Lending has become a core pillar of DeFi and even helped put decentralized finance on the map. The initial protocols supporting this concept have solidified their position in the industry, although new protocols are improving upon the existing ideas. The future of DeFi lending looks exciting, and there is still more room for progress.
How DeFi Lending Began
In theory, Bitcoin was the first network to introduce the concept of decentralized finance. Without Bitcoin, the cryptocurrency industry would not be where it is today, nor would people have entertained the idea of creating alternative financial services and products. Although the Bitcoin infrastructure doesn’t lend itself that well to decentralized finance today, it is home to a DeFi ecosystem that spans millions of dollars.
Ultimately, it was replaced by Ethereum, a network with smart contracts and other opportunities for developers. Ethereum is better-suited to facilitate DeFi concepts like lending, borrowing, staking, yield farming, etc. Thanks to platforms like Aave, Compound, MakerDAO, Liquity, and others, the lending segment took off firmly. However, new platforms are coming to market to improve upon the foundation laid out by these pioneering platforms, providing a more compelling user experience with new revenue opportunities.
What MakerDAO, Compound, And Aave Do
MakerDAO, Compound, Aave, and Liquity all look very similar on the surface. Their core service facilitates decentralized borrowing and lending, providing liquidity providers with revenue from interest payments. Moreover, the borrowers can use the borrowed assets across other decentralized finance protocols to explore yield farming, liquidity mining, and so forth. Ultimately, as long as they repay the loan, all profit generated through the borrowed asset is theirs to keep.
Compound remains one of the most significant DeFi lending protocols on Ethereum. It introduced liquidity mining incentives and the COMP governance token to attract users. Moreover, the platform still manages several billion dollars in Total Value Locked, ensuring sufficient liquidity to facilitate loans to those who need funds quickly. However, the protocol has lost its dominant spot to newer protocols like Aave in the past few months.
The Aave platform – formerly ETHland – has the highest total value locked on Ethereum in the DeFi lending category. It offers a much larger asset diversity than Compound and has a much lower collateral requirement than MakerDAO. In addition, Aave was one of the first protocols to introduce “flash loans,” a feature where borrowing and repayment occur within the same Ethereum network transaction.
MakerDAO is a decentralized solution to facilitate lending and borrowing that supports Ether to extend loans in the form of DAI, the platform’s native stablecoin. DAI is an ERC20 token pegged to the value of the US Dollar. MakerDAO has a second token – MKR – to support the stability of the DAI token and introduce governance for the Dai Credit System. MakerDAO was one of the first platforms to issue a new stablecoin not backed by funds in a bank account but maintains its value through a set of algorithms.
While Liquity is also a decentralized borrowing protocol, it introduces 0% interest loans against Ethereum used as collateral. All borrowed funds are issued in LUSD – a USD-pegged stablecoin – but require a collateral ratio of 110%. That ratio is much lower than Compound, MakerDAO, or Aave, where collateral rates of up to 300% are not uncommon.
Moreover, Liquity introduced the concept of a Stability Pool to secure all outstanding loans. The Stability Pool consists of LUSD and can be contributed to by holders of the stablecoin. The Pool is a liquidity source to repay debt from liquidated loans. Users who deposit LUSD to the Stability Pool make liquidation gains and receive LQTY tokens as an extra “reward.”
The approach by Liquity has given users an extra option to earn revenue when borrowing the LUSD stablecoin. However, protocols like Hubble have developed another revenue opportunity to attract liquidity for loans. Any collateral provided by users will earn yield when it is locked into the Hubble protocol. The project runs on Solana and supports ETH, BTC, and other assets as collateral, all of which will earn yield through various means.
Moreover, the Hubble protocol embraces the Stability Pool mechanism as well. Users can use the USDH stablecoin to provide liquidity to the pool to keep the platform healthy and ensure users can repay all loans. Users exploring this option earn roughly 10% difference from liquidated accounts. Additionally, they will receive HBB rewards at a constant rate. That HBB token can be staked on Hubble to earn protocol rewards and vote on protocol proposals.
The option to earn a yield on collateral, pocket passive income from USDH through the Stability Pool or other DeFi protocols, and earn stakeable HBB tokens from the Stability Pool creates a multi-pronged revenue stream. Moreover, users can access everything within the same interface for users who want to set up everything and let the revenue trickle in over time.