We’ve seen some interesting trends in the cryptospace over the last year. While Ethereum has made massive gains, the platform has also left a sour taste for many institutes and individuals looking to participate in DeFi. “Growing pains” doesn’t begin to cover the stress shown by Ethereum and similar L1’s, with absurd transaction times and gas fees that can not only wipe out any profit on a transaction, but actually result in a net loss.
While Ethereum is well aware of these shortfalls and are working on their next iteration, the urgency simply isn’t there to fix these fundamental issues. This gaping hole has left a massive opportunity for chains like Avalanche, who have learned from Ethereum’s choke points with a unique consensus element that keeps the platform decentralized while enabling scaling as the platform grows. More to the point, Avalanche offers cheap, fast, and secure transactions, which are the lifeblood for DeFi.
BENQI has made a name for itself in this environment through key elements such as leveraging the untapped value in the still nascent DeFi, developing liquid assets and staking, and focusing on cross-chain opportunities.
We spoke to JD about what led to the establishment of BENQI, how it fits in the Avalanche and DeFi ecosystem, and where the market will go from here.
JD Gagnon
BENQI famously onboarded over $2B in just a few days after its launch. What contributed to such rapid success?
There were a few catalysts leading up to this. The first was the immediate need for a lending and borrowing market within the Avalanche ecosystem. Prior to BENQI’s launch, there were no lending markets on Avalanche, which represents a foundational component within DeFi. The introduction of BENQI provided users the ability to unlock capital, specifically blue-chip assets that are on Avalanche.
There was also the launch of the new Avalanche Bridge a few weeks before BENQI’s launch which assisted in bridging over significant liquidity from Ethereum. The seamless and economical cross-chain transfers made it really easy for users to bridge assets from Ethereum to Avalanche.
How is BENQI different from other Lending protocols?
BENQI is firstly, a native Avalanche Lending protocol that prioritizes safety and security. Being an Avalanche native protocol, the team focuses mainly on the Avalanche ecosystem and has extensive coverage of security partners including Halborn, Gauntlet Network and ImmuneFi. Any asset parameter tweaks on BENQI have to go through rigorous risk assessments and analysis before being considered. This includes asset listings on the protocol itself too.
What is unique to Avalanche that makes it so suitable for DeFi?
Avalanche has a very unique consensus model that provides strong scaling capabilities without sacrificing decentralization. This provides extremely high throughput and fast finality on transactions, which makes navigating DeFi extremely quick and cost-effective.
What is liquid staking and why is it important?
Liquid staking enables staked assets to be liquid. This is done by tokenizing the staked capital to be used within DeFi applications.
Currently, users essentially lock up their AVAX token on the Avalanche P-Chain when they stake it, to be able to earn the staking rewards offered by validator nodes. This locked up capital is freed with BENQI’s upcoming liquid staking solution.
By staking assets on the BENQI liquid staking platform, users will be able to freely use it within DeFi such as borrowing against it, or trading it while enjoying the benefits of Avalanche staking. This enables greater capital efficiency within the Avalanche C-Chain network as more AVAX is put to work within DeFi.
One of the things that really unlocked DeFi to thrive is the ability to put the assets you hold to work by lending them out, instead of just sitting in your portfolio. Do you think we will see a similar functionality happen to NFTs? The ability to lend out NFTs and earn APY on them instead of them just sitting in your wallet?
Yes, we will definitely see similar functionalities happening with NFTs. But there would be a slight difference in the mechanisms of collateralizations for borrowing against them. It’ll probably involve the price floor of an NFT collection which is usually a more predictable method of gauging NFT prices and its movements.
It’s already happening on Ethereum where the NFT community is much more mature and “blue-chip NFTs” such as CryptoPunks and BAYC are liquid enough.
The Avalanche NFT community right now is still in its infancy stage, but it should not be too long before we see it evolving. There’s been a lot of community buzz on NFT projects launching Avalanche and the release of NFT platforms such as Kalao should be beneficial to the growth of NFTs on Avalanche.
What do you see as the next big evolution in DeFi?
