The native lending platform of the Avalanche chain has a solid product, an established user and investor base, and ambitious plans for the future. We take a deeper look and try to understand the substance behind the hype.
Just as Avalanche emerged as an answer to the question, ‘What would Ethereum look like if it were optimized for DeFi?’, BENQI answers the question, “What would Aave look like if it launched on Avalanche?”.
The new lending platform (or Algorithmic Liquidity Market Protocol to use its full name) is similar in many ways to predecessors on other chains, such as Compound (Ethereum), and Fortress (BSC). Naturally, it plans to expand its scope having gained an initial foothold.
The protocol attracted a tsunami of inflows upon launching on Avalanche’s C-Chain, amassing over $1bn in TVL in just four days (current TVL stands at around $1.7 bn). Avalanche DeFi primitives up to that point consisted largely of DEXes, making it a welcome addition to the family.
Initial funding of $6m from private investors in April was followed by a fully-subscribed initial public sale of its governance token (QI) in August. In line with the broader Avalanche culture, its stated aim is to focus on “approachability, ease of use, and low fees”, and democratize access to DeFi.
BENQI in a nutshell
Given that it is the only major lending platform on Avalanche, its primary function is to give users on the chain an easy way to deposit and borrow funds. This also makes it possible for other DeFi investors to build strategies on the back of its lending functions.
As with all DeFi lending protocols, in order to borrow you need to be a depositor and over-collateralized. The interest you earn by depositing funds can either be a source of passive income, or go towards paying the interest on your borrowing.
Clients in search of a money market with lower fees and faster transactions can bring assets from Ethereum and other chains using the Avalanche, cBridge, and Synapse Bridge protocols.
Aside from AVAX, coins that are currently accepted as collateral include bridged BTC, ETH, LINK, USDT, USDC, and DAI. Additional tokens pools are on the way.
Lending funds on BENQI is an attractive alternative to staking on Avalanche, where lock-in periods can be lengthy. Deposited funds can be withdrawn, and borrowed funds repaid, at any time.
There are borrowing limits, expressed as a % of collateral (called the “Collateral Factor” in the app). The maximum collateral factor is 80%, but is generally lower and depends on the type of currency used. It is calculated so as to minimize risk to the platform.
Interest rates adjust automatically based on supply and demand of the underlying liquidity.
The core team of seven includes JD Gagnon, Hanna Kusi, and Alexander Szul, all of whom were co-founders of Rome Blockchain Labs, an incubator and software development firm focussed on ground-breaking blockchain technology. The team as a whole is a seasoned group with a history of involvement with DeFi and solid engineering credentials.
How does it work?
Users can connect to the BenQi app using Metamask, Coin98, Walletconnect and Coinbase. The user interface is straightforward (as you would expect), with three main sections.
Overview of BENQI
The Overview section shows a birds-eye view of the user’s overall position, together with a rundown of the going rates to supply (deposit) and borrow various assets. These rates will be adjusted depending on the overall utilization rate.
Currently, BENQI uses a Linear Rate model for the majority of its assets but is transitioning to Jump Rate model, where interest rates increase at a rapid rate when utilization rates exceed a certain threshold, in order to incentivize liquidity.
Users can click down on a given asset to see analytics on recent moves in the supply, price, and interest rates.
The user can also view their overall utilization of the maximum borrow limit (based on collateral and overall liquidity, and their Health score.
The Health score is a numerical representation of how likely the user is to experience a liquidation, and is color-coded from Green to Red. It is calculated based on the liquidation limit of the user’s collateral against the value of what they have borrowed.
With a good Health score, a user can borrow funds for an indefinite period. Without repayments, however, the accrued interest will slowly depreciate the score.
A low Health score may prohibit the user from borrowing further. Users can improve their health by depositing more collateral or repaying a portion of their loan.
The Markets section is where the user can Supply or Borrow an asset. There is no minimum or maximum limit to the amount a user can deposit.
