What is BENQI?
From a tiny snowball to a full-blown avalanche, the Avalanche blockchain has quickly grown into a prosperous ecosystem for DeFi projects. With lightning-fast transaction speeds and low fees, Avalanche has become a popular platform for a wide range of DeFi applications, from lending and borrowing to trading and yield farming. BENQI is the biggest DeFi protocol on Avalanche.
BENQI is a relatively new player in the DeFi space, having launched in early 2021 on the Avalanche blockchain. The project aims to provide users with a platform for borrowing, lending, and earning yield on their digital assets, while also offering a range of other DeFi services.
Despite its relative youth, BENQI has already attracted a significant following among the DeFi community, thanks to its user-friendly interface, innovative features, and commitment to building a sustainable and decentralized ecosystem.
BENQI has already achieved a number of important milestones since its launch, including partnering with other DeFi projects to expand its range of services and integrations. In addition, BENQI has launched its own native token, QI, which is used to govern the protocol and provide rewards to users who participate in the platform's liquidity pools.
A major advantage of BENQI is that is non-custodial. This means that users' funds are always in their possession. Interaction with BENQI protocol is done via smart contracts that are approved by the user.
Extreme volatility is one of the biggest enemies for DeFi protocol. This is why teams are working hard at perfecting the liquidation mechanisms for their protocols.
As a precaution, BENQI has created a special staking pool called the Safety Module that is meant to offset any lending shortfalls. Users can stake QI in a Safety Module and get a portion of protocol reserves as rewards. These added safety precautions protect users and improve confidence in the network.
How does BENQI work?
BENQI is the most popular DeFi protocol on Avalanche. Its mechanics are similar to every other DeFi protocol, meaning users interact with a set of smart contracts instead of an intermediary.
Let's see how each component of BENQI works!
BENQI Earn
BENQI Earn is works by lending the deposited assets to borrowers. Depositors earn interest paid by the borrowers. Like any other DeFi protocol, BENQI Earn is made up of a collection of smart contracts that mediates the activity between the two parties. Funds are deposited into a liquidity pool from where borrowers can take funds and repay them with interest.
The concept of lending on BENQI works the same way as in traditional finance, with an important feature. In exchange for the deposited assets, the lender receives QiTokens e.g. QiAVAX, QiLINK, QiWBTC, QiUSDT.
The QiToken is a representation of the user's asset balance supplied to the BENQI protocol. It is received in the wallet for supplying assets to the protocol and functions to accrue value relative to the original asset through the token's interest rate.
You can think of it as an IOU that can be redeemed for the original asset plus the interest accumulated over time. Even though the value of QiTokens in your wallet stays the same, the amount of underlying crypto keeps growing.
BENQI Borrowing
BENQI offers a flexible mechanism for gaining exposure to new assets without selling the original asset. Instead, borrowers can use their crypto asset as collateral and borrow the asset of their choice. BENQI has a collateralization ratio of maximum 40%. If for example, if the price of AVAX is $100, the maximum that can be borrowed is $40 in other assets. This threshold serves as a security mechanism to repay lenders in case of liquidation.
The risk of liquidation is calculated using a Health Factor. "Health" is how “safe” your loan is, defined as the proportion of deposited collateral against the total value of the loan. It increases or decreases based on the value fluctuation of the user's deposited asset value against the user's borrowed value.
Higher Health indicates that the user's funds have greater safety from liquidation. Lower Health puts users' collateral at risk of liquidation. Due to market volatility, the collateral can drop in value, pushing the Health Factor below 1. This event triggers the liquidation process. As soon as the Health Factor goes below 1, a portion of the collateral will get liquidated.
To improve Health, a user can repay a portion or the full amount of the borrowed amount, or supply more collateral.
BENQI borrowers have to pay back the borrowed capital with interest. The interest rate adjusts based on the utilization of the asset, which is essentially the percentage of total asset borrowed out against the total asset supplied. A high utilization rate indicates that a lot of borrowing has occurred, while a low ratio indicates the opposite.
BENQI Liquid Staking
Liquid staking is a relatively new feature that belongs to PoS chains. In the Proof of Stake consensus, holders can lock up their tokens to become validators. For the duration of the lockup, stakers receive a portion of the network fees. Liquid staking breaks down the limitation of lockups by making the staked tokens tradeable, hence the "liquid" component.
