Liquidity markets or money markets are one of the foundational structures within a healthy, thriving economy. It enables idle assets to be put to work, allowing people to borrow money to grow businesses or to pay for expenses, and also generating interest for people that lend their assets.
Liquidity markets have been around for generations, connecting both borrowers and lenders to align with their economic interests. While liquidity markets have changed over time, their purpose and fundamental design are largely unchanged.
Traditional liquidity markets have been a great contributor to the rise of the global economy over the ages, enabling businesses to expand and providing individuals tools for saving money but remains heavily operated by centralized institutions. As a result, these entities have a significant amount of power and influence over user funds which generates potential counterparty risks, decreased transparency and increased rent-seeking behaviour.
This has led to the rise of Decentralized Finance (DeFi) predominantly on the Ethereum network today. Decentralized Finance represents the automation of peer-to-peer conditional transactions through smart contracts, giving birth to various DeFi protocols such as decentralized exchanges and liquidity markets.
Established decentralized liquidity market protocols such as AAVE and Compound enable users to borrow and lend their on-chain assets with just a computer and an internet connection. These protocols cut out intermediaries such as humans and institutions, replacing them with smart-contracts that determine interest rates and lending/borrowing parameters through code. This results in permissionless lending and borrowing, where users can:
- Instantly supply to and withdraw liquidity from a shared liquidity market
- Instantly borrow from a liquidity market using their supplied assets as collateral
- Have a live and transparent view of interest rates around the clock based on the asset’s market supply and demand
However, the experience (speed & cost) of interacting with these protocols are dependent on the underlying blockchain that they are built on. While decentralized liquidity markets on Ethereum are powerful, the network has been consistently congested, resulting in extremely high network fees. This has driven market participants to look for alternatives on other networks, while pricing out many users from engaging in DeFi.
To help alleviate the congestion on Ethereum, we are excited to announce BENQI Protocol, an algorithmic liquidity market protocol built on Avalanche. With a focus on ease-of-use and low fees, the BENQI protocol will enable the birth of a new generation of open financial applications, further democratizing access to DeFi for the masses.
Avalanche is a highly scalable, decentralized network with sub-second finality capable of handling 4500+ transactions per second. With multiple cross-chain bridges going live and in production (Ethereum, Binance Smart Chain, Polkadot, etc.), we envision Avalanche to be the decentralized financial settlement layer of choice for the masses due to its scalability, low fees, decentralization (888+ validator nodes) and compatibility with popular plugin wallets like Metamask.
Being DeFi users ourselves and recognizing its recent challenges, we present BENQI as one of the first liquidity market protocols on Avalanche to the community. The pains of network congestion and high network fees will be a thing of the past, and the provision of a go-to-market for assets to work on Avalanche will open up new possibilities for an open, transparent and frictionless finance. At the same time, DeFi-curious users and other people seeking an alternative from traditional markets will finally be able to participate in the open financial movement and contribute to the continued growth of DeFi.
From the team at BENQI, ❤️