Venus 2023 Q2 Report Reasons and Outlook Behind Revenue Growth

Venus 2023 Q2 Report Revenue Growth Reasons and Outlook

Author: Kentrell Key. Translation: Cointime.com QDD

Key Insights

Venus achieved continuous growth in interest income for the fourth consecutive quarter, contributing $2.3 million to the DAO and $9.2 million to depositors.

The price of BNB dropped by 32% due to the charges filed by the U.S. Securities and Exchange Commission (SEC) against various Binance entities, affecting the total asset value on Venus and causing a 12% decrease in the total supply value during the quarter.

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Venus continues to launch V4 features, including the Isolated Fund Pool and Elastic Price Oracle, to enhance the security, flexibility, and reliability of the platform.

Adjustments to the interest rate parameters resulted in an increase in borrowing rates, leading to a decline in user activity in the second quarter, including lower-than-usual activity during the “Maverick Launchpool” event.

About Venus

Venus is a decentralized money market protocol based on the Binance Smart Chain (BNB), used for depositing and borrowing various crypto assets. The interest rates on these assets are algorithmically determined by an interest rate model triggered by the borrowing ratio of the deposited assets. The protocol is governed by the VenusDAO community and governed by the XVS token. Users can stake governance tokens in the safety vault, participate in governance, and receive a portion of the protocol’s income.

Key Metrics

Performance Analysis

Usage

User activity on the Venus protocol declined in the second quarter, with a 9% decrease in active borrowers and a 10% decrease in active depositors. This was mainly due to adjustments in the interest rate parameters, resulting in an increase in borrowing rates, thereby suppressing the profitability of leverage strategies.

Binance Launchpool events typically drive borrowing activity on Venus, during which the number of active borrowers usually increases by 100% to 200%. However, during the “Maverick Launchpool” launch in June, there was no significant surge in activity. Additionally, on June 10th, the amount of BNB borrowed reached its lowest level since January 2021, with only 89,140 BNB borrowed.

Total Supply Value

The total supply value on Venus decreased by 12% in the second quarter, despite the relative stability of most crypto asset prices. This can be attributed to the 32% drop in the price of BNB due to the U.S. Securities and Exchange Commission filing 13 civil charges against various Binance entities. The impact of this regulatory action led to a decrease in the value of assets held on Venus, with outflows observed in non-stablecoin assets other than BTC, XVS, CAKE, ADA, and MATIC.

Revenue

Interest income continued to grow for the fourth consecutive quarter, reaching $11.5 million. The growth in the second quarter was mainly due to further adjustments to the interest rate curve recommended by Gauntlet and borrowing activities that are relatively insensitive to interest rate changes. These adjustments resulted in a 33% increase in interest income for the protocol and a 14% increase in income for depositors.

Amongst this revenue growth, BNB’s revenue growth was particularly prominent, increasing by 70% compared to the previous quarter. If depositors’ earnings from the Binance Launchpool activity remain high and the position of the attacker in the BSC Token Hub does not fall to the liquidation level, this growth is expected to continue.

During the Launchpool activity, a large amount of stablecoins were deposited, and the largest amount of BNB was borrowed. By holding BNB on the Binance trading platform, users can obtain tokens from new projects.

At the end of the quarter, the attacker’s position was only about 10% away from liquidation (calculated in BNB at approximately $220). This position was formed after the second quarter’s expenditure of approximately $1.3 million on USDC and USDT loans and approximately 11,000 BNB (devalued as the price of BNB fell).

Available Liquidity

At the end of the quarter, $647 million worth of liquidity was still available for borrowing, with BTC and BNB accounting for 76% of the total value. The high utilization rate of stablecoins is mainly due to the excess position held by the attacker in the BSC Token Hub, which accounts for 59% of the total outstanding USDT debt and 64% of the USDC debt.

In addition, a considerable portion of the outstanding loans has remained unpaid since the liquidation events involving CAN, XVS, and LUNA in 2021 and 2022. Specifically, at least 95% of the BTC loan balance, 24% of the BUSD balance, and 29% of the ETH balance remain unpaid and currently lack sufficient collateral. Excluding the debt of the BSC Token Hub attacker, Venus currently has $83 million in bad debt in the protocol. These debts totaling $238 million account for nearly half of the total outstanding loan value in Venus. The Venus team is focused on managing the debt and has indicated that they are almost ready to repay the insufficient part with the new automated system of interest income.

Revenue and XVS Rewards

In the second quarter, interest income and liquidation income from the protocol exceeded the XVS rewards issued to users, totaling over $800,000. This surplus was mainly generated during the SUI Launchpool and Open Campus LaunchLianGuaid activities, which accounted for 68% of the quarterly interest income, as indicated by the growth in interest income.

However, the Maverick Launchpool activity that started on June 14th did not see a corresponding surge in interest income. This suggests that although the BNB borrowing rate on Venus reached its lowest point of the year, BNB leverage may still come from other platforms.

The impact of Gauntlet’s interest rate curve optimization, which took effect on June 1st, is also evident. After the adjustment, the daily interest income in June increased by 34% compared to May, starting to grow after the SUI Launchpool on May 3rd. The modification of the interest rate curve has a positive impact on income, validating the importance of managing borrowing costs on the platform.

