Lending is the core business of DeFi, and three of the top five DeFi lock-up rankings are all lending products.
The current main lending model in the DeFi field is the floating interest rate model, which means that the borrowing interest rate and the deposit interest rate will fluctuate according to user demand. When the market demand for a certain asset increases, it will significantly increase the borrowing interest rate of a certain asset. The borrowing rate is not only related to demand, but also related to the total amount of assets in the pool. The more assets that can be borrowed in the pool, the lower the general borrowing rate will be.
The current DeFi loan agreements are based on a floating interest rate model. When the demand for borrowing is strong, the borrowing interest rate may rise sharply, but for many users, predictable financial expenditure may be a better choice. Fixed-rate borrowing already has a considerable scale in Aave.
Predictability is a more important point for many people. Unpredictability often represents risk. The result may be good, but it may also be bad. This is actually equivalent to gambling. Especially for traditional financial institutions, if they want to make large loans or deposits, but the result is unpredictable, this may become an important factor hindering the entry of institutions. Today, let’s talk about which platforms currently provide fixed loan products on the market, and what are the differences in models?
One, Aave
Aave is a well-known lending platform and one of the leading DeFi products. It is highly innovative, has a high reputation and a relatively large user group.
In addition to floating rate lending, Aave also provides fixed rate lending services, as shown in the following figure:
The fixed interest rate in Aave is not absolutely fixed, and interest rates may be rebalanced in extreme cases. The conditions for rebalancing are: when the average lending interest rate is lower than 25% and the utilization rate exceeds 95%, interest rate rebalancing will occur, and interest rates will change, but from the current situation, there is little chance of rebalancing.
In Aave, we can see the relevant data of each asset, including the proportion of fixed-rate borrowings. From the current point of view, fixed-rate borrowings in Aave V1 account for a relatively high proportion of USDT, USDC and DAI, accounting for 42.4%, 27.6% and 15.9% respectively. But if you look at the V2 version alone, the proportions of USDT, USDC and DAI are as high as 56.7%, 57.9% and 67.2% respectively.
Aave’s fixed-rate borrowing and floating-rate borrowing use the same pool of funds, which is essentially no different from floating-rate borrowing, except that the interest rate paid no longer changes with demand.
Two, YIELD
YIELD is another model of fixed-rate loan agreement. Its business logic relies on Maker and has a deep binding relationship with Maker.
The overall process of using YIELD to lend out DAI is as follows:
Users first deposit ETH before they can lend DAI. Currently, only ETH mortgage is supported, and only DAI can be borrowed. The mortgage rate is the same as Maker, currently 150%. This corresponds to the first step in the flowchart.
Then borrow in Borrow, which corresponds to the second and third steps in the flowchart.
In fact, the behind-the-scenes operations of the second and third steps are hidden and the user cannot perceive them. In these two steps, the user first mints coins, minting yfDAI, which is the blue token in the flowchart, and then the system automatically converts yfDAI into DAI to the user, thus achieving the result of the third step.
The exchange of yfDAI and DAI is automatically carried out through the pool. Users can also inject liquidity into the pool to support the exchange. Providing liquidity will receive commission dividends.
There is a discount between yfDAI and DAI, such as 0.97:1, where the discount is the interest paid by the user for borrowing.
In the Lend interface, users can deposit DAI to obtain yfDAI at a discount. The discount is the yield to maturity. You can choose different periods when purchasing, and the yields for different periods are different. After expiration, you can use yfDAI 1:1 to redeem DAI.
At present, YIELD’s overall data is average, and the lock-up amount is relatively small.
The essence of the YIELD model is to issue a tradable zero-coupon bond with a maturity date through coin premium, and give this credit the right to exchange assets at a certain ratio when it expires.
Judging from the fixed interest rate products currently seen in the market, most products use this model. UMA and Mainframe are both similar models. UMA has not tried too many in this regard. Mainframe is a product dedicated to providing users with fixed interest rate loans, and the attention is relatively high. Take a look below.
Three, Mainframe
Mainframe has not yet been launched, and one round of audit has been completed. It is expected to be launched in January next year. The token is MFT.
The structure of Mainframe is similar to YIELD, but there is a big difference. First look at a general picture:
The Mainframe system consists of four parts: lender, borrower, guarantee pool, and redemption pool. It can be seen from the above figure that the borrower casts yDAI through mortgage assets, the yDAI is sold to the lender, and the DAI paid by the lender is put into the redemption pool.
There is a guarantee pool in Mainframe. Users can inject funds into the guarantee pool to earn liquidation income. The assets pledged by the borrower will be used for lightning loans to earn income, and the income will also be injected into the guarantee pool.
The biggest difference between Mainframe and YIELD is that YIELD’s yfDAI is automatically sold by the system through the pool and replaced with DAI to the user, while the Mainframe is sold to the lender.
The possible problem with direct selling to the borrower is that when the lender’s purchase demand is insufficient, the transaction cannot be completed, and a larger discount may be required to achieve the transaction, and the borrower may pay higher borrowing costs. However, we can also find that the borrower and lender in YIELD are separated. The source of funds of the borrower is the fund pool rather than the lender. The size of the fund pool determines its scale.
It can be seen from the figure that the guarantee pool also supports cToken and aToken injection, which provides additional income channels for users of Compound and Aave platforms.
Judging from the latest news, because Compound had liquidated US$85 million in assets due to DAI fluctuations during the last market volatility, Mainframe decided to change the initial asset from ETH to WBTC, and the target asset from DAI to USDC.
Four, summary
At present, there are not many DeFi products that provide fixed lending rates on the market. The most mature is Aave. In the current Aave market, fixed-rate lending products have taken up a large share. The data shows that fixed-rate lending products are indeed accurate. There are needs.
There is no essential difference between Aave’s fixed-rate products and mainstream floating-rate products, except that the borrower pays a fixed interest rate.
In addition, the zero-coupon bond model used by YIELD is another main model. Borrowers issue bonds at a premium, lenders buy bonds at a discount, and exchange assets at maturity to earn income. Bonds can be traded and transferred, and the form is more flexible. . At present, fixed-rate lending has not yet become popular, but in the future we will see the emergence and adoption of more fixed-rate lending products, which will also clear some obstacles for institutions to enter the market.
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