The difference between Equilibrium and Aave and Compound lies in the cross-chain and guarantee mechanism.
Original title: “Equilibrium’s cross-chain lending market”
Author: Blue Fox Notes
DeFi has achieved success on Ethereum, especially since Compound implemented liquidity mining in June this year, detonating the entire DeFi field. According to the current statistics of defipulse, the total amount of assets locked in the entire DeFi is currently more than 13 billion US dollars.
The success of DeFi on Ethereum has also prompted other chain assets to try to participate in the development of DeFi. For example, Bitcoin has realized circulation on Ethereum through a centralized packaging method (such as WBTC). Currently, there are about 140,000 tokenized BTCs circulating on Ethereum, worth more than 3.6 billion U.S. dollars.
Bitcoin circulating on Ethereum, sournce: btconethereum
In addition to Bitcoin, there are other chain assets that also want to participate in DeFi, and if the way of participation is to conform to the spirit of DeFi, it needs to be implemented in a decentralized way, which means decentralized cross-chain DeFi demand will increase.
Cross-chain DeFi realizes the free circulation of assets
At present, DeFi mainly includes activities such as lending, trading, derivatives, and liquidity mining. Participating in these activities requires interaction with different dApps. For example, users borrow ETH in Aave, mortgage and borrow DAI in Maker, and buy more ETH on Uniswap, thus making more ETH. The user has to interact with the interface of multiple protocols and control the mortgage rate through multiple protocols. The experience of the whole process is not ideal. In addition, to generate and trade synthetic assets, conduct on synthetix, conduct decentralized option trading, conduct on hegic… There is a lot of fragmentation among dApps.
If these dApps are all based on the Ethereum chain, they are not the most complicated, at least they are all traded and settled on the Ethereum chain. With the increase in demand for asset interoperability between different chains, cross-chain asset circulation and cross-chain DeFi become more complicated. Because different blockchains have different ledgers and different wallet addresses, participating in DeFi activities, such as liquidity mining, lending, and transactions, is not easy.
In order to participate in DeFi of different chains, current users often need to exchange tokens through a centralized exchange before participating, but the original token exposure may not be maintained. For example, if a user puts BTC on a centralized exchange Converting to dai and participating in DeFi activities seems to have gained a lot of gains in the short term, but the recent increase in BTC may cause users to lose more. At this time, users need to use BTC to directly participate in DeFi on Ethereum, so WBTC was born. But it also has the characteristics of centralization. This makes the demand for direct decentralized cross-chain lending, transactions, and liquidity mining more urgent. If there is a truly decentralized cross-chain DeFi, it means that there is no need to complete the flow of assets between different chains and directly participate in DeFi activities through a centralized organization.
For example, mortgage DOT, lend ETH, lend DAI, and use DAI to participate in the liquidity mining of various DeFi projects. In this way, idle DOT assets can be used to obtain higher returns. The reverse is also true. Users can directly use idle ETH, DAI, etc. to mortgage, lend out DOT, and use DOT to participate in various DeFi activities.
In short, cross-chain DeFi needs to achieve free circulation between different chain assets and direct participation in DeFi activities through interoperability agreements in order to achieve truly seamless open finance. This is why Equilibrium exists.
Equilibrium’s cross-chain lending market
Equilibrium is an interoperable platform for cross-chain DeFi liquidity pools. It uses Polkadot technology, using a Substrate-based engine and cross-chain bridging to achieve the interoperability of DeFi liquidity pools. Subsequent Polkadot launches version 2.0, and Equilibrium plans to become a parachain on Polkadot, thereby providing interoperable cross-chain DeFi services for various assets.
Substrate of Equilibrium from a high-level perspective, sournce: Equilibrium
Equlibirum unifies the asset pools of different chains to form a decentralized lending platform and a cross-chain DEX platform. From the perspective of user experience, through Equilibrium, ETH can be used to borrow assets on chains such as DOT, and vice versa; users can also use Equilibrium to implement direct asset exchange between different chains, such as direct exchange of DOT assets to ETH assets. In this way, by providing interoperability for different chain assets, seamless participation in DeFi activities can be achieved, thereby solving the problems of fragmentation of operations and non-interoperability of assets.
If it is simply understood, Equilibrium can be regarded as a cross-chain currency market, similar to cross-chain Aave or Compound. In addition, in addition to cross-chain lending, Equilibrium can also implement cross-chain DEX.
Let’s take the lending market as an example below. What is special about Equilibrium?