XVS Insurance Vault

In addition to the basic reward of $354,000, XVS stakers also received $350,000 worth of XVS tokens from the protocol’s revenue distribution. Although the basic reward increased by 46%, the income distribution decreased by 36%. The implementation of VIP-113 increased the daily basic reward from 525 XVS to 1,100 XVS. Furthermore, compared to net inflows in the first quarter, the insurance vault experienced a net outflow of 290,000 XVS in the second quarter. The proposal also includes the expectation to restore a 9% annual interest rate in the next quarter:

“Due to various ongoing changes and audits, we cannot adjust the annual interest rate for XVS Vault allocation prior to today, and more XVS has already been distributed in the earlier weeks, so it is necessary to further reduce the annual interest rate for the remaining portion of this quarter to compensate for the additional XVS already distributed. We expect the annual interest rate to rise to over 9% in the next quarter, as Venus has performed well in the past few weeks.”

Borrower’s Perspective

Overall, BNB borrowing rates had the largest increase among the mentioned categories, with a daily average increase of 2.8 percentage points in the second quarter. However, between May 12th and June 12th, the XVS rewards obtained from borrowing BNB exceeded the borrowing costs, averaging over 36 basis points. In such cases, users borrowing BNB actually gained increased returns, assuming prices remain unchanged. In short, these users received positive returns on both collateral and loans. Although the average stablecoin borrowing rates remained relatively stable, the high rates at the end of the quarter may persist due to reduced liquidity.

Qualitative Analysis

Isolated Funds Pool

The Venus team continues to introduce new features, gradually realizing the vision of Venus V4. One development in the second quarter is the introduction of the “Isolated Funds Pool” feature, including categories such as stablecoins, DeFi, Liquid Staked BNB, GameFi, and TRON, as well as preliminary support for nearly 20 new markets.

These isolated funds pools are independent from the core Venus fund pool. They represent individual lending markets with unique parameters. Creating these isolated funds pools expands the range of choices for users and enables them to leverage a wider range of assets in the DeFi and other fields.

As shown in the above figure, Venus’s isolated fund pool offers various advantages compared to traditional fund pools. First of all, the isolated fund pool provides an additional layer of security, as anomalies in one fund pool will not affect other fund pools in the protocol. By reducing systemic risks, users can better evaluate their investment considerations and make decisions based on specific fund pools. This flexibility enables users to better align their investments with their financial goals.

In this development trajectory, Venus plans to launch the second phase of isolated lending in the third quarter, which includes the introduction of four new isolated fund pools in categories such as DeFi, GameFi, Liquid Staking BNB, and TRON.

Elastic Price Oracle

In the second quarter, Venus V4 introduced the Elastic Price Oracle through VIP-123, achieving another important milestone.

The Elastic Price Oracle provides an additional security layer for the Venus protocol by integrating multiple oracle supports, perception checks, and backup mechanisms. Its design is mainly aimed at eliminating the risk of single point of failure when obtaining real-time asset prices.

For background, when LUNA became a collateral asset on Venus in May 2022, it relied entirely on Chainlink’s price oracle for real-time pricing updates. The minimum value of the LUNA price oracle contract was around $0.10 and was equipped with a circuit breaker that would stop price updates once the threshold was reached.

When the market price of LUNA significantly dropped below its hardcoded minimum value of $0.10, Venus continued to process transactions in the market at that minimum value due to the lack of outdated price detection in the Venus market. The difference between the actual price and the processed price resulted in bad debt for the protocol. Users took advantage of this loophole before the Venus team could suspend the system for security maintenance.

To prevent similar incidents from happening again, Venus implemented the Elastic Price Oracle to effectively handle such situations. The current implementation includes integration with multiple reputable sources, including Chainlink, Pyth Network, Binance Oracle, LianGuaincakeSwap, and the upcoming RedStone Oracles. This multi-source approach ensures a more accurate and reliable representation of asset prices, thereby enhancing the stability of the Venus protocol.

Bad Debt Repayment

Since its establishment in 2020, the Venus protocol has experienced multiple incidents of bad debt. However, the revenue growth from BNB lending has allowed the protocol to start addressing these bad debt issues and release liquidity.

In the second quarter, the protocol’s risk fund successfully repaid 1437.5 ETH and 90.3 BTC, with a total value of approximately $5 million, according to VIP-118 and VIP-121. However, the balance of the risk fund cannot be publicly confirmed on-chain. When examining the repayment transactions, it was observed that the funds for BTC and ETH repayment were transferred to the treasury from different addresses approximately 4 days and 3 days, respectively, before the proposal execution. The ETH repayment wallet still owes 2945 ETH, and the BTC wallet owes 1825 BTC. It was observed that the BTC borrower has been liquidating XVS to repay BTC until September 2022 and currently holds approximately 73,000 XVS rewards, which Venus considers as a destroyed account.

Summary

The Venus community experienced growth in the second quarter, with a total of 27 proposals executed, a significant increase from the 18 proposals in the first quarter, and over 100 AMA sessions held in various languages. Despite a decline in daily usage in the second quarter, the protocol continues to progress in its development. The rise in borrowing rates has affected the profitability of leverage strategies and has changed the behavior of users in the recent active Binance Launchpool activity. It is worth noting that the total supply value on Venus has decreased by 12%, primarily due to the drop in the price of BNB after the U.S. Securities and Exchange Commission filed charges against different Binance entities.

Despite these challenges, the protocol achieved revenue growth for the fourth consecutive quarter, reaching $11.5 million. This growth can be attributed to interest rate adjustments and borrowing activities that are relatively insensitive to interest rate changes. At the end of the second quarter, there was still $647 million in liquidity available for borrowing, with BTC and BNB dominating.

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