State of Venus Q1 2023

Key Insights

• Protocol revenues increased for the third consecutive quarter and outweighed XVS incentives by $1.1 million.
• Venus implemented a stability fee to address the VAI depegging issue. It has already successfully encouraged repayments and reduced the circulating supply by 75% while below its peg.
• In response to Paxos halting BUSD mints as directed by the NYDFS, BNB Chain swapped $63 million in frozen BUSD debt for USDT through upgraded vToken contracts, mitigating liquidity risk from the BSC Token Hub exploiter’s outsized position.
• XVS incentives underwent another 50% reduction, resulting in a total reduction of 75% within a four-month period.

Primer on Venus

Venus is a decentralized money market protocol on the BNB Chain that facilitates depositing and borrowing of various cryptoassets. The interest rates for these assets are set algorithmically using an interest rate model that triggers updates based on the proportion of deposited assets lent. This is known as the utilization ratio. The protocol is managed by the Venus DAO community and governed by the XVS token. Users can stake the governance token in a vault to participate in governance and receive a portion of the protocol revenue.

Key Metrics

Performance Analysis

Overview

Venus has been able to sustain its usage metrics despite the difficulties faced by the crypto industry. Daily active users (DAUs) decreased by 3% in Q1 due to there being only one Binance Launchpad event, compared to two in Q4. Typically, during these events, DAUs surge by 2-3 times normal levels. The events attract large amounts of stablecoins to be supplied as collateral on Venus to borrow the maximum amount of BNB for discounted tokens of new projects.

Furthermore, the absence of high volatility events in Q1 further contributed to the decrease in DAUs. For reference, the collapse of FTX in Q4 resulted in DAUs increasing by an average of 188% over three days.

Despite a 23% increase in value on Venus, the protocol's gains lagged behind the broader crypto market cap by 26%. At the token level, one notable trend was a 56% increase in USDT, followed by a 49% decrease in BUSD. Both changes can be attributed to a proposal executed by the DAO, whitelisting BNB Chain to swap the BSC Token Hub exploiter’s $63 million of BUSD debt to USDT. The proposal came as a response to a statement from Paxos indicating they would halt minting of BUSD as directed by the New York Department of Financial Services (NYDFS).

The termination of BUSD minting and ongoing redemptions notably increased liquidity risk for the protocol. If the exploiter's position fell underwater, the lack of sufficient BUSD liquidity in the open market could’ve hindered the liquidation process.

In total, $5.5 billion in loans were originated and repaid in Q1, demonstrating the continued activity on Venus markets. BNB played a significant role, accounting for 74% of the value borrowed. The increase was largely driven by the Binance Launchpad event which contributed to 58% of the quarter’s loan originations occurring in the first two days of the event. Stablecoins also played a part, accounting for 11% of the borrowed value. Out of the top pools, ETH and USDT were the only assets that experienced net positive growth in value deposited and borrowed.

Revenue and Incentives

Interest revenues increased for the third consecutive quarter to $9.8 million. The increase in Q1 is primarily due to increased market prices, and moving foward, interest curve adjustments made to key assets on March 13 will likely boost revenues. Overall, these updates aimed to improve the protocol's health by encouraging repayment when utilization is high. This dynamic helps avoid a liquidity crunch while also increasing revenues.

Venus uses a jump interest rate model which takes five parameters (base rate, kink, multiplier, jump multiplier, and reserve factor) to produce the borrow and supply rates. At the recommendation of community partner Guantlet, the DAO executed parameter changes, which increased the jump multiplier for all stablecoins (USDC, USDT, BUSD, DAI, and TUSD). Under the previous stablecoin interest rate curve, the maximum borrow rate (the rate at 100% utilization) was 29.4%, and the maximum supply rate was 26.1%. Upon raising the jump multiplier, the maximum borrow rate increased to 71.5%, and the maximum supply rate increased to 62.5%. Similarly, the parameter changes reduced the kink and lowered the multiplier for CAKE. This in turn increased the maximum borrow rate from 86.7% to 401.3% and the max supply rate from 19.5% to 235.2%.

BNB experienced the most impactful changes, where the kink was lowered and the multiplier, jump multiplier, and reserve factor were increased. The changes led to an increase in maximum borrow rates from 80% to 261.2% and maximum supply rates from 64% to 162.1%. The change was implemented just four days before the start of the most recent Binance Launchpad event, where 37% of Q1 revenue was generated in just five days.

Protocol interest and liquidation revenues outweighed XVS incentives disbursed to users, also known as emissions, by $1.1 million in Q1. While the increase was only 3% QoQ, the increase jumps to 202% when disregarding liquidation revenues, as Q1 experienced half of the liquidation volume seen in Q4. This increase in net revenue results from the DAO’s decision to reduce market emissions by 50% in February, the second 50% reduction in 3 months. Additionally, the DAO reduced incentives to the VAI vault by 50% to help the peg recover to $1.

XVS Vault

In addition to $243,000 in base rewards, XVS stakers received $548,000 in XVS tokens from protocol revenue distributions. Interest revenues are collected in the treasury over the quarter, and a portion of these revenues is used to purchase XVS tokens on the open market, which are then distributed to stakers in the subsequent quarter. The drop in APR is due to both a 44% decrease in daily distributions and the staked balance increasing by 352,000 XVS over the quarter. Notably, only 206,000 XVS were released into circulation in Q1. This net inflow indicates that users are preparing for an imminent launch of the Venus V4 upgrade. Among other things, the upgrade aims to supercharge returns on XVS by allowing stakers to receive an additional 20% of the protocol revenue.

