Disclaimer: This article compares the major DeFi lending projects in six dimensions of collateral assets, created assets, clearing mechanisms, risk control models, ecological applications and decentralization.
Contrast Dimension
1. Collateral Assets
2. Creating Assets
3. Liquidation Mechanisms
4. Risk Control Model
5. Ecological Applications
6. Decentralization
1. Collateral Assets
Single Asset:
Advantages: Single risk is easier to manage and has lower exposure to unknown risks.
Disadvantages: Low capital efficiency, difficulty to reduce losses due to lack of risk diversification.
Multi-Asset:
Advantages: High capital efficiency for users, high flexibility, easy to capture token value.
Disadvantages: High exposure to unknown risk and increased potential for misuse of high-risk assets
MakerDAO
Initially, only ETH was accepted as collateral, but later accepted multiple collaterals such as USDC to increase stability
Liquity
Only ETH is accepted as collateral, unwilling to take the risks associated with tokens other than the native asset — ETH.
Synthetix
Synthetic asset trading platform with lending functionality, which can only generate sUSD by pledging SNX. The on-chain value is reflected in the governance token SNX within the ecology (obtain a cut of transaction fees by pledging SNX) instead of ETH (pledge ETH to generate sETH).
Parasset
Accepts multi-assets including Nest and ETH.
2. Creating Assets
Stable Coins:
Stablecoins anchored to USD can be considered as synthetic assets of USD and fulfills the demand for stable coin lending.
MakerDAO:
DAI — Mortgage multi-asset to mint.
Liquity:
LUSD — Mortgage ETH to mint.
Synthetix:
sUSD — Mortgage SNX to mint. sUSD can be used for various synthetic assets purchase such as sBTC. Synthetix ties the demand for synthetic assets to sUSD and SNX.
Parasset:
PUSD — Mortgage ETH or NEST to mint.
PETH — Mortgage NEST to mint.
Integrating synthetic assets and stable coin lending, Sythetix generates sUSD that is less capital efficient in lending due to the excessively high collateral rate. Parasset combines the advantages of both. Lower collateral rate, as well as minting, generates p-assets that can meet miners’ demand for mining offers while miners do not need to hold the corresponding underlying assets, thus avoiding the credit risk of native assets.
3. Liquidation Mechanisms
MakerDAO
Bidding — protects the interests of the borrower as much as possible, the downside is that bidding can take a long time.
Parasset
Obtain collateral by paying off debt at a discounted price.
Synthetix
Liquidator mechanism. The first liquidation was triggered on November 6, 2020, which results in a significantly lower probability of a liquidation event because of its extremely high collateral rate. Due to its unique dynamic collateral rate, i.e., when the mortgage assets (SNX) depreciate and the synthetic assets in the system appreciate, everyone’s debt becomes higher and vice versa.
Liquity
Systematic Liquidation — Abandoning the role of the liquidator, the system liquidates itself and distributes its liquidation proceeds directly to the stabilization pool, with the advantage of timely liquidation.
4. Risk Control Model
Core risks of collateralization:
- Collateral rate — C
- Liquidation line — K
- ↓
1. Liquidation Risk
2. Downtime Risk
Liquidation Risk
The ability to trade-off collateral quickly within a clearing time frame, which can be affected by the 5 factors below.
1) Volatility
2) Asset liquidity
3) Liquidation size
4) Oracles
5) Liquidation mechanism
Parasset’s insurance fund for liquidation risk has the following features:
1. insurance fund mechanism (to manage the risk of margin call liquidation)
2. fast minting mechanism (to manage the risk of price instability of undersupply)
3. a dynamic stabilization fee mechanism based on liquidity and collateral rates (the nature of insurance fund returns)
4. Volatility-based dynamic liquidation line mechanism (dynamic management of liquidation risk)
1) Volatility
K and C can ideally change dynamically with volatility, but dynamic changes in product design can affect user experience: users cannot remember the liquidation line, and volatility changes can be significant ( thus Parasset uses a fixed ratio, while Sythetix uses a dynamic ratio).
Liquity
Fixed ratio between K and C, K equals to C.
Sythetix
Dynamic variation between K and C, with a particularly high C to reduce the probability of liquidation, thus reducing the impact on user experience to a certain extent.
MakerDAO
Fixed ratio between K and C
Parasset
Fixed ratio between K and C. K is currently set at 1.2 times of C.
2) Asset liquidity
Liquidation may or may not be successful, and poor liquidity may lead to liquidation. Parasset stabilization fee is partly determined by the collateral rate and partly by the ratio of total collateralization (the ratio of total ETH collateralization to total liquidity, taking account into liquidity and liquidation scale)
3) Liquidation size
Liquity
Liquity uses a risk-sharing and recovery model to prevent chain reactions from occurring, thus inhibiting large-scale liquidations in some degree.
Synthetix
Adopted pre-risk control, and high collateral rate to avoid liquidation events as much as possible.
