assets on Aave, significantly more compared to Compound.
Both Compound and Aave operate similarly where lenders can provide liquidity by depositing cryptocurrencies into the available lending pools and earn interest. Borrowers can take loans by tapping into these liquidity pools and pay interest.
Aave distinguished itself from Compound by pioneering new lending primitives like rate switching, collateral swap, and flash loans.
Rate switching: Borrowers on Aave can switch between variable and stable interest rates.
Collateral Swap: Borrowers can swap their collateral for another asset. This helps to prevent loans from going below the minimum collateral ratio and face liquidation.
Flash loans: Borrowers can take up loans with zero collateral if the borrower repays the loan and any additional interest and fees within the same transaction. Flash loans are useful for arbitrage traders as they are capital- efficient in making arbitrage trades across the various DeFi Dapps.
Cream Finance
Cream Finance (C.R.E.A.M) was founded in July 2020 by Jeffrey Huang and Leo Cheng. Cream is a Compound fork that also services long-tail, exotic DeFi assets. Cream partnered (merged) into the Yearn Finance ecosystem in November 2020.17 It is deployed across Ethereum, Binance Smart Chain, and Fantom.
Cream has a more lenient asset onboarding strategy as compared to Compound and Aave. Employing the fast-mover strategy, it has listed more assets than any other lending protocol at a faster speed. It has chosen to focus on long-tail assets - assets with lower liquidity or belong in niche categories. It was one of the first lending protocols to accept yield-bearing tokens and LP tokens as collateral.
Cream has also launched the Iron Bank, an uncollateralized lending service offered to whitelisted partners. As one of its partners, Yearn Finance can utilize the borrowed funds from Cream to further increase the yield obtained from its yield farming activities.
In anticipation of the upcoming launch of ETH 2.0, Cream also offers ETH 2.0 staking service where users can stake ETH for CRETH2, which can be supplied and borrowed against as collateral. All the ETH 2.0 staking work will be done by Cream, and the yield is shared with CRETH2 holders.
Essentially, CRETH2 is a custodial staking service, with a fee of 8% on the validator reward. In addition to ETH 2.0, Cream also offers staking services for Binance Smart Chain and Fantom.
17 (2020, November 25). Yearn & Cream v2 merger. Yearn and Cream developers ... - Medium. Retrieved May 28, 2021, from https://medium.com/iearn/yearn-cream-v2- merger-e9fa6c6989b4
Cream positions itself as a more risky lender against Compound and Aave, facilitating and enabling the market demand for leveraging and shorting niche assets.