Borrower Perspective

Stablecoin borrow rates increased in Q1, with or without accounting for XVS incentives. The increase is due to a combination of factors, including the 50% reduction in incentive emissions and interest rate parameter changes. Among stablecoins, USDT experienced the highest borrow rates, increasing by 2.5% to an average of 5.8%. The increase was largely due to the debt swap between BUSD and USDT.

Of the stablecoins averaging more than $2 million in available liquidity, USDC provided the lowest average borrow rates at 4.9%. However, the USDC borrow rate did briefly surge as high as 17.9% on March 11 as users shorted the stablecoin which dropped as low as $0.87. Following assurances from Circle, USDC began to reclaim its peg, and the borrow rate fell back to 3.8% within the 24 hours.

Lender Perspective

The modifications to the CAKE market's interest rate curve have been advantageous for CAKE suppliers. Focusing on the month of March, specifically before the March 13 change and after the completion of Binance Launchpad on March 22, a 5.8% increase in APR emerged, moving from an average of 10% to 15.8%. These elevated yields have drawn a 2.5% increase in CAKE deposits and just an 8% decrease in CAKE borrowed.

Presently, on PancakeSwap, users have the opportunity to earn extra CAKE rewards by staking CAKE in a Syrup Pool for a 42% APR. Some investors have adopted the strategy of borrowing CAKE on Venus and then staking it on PancakeSwap to capitalize on the rate differential.

In Q4, the Syrup Pool posted a 49% APR. However, following the recent adjustments to the interest rate curve, the average borrow rate for CAKE on Venus increased by 14%, reaching 36%. This development does add some risk to the strategy. If the Syrup Pool’s yield were to drop by 7%, the strategy would no longer be profitable, as yield would be below Venus’ observed average borrow rate of 36%.

VAI

After Venus’ native synthetic stablecoin VAI depegged from $1 to $0.75, Venus addressed the issue by pausing VAI minting in September 2021. The community worked together to bring VAI back to its peg, by implementing a stability fee with a floating rate on Dec. 30, 2022.

The stability fee encourages minting when demand is high and the price is over $1.00 and discourages minting when demand is low and the price is below $1. The floating rate is calculated using the formula: ƒ=base_rate + (1 - VAI_price) * floating_rate * base_rate.

The Venus team plans to gradually increase the floating rate to find the optimal parameters, after which they will reopen VAI minting with a VAI 2.0 proposal. The success of the stability fee has already been demonstrated by the largest whale repaying 15 million VAI, which reduced the circulating supply by 75% while below its peg.

Qualitative Analysis

As regulatory scrutiny on decentralized finance intensifies, it's becoming increasingly evident that 2022 was merely a dress rehearsal for the challenges that lie ahead. As the second-largest protocol by TVL on BNB Chain, Venus may face short-term growth obstacles due to the sunsetting of BUSD by PAXOS and the recent lawsuit against Binance Exchange. However, the successful implementation of the VAI stability fee presents a unique opportunity for Venus to fill a gap in the Binance ecosystem left by the phasing out of BUSD.

The primary distinction between VAI-denominated debt and BUSD-denominated debt on Venus lies in the allocation of interest revenues. With BUSD, Venus shares the majority of its revenues with depositors. It only retains 10% and considers the remaining 90% paid to depositors as the cost of capital. In contrast, VAI allows Venus to retain 100% of the interest revenue. However, VAI adoption and the increased revenues that follow would likely come with additional costs. New, or in this case reborn, stablecoins often face a bootstrapping challenge to establish liquidity and organic usage. Historically, this challenge has been overcome with incentives provided by the protocol. Over the past four months, Venus has increased its capacity to offer such incentives by reducing XVS incentives by 75%.

VAI minting is anticipated to soon be resumed, coinciding with the launch of several Venus V4 features, including isolated markets, currently in testnet. The DAO also plans to expand the Venus community beyond the BNB Chain ecosystem, with Polygon likely to host Venus' first cross-chain deployment. This prediction is based on the 2023 Community Survey Results, which revealed 39.7% of voters favored an initial deployment to Polygon, closely followed by Ethereum at 35.4%.

While specifics of a cross-chain deployment will likely be discussed in the community forum and through Snapshot votes, another growth initiative is already underway. On March 31, the Venus Stars website was released to serve as the new hub for the Venus community and its global ambassadors.

Closing Summary

Venus and the broader DeFi ecosystem face new headwinds brought in Q1, but the protocol managed to maintain its value and position as the leading money market protocol on BNB Chain. Q1 saw a boost in interest revenues, while an adjustment of interest rate parameters for key assets, including BNB, CAKE, and various stablecoins, is expected to further enhance revenues moving forward. The implementation of a stability fee for VAI in late Q4 2022 proved successful in Q1, leading to the anticipation of VAI minting resuming. As BUSD phases out, Venus is poised to leverage its native stablecoin VAI, which retains 100% of the interest revenue for the protocol. The rollout of Venus V4 features will likely continue into Q2, and a potential cross-chain deployment to Polygon is also on the horizon.