Differences in the Equilibrium lending market
Interoperability across chains
Cross-chain interoperability is the biggest difference between Equilibrium and Aave and Compound. Because both Aave and Compound are based on the Ethereum lending market. Equilibrium is a cross-chain lending market, which builds currency markets for different chains. On Compound, there are currently encrypted token lending markets such as BAT, DAI, USDT, and WBTC, but most of them are ERC20 tokens. The token market to be built on Equilibrium not only has ERC20 tokens, but also DOT, BTC, EOS and other public chain tokens. The assets of these different chains can be directly loaned, and lenders can provide DOT to Equilibrium’s currency market, and borrowers can use DAI to borrow assets from heterogeneous chains such as DOT.
That is to say, in Equilibrium’s lending market, assets between different chains can be directly interconnected, and loans can be completed on the same interface, without interacting through multiple dApps.
Introduce a guarantee mechanism
It is not completely accurate to say that Equilibrium is a cross-chain compound. Because in addition to the cross-chain feature, Equilibrium’s lending market model has a different design from that of Compound.
The general DeFi currency market has borrowers, lenders, etc., while Equilibrium introduces bailsman, which is similar to the role of guarantor. This is a special design of Equilibrium. Equilibrium has a liquidity pool rescue plan, and all guarantors are unified into a liquidity pool to share risks and losses together.
Bailsman provides assets to ensure the security of the loan, and at the same time, they can also obtain guaranteed income. Equilibrium will unify the various deposited assets of bailsman into a liquidity pool. This is equivalent to turning the different asset combinations of the guarantor into an asset combination that can obtain income. The users who pledge in the Equilibrium agreement, such as lenders and mortgagers, provide liquidity for the agreement and can obtain income from it. These mortgaged assets become a “bridge” for cross-chain transactions and can also obtain their respective blockchains. The income from pledge in the PoS agreement.
Due to the role of bailsman, the lender is also different from the lender of Compound. In Equilibrium, the lender does not bear the risk of liquidation. The liquidation risk is borne by bailsman, and of course the guarantor also gains additional benefits.
On Equilibrium, for borrowers, they can borrow mainstream crypto assets to generate synthetic assets or decentralized stablecoins. The interest will be automatically calculated APR. If the borrower defaults, its mortgage assets will be distributed to bailsman proportionally.
To borrow, the borrower first needs to provide collateral assets. Compared with the single-chain lending market, Equilibrium’s borrowers can provide a variety of encrypted assets as collateral, and there will be a process of cross-chain packaging tokenization. Users pay different floating interest rate fees based on their mortgage rate, specific asset portfolio, and volatility risks.
Traders can conduct cross-chain asset transactions, even margin trading, and cross-chain asset transactions. Under the Equilibrium agreement, users are not peer-to-peer interactions, whether it is borrowing or trading, they are all interacting with the fund pool.
Four user roles on Equilibrium, sournce: Equilibrium
Equilibrium’s establishment of a guarantee mechanism also allows the lender and the guarantor to get what they need. The guarantor obtains additional income by providing a liquidity pool, while the lender does not bear the risk of liquidation and can also obtain rapid liquidity. Through the guarantee mechanism, the interests of different roles are thus taken care of.
Equilibrium’s guarantee mechanism can achieve a lower mortgage rate:
Design of lower loan mortgage rate on Equilibrium, sournce: Equilibrium
Equilibrium introduces a guarantee mechanism, and another advantage is that it can alleviate liquidation problems under market risks. Liquidation in auction mode may cause chain reactions. This was fully reflected in the Black Swan incident on March 12, 2020. In the event of a price collapse, market participants are unwilling to buy collateral, even if the collateral is discounted, which leads to problems in the liquidation market. In addition, when the market is volatile, high network congestion costs will also exacerbate this problem. Equilibrium’s rescue mechanism can alleviate liquidation problems through liquidity pools.
Once the borrower defaults, the collateral will be allocated according to the corresponding proportion of the guarantor in the liquidity pool.
Finally, Equilibrium also has a mechanism to stabilize funds. It is a line of defense for the system to protect solvency. This part of the funds comes from Equilibrium’s own funds as a reserve fund, and part of the funds of the system, such as part of the loan processing fees, will be supplemented in the future.
Equilibrium is not just a cross-chain currency market
From a lower level perspective, Equilibrium is an interoperable platform for cross-chain DeFi liquidity pools, which currently mainly serves the currency market. But from its own model, it can also realize the generation of cross-chain stablecoins, cross-chain synthetic assets, and cross-chain transactions of different chain assets. There can be spot transactions of cross-chain assets, or cross-chain. Options, cross-chain margin trading, etc. Similar to Synthetix, Uniswap, Hegic, dydx that can have cross-chain…
One advantage of Equilibrium’s cross-chain DeFi is that it is based on Polkadot Substrate, and its trading pairs are not limited to ERC20 tokens, and can also interact with any different chain tokens connected to the Polkadot network, allowing faster settlement. Speed, there are lower transaction fees.