The next big evolution in DeFi would be cross-chain solutions. The current environment is a multi-chain one with plenty of liquidity flowing around. The days of Ethereum being the only chain for DeFi are over and it’ll be interesting to see how protocols will be able to leverage cross-chain liquidity safely and securely.
We’re seeing plenty of bridges being built to support this and with tons of capital sitting on Ethereum, there’s plenty of incentives to build solutions that capitalizes on liquidity on Ethereum while enjoying the speed of faster, scalable chains such as Avalanche.
What use-cases do you think we will see for NFTs that will unlock their full potential?
NFT stands for Non-Fungible Tokens. By being non-fungible, the token itself is a unique and non-interchangeable form of data.
This characteristic alone is game-changing for fields that involve ownership and immutability. We could see event tickets being issued as NFTs, that places a transaction fee on top of it so the issuer still profits off scalpers trying to resell these tickets.
We could see property certificates being issued as NFTs, and as all of these are tokenized, it could be collateralized on the blockchain through DeFi applications such as BENQI.
By tokenizing assets as NFTs, plenty of opportunities are presented which minimizes the reliance on intermediaries and worries of counterfeiting.
What are your thoughts on regulation in the cryptospace? And how do you see it affecting BENQI?
Regulation can be a good thing, if structured beneficially for everyone. At the end of the day, the crypto space is still very nascent. We hear of people losing money through exploits or even just sending assets to the wrong addresses and a lot of these incidents cannot be reversed due to the nature of the blockchain. As plenty of these regulators are not crypto-native, it may be hard for them to understand why this happens, and it’s the community’s job to educate not just the regulators, but the greater non-crypto community.
Regulation is something BENQI is positioned to face, and the founding team is open to having discussions and dialogs with regulators to see how both sides can work together.
What is the biggest factor stopping institutions from getting in on the high APY’s available in DeFi (compared to traditional markets)?
The high APYs within DeFi are not insured, so any loss of funds through exploits or smart contract failures may be a bigger problem than the potential gain institutions can obtain from DeFi.
Additionally, it’s illegal in most jurisdictions for most institutions to participate in DeFi.
Once institutions do come, will that hurt or help the “average” DeFi investor & why?
It will definitely help the “average” DeFi investor. The arrival of institutions signals validation of the system and due to that, there would be much greater interest in DeFi alone. This will in turn, open the floodgates for a lot of capital to move in, and the existing DeFi investor would be well positioned to capitalize on it.
It seems like we still hear about hacks & smart contract vulnerabilities too often these days. Do you think we are at the point where the average investor does not need to worry about their money being lost due to either a vulnerability in the code or human risk? If not, will we ever & when do you see this happening?
I think most investors should still do some due diligence when deciding to place their money in a new protocol. There are of course, more experienced DeFi investors that know of the risks involved but I think there should be more education on good security practices, and the risks involved with smart contracts.
What’s next for BENQI?
BENQI is currently working on a liquid staking solution, which is in audits at the moment. As the liquid staking solution would be novel tech, we’re ensuring that the security audits and penetration testings are done rigorously before releasing it out to the public.
Additionally, there will be a safety module being implemented to the current BENQI lending markets app. Users will be able to contribute to the safety of the protocol by staking their QI token and in return for that, obtain QI incentives through protocol revenue buybacks of the QI token.
And while all of these things are being worked on, there’s continual improvements to the app on the UI front, and plenty of exciting integrations and business development work behind the scenes.
Moving Forward
Only time will tell how these trends will play out as we approach 2022; this industry moves lightning fast, and at any point in time a new algorithm or technology could cause the entire market to shift focus. However, we’ve seen a strong indication that DeFi isn’t going away, and the world is ready to move further away from CeFi and explore both models over the foreseeable future. Some elements like fast, cheap, and secure transactions will always be desirable, as will cross-chain functionality. As BENQI, Avalanche, and others continue to develop these platforms, we can expect the DeFi experience to become more and more accessible to the masses as they see mass adoption on these tried and true DeFi platforms.