MakerDAO
Adopted post-risk control, and emergency shutdown procedure.
Parasset
Usually, the returns from stabilization fees are transferred to the insurance pool to increase the resilience of the pool in case of liquidation.
Shutdown risk
The length of time between the start of the mortgage and the trigger of liquidation, triggering a shutdown is when the price reaches the liquidation line.
Stability risk
Choice of global liquidator: The global liquidator is a key mechanism for the Maker platform to be able to counteract oracle or management step attacks. The management mechanism selects the global liquidator and determines how many liquidators are needed to initiate global liquidation.
Calculation of stabilization fee/rate
MakerDAO
Stabilization fee = ( ( DAI Lent * ( 1 + Annualized Stabilization Rate ) ) ^ ( Debt Length in Days/365 ) ) — DAI Lent
Parasset
Stabilization Fee = Total Debt at Time t-1 * Dynamic Stabilization Rate at Time t-1 * Difference in Block Height at Time t and Time t-1
Dynamic Stabilization Fee Rate at Moment t = Initial Stabilization Fee Rate * f
How does the system handle fees collected?
MakerDAO
The MKR fees collected are sent by the smart contract to a destroyer contract, and all MKRs in the destroyer are permanently out of circulation and no one can transfer funds from that address.
Liquity
A portion of the one-time fee collected is set aside as a Gas fee in liquidation
Parasset
The stabilization fee collected goes into the insurance fund pool
Risk Control Mechanism
Insurance Fund LP earns returns in 3 ways:
1. Transaction fee of 2‰
2. Stabilization fee
3. Liquidation residual value
The existence of an insurance fund allows parallel assets and underlying assets to always maintain a 1:1 equivalence. The larger the insurance fund is relative to the size of the parallel assets, the lower the risk of “margin call liquidation” and the more credible of value anchoring of the parallel assets to the underlying assets, but the overall yield of the insurance fund is also lower.
Price Stability
When it comes to stable coins, the stability of the coin price must be considered. Unlike the credit backed that centralized stable coins need to worry about, the core of decentralized price stability is the anchoring mechanism, and different protocols use approaches that have their own advantages and disadvantages.
Anchoring Mechanism & Supply and Demand.
Supply and demand will be reflected in the price to some extent, and stable coins need to avoid deviating from the anchor price as much as possible.
Anchor Price & Collateral Rate.
The anchor price and the collateral rate are also related, the collateral rate can be roughly considered as the price ceiling without considering the transaction fee, for example, when the price of Liquity > $1.1 (110% collateral rate), users can pledge ETH to receive LUSD directly. The ceiling of MakerDAO can be considered as $1.5. When considering this factor alone, a low collateral rate is more conducive to keeping the price cap close to the anchor price; Parasset takes a compromise between the two with a collateral rate of 120%.
MakerDAO & Synthetix
DAI relies heavily on arbitrage and soft anchoring (Soft Peg) of the stabilization fee.
- The MKR holders can maintain the price anchoring of Dai by adjusting the stabilization fee rate. Changing the stabilization fee will change the cost of generating Dai, and MKR holders can adjust the stabilization rate to maintain Dai’s price anchor.
- If the Dai price is always above $1 it means that demand is greater than supply. If this situation continues for too long, it means that the stabilization fee needs to be reduced to encourage Dai generation.
- If the Dai price is consistently below $1, this means that supply is greater than demand and there is too much Dai circulating in the market. if this situation continues for too long, it means that the stabilization fee needs to be raised to slow down the generation of Dai and encourage those who have lent Dai to buy Dai from the market to pay it back.
Theoretically, supply and demand can be actively regulated through arbitrage, however, since arbitrage is far less profitable and efficient than centralized USDT (e.g., price > 1USD, USDT is equivalent to 100% collateralization; meanwhile MakerDAO is 150%, requiring 1.5 times more money than in the USDT to obtain the same return, and that is without considering differences in asset volatility, length of risk exposure, etc., so it is unreliable to rely solely on arbitrage to achieve stability.
A more common scenario in bull markets: Users use DAI to continue buying ETH to increase leverage, the DAI is just an intermediate conversion token and will not be destroyed but will return to the secondary market, leading to an increase in the supply of DAI. Comparing this situation with sUSD, we can notice that sUSD is destroyed as a medium to exchange SNX for other synthetic assets, which makes sUSD less affected by supply and demand in both bull and bear markets (since Synthetix has inverse assets, both bullish and bearish will be absorbed by the corresponding synthetic assets instead of being reflected in the price of sUSD, which also improves the stability of the sUSD price)
Liquity
The mechanism is hard-anchored (can be exchanged for the corresponding ETH at any time at the face value of LUSD) + soft-anchored.
1. As the price gets closer to the upper limit, investors’ expectation of price increase decreases, which in Liquity is when the price approaches $1.1.