This is the scalability aspect of Equilibrium’s underlying model. As for the specific evolution, it depends on two points: one is the success of Equilibrium’s decentralized cross-chain lending market; the other is the early team and later community governance promoting the evolution of Equilibrium How to make decisions. Only time can tell.
Equilibrium’s token mechanism
Equilibrium’s token is EQ, its initial supply is 120 million, and its annual inflation rate is 2.5%. It has four main purposes:
Provide liquidity for the rescue pool
Liquidity providers can pledge EQ in Equilibrium’s liquidity pool to provide liquidity to the rescue pool, so as to ensure the repayability of the system. This is also the most important use of EQ tokens and an important aspect of its capture value. In other words, to provide liquidity for the rescue pool, which can obtain corresponding benefits, such as system fees.
In the Equilibrium protocol, there are three sources of revenue. One is the transaction fee of the system. All transactions on the Equilibrium parachain need to pay transaction fees. Transaction fees are settled in EQ tokens, which will also be mentioned below. The second is additional issuance from the system. The annual EQ inflation rate is 2.5%, and this part of the new tokens provides incentives for its participants. The third is the handling fee from the currency market. For example, the borrower needs to pay interest on the loan.
As collateral for borrowing
In addition to mainstream crypto assets, EQ can also be used as collateral for mortgage lending. This is the same as other lending agreements. On Compound, users can use COMP tokens to mortgage loans, and on Equilibrium, EQ can also be used as collateral for loans. This will lock in part of the liquidity of EQ tokens.
Fee payment medium
DeFi activities on Equilibrium require payment of chain transaction fees, because it involves resources such as storage and computing. Equilibrium uses Polkadot’s weight-based fee model, which charges fees before executing transactions. The fee is paid in EQ tokens. In other words, EQ is also the payment medium of its system.
Staking to maintain network security
The normal operation of the Equilibrium chain requires the participation of EQ pledgers. EQ token holders participate in the consensus of the network by staking EQ tokens, which can prevent participants from doing evil and ensure network security. The EQ required to participate in the network depends on the activities performed, the length of the EQ pledge, and the amount of EQ pledge.
For governance
EQ tokens are used for governance voting. By holding EQ tokens, you can determine the cost distribution, the Equilibrium parachain upgrade plan, etc. Equilibrium plans to use Polkadot’s native method for system governance, including voting time, statistics, adaptive majority deviation, and voluntary lockout mechanisms.
In addition, EQ has some new uses: EQ can be used in multiple protocols, for example, it can also be pledged on cross-chain DeFi applications to generate synthetic assets such as stable coins.
In addition, Equilibrium has launched a liquid mining plan, 10% of which, or 12 million EQ tokens, will be distributed to participants through the liquid mining plan. Liquid mining is mainly the participation of borrowers and lenders in Equilibrium In the lending market, there is thus an opportunity to obtain EQ token incentives.
Equilibrium’s parachain auction incentives
We also mentioned above that Equilibrium is an interoperability platform based on Polkadot technology’s cross-chain liquidity pool, and in the near future, Polkadot will have 100 parachain slots auctioned. DOT token holders can participate in these parachain slot auctions, and can lend their DOT to bidders of each parachain slot.
Equilibrium also plans to participate in Polkadot’s parachain slot auction. In order to incentivize users to support Equilibrium, Equilibrium plans to use 7.5% of its total initial tokens, which means 9 million EQ tokens will be used to incentivize DOT token holders. DOT token holders can support Equilibrium’s parachain slot auction by staking DOT tokens, thereby obtaining EQ token rewards. The DOT tokens participating in the pledge will be returned to users after the parachain lease expires. In other words, users are equivalent to lending their DOT to Equilibrium, and thus get rewards in EQ tokens.
Conclusion
Equilibrium is a decentralized currency market, but it is different from Aave and Compound. It is cross-chain. It is based on the Polkadot substrate engine to realize the interaction of liquidity pools on different chains, thereby realizing the interoperability of the currency market. Not only that, it can also generate synthetic assets such as stablecoins. In the specific design, bailsman’s guarantee mechanism is added, showing characteristics different from other decentralized lending protocols.
Equilibrium runs on the Polkadot parachain. It has an NPoS consensus mechanism. From the perspective of scalability, Equilibrium will not only be a currency market in the future, but also a synthetic asset generation and trading market, which can introduce more cross-chain futures, options and other transactions. . If its currency market model can be successful, it has the opportunity to become the basis of various cross-chain DeFi applications in the future. This also shows from one side that Polkadot will exhibit different ecological characteristics from the previous public chains such as EOS. Before Ethereum can completely solve the scalability and introduce sharding, Polkadot will have a larger window period. There is an opportunity to form a cross-chain DeFi ecosystem.
