BENQI Review – Earn Interest or Access Liquidity on the Avalanche Blockchain

In the cryptocurrency market, 2021 has been an extremely strong year for layer 1 blockchains. The native assets of blockchains like Solana, Avalanche, Fantom and Harmony have seen explosive growth, which was driven to a large extent by Ethereum’s struggles with congestion. Users realized they can accomplish a lot more if they don’t have to pay exorbitant fees for every transaction, and DeFi developers tapped into this demand by launching protocols on blockchains beyond Ethereum. 

BENQI review

BENQI is a liquidity market protocol on the Avalanche blockchain that allows users to borrow and lend their crypto assets in a decentralized manner. Lenders earn interest in exchange for providing liquidity, making BENQI an attractive option for earning yield on cryptocurrency holdings. In accordance with the ethos of DeFi, BENQI is non-custodial, which means that users retain control over their private keys while using the protocol. 

BENQI was launched in August 2021 and started seeing rapid growth right off the bat. To provide better context of how big BENQI has become, we can point out that at the time of writing, there’s $3.9 billion worth of assets supplied to the protocol, and $2.2 billion worth of assets being borrowed from it. 

One of the reasons why BENQI was able to grow so quickly is that it was the first liquidity market protocol to launch on the Avalanche platform. Since lending and borrowing is such an important part of DeFi, the launch of BENQI helped kickstart the DeFi ecosystem on Avalanche. 

By using the Avalanche blockchain, BENQI benefits from its speed and relatively low transaction fees. Avalanche has been growing in popularity among DeFi users, as it addresses the congestion and expensive transactions of Ethereum, and the centralization concerns of Binance Smart Chain. Avalanche can handle more than 4,500 transactions per second and achieves transaction finality in under 2 seconds. It’s also compatible with the Solidity smart contracts programming language, which means that developers can use popular Ethereum development tools while building their smart contracts and decentralized applications for Avalanche. 

At the time of writing, BENQI supports 8 different crypto assets: AVAX, USD, USDT, DAI, WBTC, WETH, LINK and QI. The most popular asset among both lenders and borrowers is currently AVAX, the native asset of the Avalanche blockchain. 

BENQI has managed to attract some high profile backers such as Ascensive Assets, Ava Labs, Dragonfly Capital, Mechanism Capital, Arrington XRP Capital, and multiple other. The demand from investors is evidenced by the fact that BENQI’s seed and private raises were oversubscribed by 3x.

Now that we know the basics about BENQI, let’s check out some of the most important aspects of the protocol itself, as well as the ecosystem built around it. 

How does BENQI work?

In simple terms, BENQI allows users to deposit their cryptocurrencies and earn interest on their holdings, or borrow cryptocurrencies to access liquidity. 

Lending

The interest earned by lenders is not fixed, as it changes depending on market conditions – if borrowers are showing a lot of demand for a particular asset, the interest rate will start rising, unless more of the asset is deposited to the protocol to meet the demand. 

After users deposit assets to the protocol, they receive an equivalent amount of “QiTokens” corresponding to the asset they deposited. For example, users who deposit AVAX receive QiAVAX, users who deposit USDT receive QiUSDT, and so forth.

These QiTokens represent the balances that the user has supplied to BENQI, and they can be converted back into the original token. Even though the amount of QiTokens held by the user doesn’t change, the QiTokens can be redeemed for a steadily increasing amount of the original tokens, which is how the lender earns interest.  

BENQI does not impose any limits on deposits, as users can deposit as much cryptocurrency as they want. After assets are deposited to BENQI, they can be withdrawn at any time. 

Borrowing

In order to borrow assets from BENQI, a user must first supply some collateral to the protocol. The amount of assets that a user can borrow from BENQI depends on the type and amount of collateral that’s being supplied. 

An interesting aspect of BENQI is that the loans taken through the protocol can be repaid at any time, so long as the user’s position is considered safe. A position’s safety is represented by a metric called Health, which essentially reflects the value of the supplied collateral versus the value of the borrowed assets. When a borrower’s Health drops below 1, this means insufficient collateralization, and the protocol will start liquidating the user’s collateral as required.

If a user wants to improve the Health of their position, they can either start repaying their loan or deposit more collateral to the protocol. 

Using BENQI through app.benqi.fi

Users can interact with the BENQI protocol through the app.benqi.fi interface. It supports 4 different wallet options, including MetaMask, Coinbase Wallet, Coin98 and WalletConnect. The interface is suitable for an international audience, as it supports 8 different language options. 

Under the “Markets” tab, users can start lending and borrowing through the BENQI protocol. After selecting the asset to deposit, the platform displays the following key pieces of information:

• Supply APY: The interest lenders are currently earning
• Distribution APY: The QI and AVAX rewards earned by lenders
• Collateral Factor: The maximum amount users can borrow from BENQI if the deposit is used as collateral

The “Overview” tab provides a quick overview of the BENQI protocol, and is useful to quickly check market conditions. Here, you can see the assets that are currently supported on BENQI, their total liquidity, as well as their respective supply and borrow APYs.

QI Token

The QI token (which is not to be confused with “QiTokens” received by lenders) is the governance token of the BENQI protocol. The BENQI team has decided to implement the progressive decentralization approach, which means that they will gradually hand over control of the protocol  to a DAO (decentralized autonomous organization). 

QI token holders will be able to submit and vote on proposals to change key parameters on the protocol, including supported assets, risk parameters, interest rate model, liquidity mining programs, and more. 

QI has a total supply of 7.2 billion tokens, which the team plans to allocate in the following way:

• Liquidity mining program: 45%
• Token sale: 25%
• Treasury: 15%
• Team: 10%
• Exchange liquidity: 5%

What to expect from BENQI in the future?

The next important milestone in the BENQI roadmap is “Liquid Staking”, a feature that will make it possible for AVAX stakers to maintain access to liquidity even while they’re staking. BENQI plans to achieve this by introducing a token called sAVAX, which will represent staked AVAX tokens. Details about how the liquid staking feature are currently unknown, but we can expect the BENQI team to reveal more information in the coming weeks. 

The bottom line

BENQI has delivered a key piece of DeFi infrastructure for the Avalanche blockchain, and this is evidence by the quick growth in the liquidity that’s available on the protocol. The project has been gaining solid momentum, as evidenced by its recent developments.

In November of 2021, the QI token was listed on Binance, the world’s largest cryptocurrency exchange by trading volume. The token was also featured on the Binance Launchpool program, where users were able to earn QI tokens by staking BNB, AVAX or BUSD. 

Recently, the app.benqi.fi interface added a “Bridge Assets” section, which is a nice improvement to the user experience. Through this section of the interface, users who are interested in bridging tokens from other blockchains to Avalanche can choose between the leading solutions that are available at the moment.

Avalanche has established itself as a top-tier option among layer 1 platforms, and BENQI seems to be positioned well to continue being an integral part of its DeFi ecosystem. When the project launches their liquid staking feature, the BENQI protocol will deliver even more utility to AVAX investors and Avalanche ecosystem participants more broadly.