2. Replaces the one-time minting fee of MakerDAO. Since Liquity emphasizes the timeliness of liquidation, it adopts a one-time fee that is more efficient in the short term, which does not directly affect existing vaults but indirectly reduces the need for users in the system to reopen the vaults.
Parasset
The mechanism is hard anchoring + soft anchoring, fast coin minting can return the P-asset price to the anchor, stabilization fee as a soft anchor.
- PUSD supply ↑ price ↓ when PUSD > $1 through fast minting (PUSD is obtained by depositing USDT in the insurance pool)
- PUSD supply ↓ price ↑ by fast minting (USDT is obtained by depositing PUSD in the insurance pool) when PUSD < $1
5. Eco-Applications:
*In a bull market stable coin lending will have more obvious leverage. in MakerDAO as an example, borrowed DAI to purchase ETH to deposit in CDP repeatedly can theoretically reach about 3 times of leverage; Liquity can theoretically reach 11 times of leverage due to the lower collateral rate.
MakerDAO
As the leading decentralized stable coin, DAI is basically in a position to extend its eco-application as long as the stable coin is needed in the Ethereum ecology, and the most of early DAI is on Compound.
Liquity
Liquity can be seen as a lite version of MakerDAO, reducing the system's unknown risk by returning to single coin collateral while increasing capital efficiency and liquidation efficiency. The eco-application is basically the same as DAI, but due to its introduction of the third-party front-end concept, it may make minting LUSD have more Dapp options, and the expansion potential could be greater than MakerDAO.
Synthetix
sUSD can be used as a stable coin, but due to the low capital efficiency caused by the high collateral rate, its main application scenario should be the synthetic asset trading platform. sUSD plays an irreplaceable role in this field due to the high demand for financial derivatives trading and the relatively lower and more flexible threshold for synthetic assets.
Parasset
Parallel assets not only meet the demand for stable coin lending but also as synthetic assets simultaneously meet the real demand of miners within the NEST ecosystem, keeping the demand from overflowing, while increasing calls to oracles and keeping the value in the system:
- When a parallel asset is generated and a price needs to be used, the NEST oracle will be called, and at the same time, the calling fee goes into the DAO system.
- When the price of the asset fluctuates, the need to re-mint the coin arises to call oracles.
- When parallel assets are redeemed, the stabilization fee is calculated and the demand for calling oracles is created.
- When the collateral assets are liquidated, use of CoFiX, the demand for calling oracles is created.
To further explain the ecosystem, NEST V3.6 introduces “dual-track quotes”:
- Previously, miners were required to submit ETH/USDT prices and corresponding bilateral assets.
- Now additional ETH/NEST prices and corresponding bilateral assets need to be submitted, doubling the assets involved in the offer.
- Additionally, a pledge of 200,000 NEST is required to participate in the double quote.
Dual-track quotes can price quoted tokens (QP Token, e.g., NEST), and the price is combined with downstream AMM, allowing quoted miners to circulate on-chain funds. Having a large amount of USDT (or ERC-20) on hand increases the opportunity cost for miners to hold:
- Miners cannot buy ETH and hold a large amount of U in hand for NEST mining (if ETH appreciates, they also need to have more U on hand, and other unstable ERC-20 will have a greater impact).
- Miners will be similar to the LP role in DEX — making a little but bearing unpredictable losses.
- Miners want to become validators, increase their quoted assets to twice their previous value is needed due to taking orders to re-quote.
Parasset solves the quote and asset inventory issue by allowing miners to generate parallel assets, by simply holding “collateral assets”. By quoting from parallel assets, mining and holding coins are mutually unaffected.
6. Decentralization
Lending agreements can be judged on the following six elements:
Asset Escrow:
The way the borrower’s collateral and the lender’s funds are managed: platform escrow, self-management.
Margin Call on Pledged Assets:
Like a margin call, as the price of the pledged asset (digital currency) fluctuates. When the fluctuation in value triggers the collateral rate to be greater than a certain threshold, some projects will prompt margin call notice. The notification is further divided into direct notification by the platform, incentivizing others to notify with financial incentives, and some platforms will simply start the liquidation procedure.
Providing additional liquidity for pledged assets:
The pledged assets are liquidated by direct auction, sale by the platform, or liquidation by others through an incentive mechanism.
Liquidation price determination:
The pricing issue when liquidating pledged assets, whether centralized or decentralized.
Interest Setting:
Whether the setting of interest on lending is centralized or decentralized.
Agreement Development:
Whether the agreement is centrally developed by a fixed team or distributed.
MakerDAO
MakerDAO exemplifies the lack of decentralization of MKR governance in the 312 event.
Liquity
In addition to the above aspects, Liquity also innovated by introducing front-end decentralization, the liquidation process improved efficiency at the cost of centralization by removing liquidators.
Parasset
In contrast to Compound, Parasset uses Nest oracle, which is completely decentralized.