In the Supply tab, the user enters an amount, confirms the transaction, and a corresponding amount of yield-bearing Qitokens (e.g. QiAVAX, QiLINK) are deposited in the user’s account. These can then be redeemed or traded as a crypto-asset anywhere on the Avalanche chain.
The Deposit APY shows the interest rate the user will earn on their deposited capital, while the Distribution APY displays the effective return calculated based on the QI token earned as part of the transaction. This is related to the Liquidity Mining Incentive Program, and distribution rules vary depending on the period in question.
Users who wish to borrow against their deposit select the ‘Use as Collateral’ toggle, and switch to the Borrow tab. Here they can select what proportion of their borrowing limit they wish to utilize. The page also displays the effect on their Health of going ahead with the transaction.
Depending on the period, borrowers can also be rewarded for activity with QI tokens, as shown in the Distribution APY.
The Rewards section displays the amount of accrued QI and AVAX available to claim, which users can add to their wallet. It is also possible to deposit Pangolin LP tokens, which can then be staked in return for QI.
While the name of the platform is pronounced ‘Ben-key’, the governance token QI is pronounced ‘Chi’ (as in Tai chi). Ban-Chi is apparently Mandarin for ‘earn interest over time’.
The QI tokens were launched in April 2021. In the initial ‘Benqinomics’, 45% of the total QI (3,240,000,000) were allocated for distribution via various Liquidity Mining Incentive and Community programs.
The founding team retain 10% of the total QI supply. While currently centralized with the founders making the key (no pun intended) decisions, the eventual aim of BenQi is to be a full DAO.
In other words, QI holders will eventually be able to initiate, vote and decide on developments (called BIPs or BenQi Improvement Proposals) both on and off-chain, such as adding new coins to the platform as collateral.
Despite their initial success, the team are not resting on their laurels. At the beginning of December, BenQi announced it was partnering with Imperium Empires, Avalanche’s first AAA GameFi Metaverse Project.
The space-themed Imperium Metaverse aims to solve a number of issues with the GameFi status quo (including low-quality graphics and hyper-inflationary NFTs). BenQi is helping address the lack of an underlying DeFi protocol that is integrated with the gameplay universe.
BenQi’s strategic purpose is to demonstrate a use case whereby gamers worldwide are effortlessly inducted into becoming DeFi users, earning yield on their assets without the need to leave the game and grapple with complex yield-farming concepts such as crop rotation.
The team are aware of the need to prove themselves, as well as hedge against the many dangers that still beset the almost equally young industry of decentralized finance.
In addition to working with Chainlink, Halborn, and Gauntlet to ensure their protocol remains secure and risk-minimized, they have aggressive plans to level BenQi up from an Aave-twin to a behemoth in its own right, which other startups want to clone.
This will involve establishing additional DeFi primitives related to lending in the coming quarters, and expanding the number of DeFi strategies that Avalanche users can pursue.
Key to the future expansion will be the launch of subnets.
The subnet concept is Avalanche’s solution to the ‘blockchain trilemma’ that Polkadot Parachains and Compound Cash are trying to solve. Unlike these solutions, however, subnets are not constrained by the limitations of EVM and not limited to a maximum number of slots.
Subnets would allow traditional finance institutions to establish regulated and compliant subnets, or footholds in the DeFi universe. JD Gagnon describes this capacity as ‘regulation-as-a-service’, and sees the winning over of traditional institutions to DeFi as an inevitable next move, which BenQi will be at the forefront of.
BenQi are already actively speaking with custody providers about partnering on initial projects in this area, and see it as an opportunity to get a seat at the table in the inevitable regulatory discussions that will determine the future of decentralized finance.
The limited historical data suggests a positive coming 12 months for the BenQi platform. The management team has won the confidence of investors (both public and private), as well as users.
Its success is inevitably tied to a greater extent to the fortunes of the Avalanche platform and the outcome of the current cold war stand-off between the rival chains. Within the Avalanche universe, it remains one of the most solid bets, and in its core market remains the only game in town.