BENQI uses its own liquid staking protocol to tokenize staked AVAX. Liquid staking tokens are the equivalent in value with the staked token at a 1:1 ratio. Staked AVAX comes in the form of sAVAX. Liquid staked tokens can then be used on DeFi protocols such as AMMs, Lending & Borrowing Protocols, Yield Aggregators etc.
How to make money on BENQI?
The permissionless nature of BENQI Protocol attracts plenty of capital from the Avalanche ecosystem. If you are invested in the Avalanche ecosystem and want to make money off your idle capital, BENQI offers a three main services: lending, borrowing, and liquid staking.
BENQI Lending
Lending can be a simple method of earning a passive income on your crypto assets. All you need is some native Avalanche tokens.
To start lending on BENQI, follow these steps:
1. Open the BENQI app
2. Click on the MARKETS tab on the menu and click on "Supply"
3. Select the type of asset from the drop box menu in the "Supply" dashboard
4. Enter the desired amount to deposit and click "Deposit"
5. Once the transaction is confirmed, the deposit is successfully registered and it starts earning interest.
6. QiTokens will be deposited into your wallet as a representation of your supplied asset into the protocol
7. Profit
BENQI Borrowing
Borrowing is a useful strategy to increase your buying power while maintaining exposure to the underlying collateral. Unlike lending, borrowing is a more advanced strategy because there's always the risk of having the collateral liquidated.
To start borrowing on BENQI, follow these steps:
1. Open the BENQI app
2. Click on the MARKETS tab on the menu and click on "Borrow"
3. Select the type of asset from the drop box menu in the "Borrow" dashboard
4. Enter the desired amount to borrow and click "Borrow"
5. Once the transaction is confirmed, the borrow is successful and it starts accruing payable interest
BENQI Liquid Staking
Avalanche staking is a low-effort way to earn passive income on your idle AVAX. In addition to the staking rewards, BENQI opens up the possibility of liquid staking at zero fees. Simply convert your AVAX to sAVAX and start trading it like any other token.
To start liquid staking on BENQI, follow these steps:
1. Open the BENQI app
2. Click on the "Stake" tab
3. Input the desired amount of AVAX to be staked
4. Click on "Stake"
5. Receive sAVAX in the same wallet
The process of unstaking works similarly, by clicking on the "Unstake" tab. Keep in mind there is a 15 day unstaking cooldown period for staking AVAX. After the cooldown period ends, you can claim your AVAX from your account.
15 days of waiting can be a long period in case of an emergency. If you want to instantly convert your sAVAX for AVAX, access the AMM on BENQI and swap sAVAX for AVAX. Although it happens faster than the unstaking process, swap fees will apply.
Price Prediction for BENQI — Can it hit $1000?
Buying and hodling QI — the native token of BENQI — is one way of potentially making money on BENQI.
QI has two use cases: governance and staking. Because BENQI is one of the largest DeFi protocols on Avalanche, DAO participants have an incentive to accumulate QI and increase their voting power over time. Additionally, QI can be staked in order to vote for specific Avalanche validators to receive additional delegations. This means Avalanche validators also have an incentive to buy and stake QI.
By looking at its current price, it’s natural to think about the chance of QI hitting $100 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.
Let’s examine the potential growth of the QI token by analyzing its tokenomics. QI’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} QI tokens being in circulation today, that means a price of {PRICE} per QI.
How did we come to that calculation? It’s quite easy, the price of a QI token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each QI coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of QI at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for QI to hit that price.
At a price of $1 per token, that means the current market cap of QI would equal ${{CIRCULATING_SUPPLY} * 1}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. QI’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} QI which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of QI? Taking into account the current price of a QI token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. QI coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of a QI token. Doing the same calculation but with a price of $1 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1} for the QI protocol fully diluted market cap.
These are all crucial details to know when calculating if QI can reach the price of $1 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of QI depends solely on its growth as a network used by tens and hundreds of millions of users. Due to its sheer token supply, the price of QI is less likely to break $1 by 2030.
If you’re looking to add some QI to your portfolio, the most trusted places to get some are Binance and Coinbase.
