The Most Important Brick in DeFi: Yupana Review
Lending protocols are very important to the DeFi ecosystem as loans are the backbone of the economy. Now, MadFish Solutions is about to launch Yupana, so it might be the high time to talk about the role of loans in DeFi.
In this post, we explain why loans are so important, how Yupana will work, and who will be primarily interested in loans secured against cryptocurrency.
Loan Market Is Five Times As Big As Stock Market
Global GDP comprises $85 trillion. Equity market capitalization is $93 trillion. Loans outstanding exceed $475 trillion. The loan market is the world’s biggest.
Loans provide an uninterrupted turnover of funds and allow one person’s idle capital to be turned into another person’s working tool.
Lending is considered one of the safest ways to make money. The bank takes care of finding borrowers, checking their solvency, bookkeeping and other concerns. The investor simply puts money on deposit and gets a profit.
All in all, the opportunity to get money at interest moves the economy forward.
How Loans Work on Blockchain
DeFi uses lending protocols in place of banks. The liquidity of lending protocols on Ethereum is $20 billion or 50% of all funds blocked in DeFi.
Since there is no enforcement mechanism in blockchain, borrowers take out loans secured by cryptocurrencies. The value of the collateral always exceeds the value of the loan, so that if prices fall, the protocol can liquidate the collateral and return the investor the funds invested. For example, with a tez value of $2 and a collateral requirement of 200%, the borrower can take $1 for every tez in collateral.
When the loan is repaid, the borrower must return the tokens as well as the interest rate: profit to the lenders and the platform fee. The interest rate on loans in lending protocols depends on the demand for the token among borrowers. For example, investors contributed 100,000 kUSD and 10 uBTC to the protocol. Borrowers have deposited 90,000 kUSD and 1 uBTC, resulting in kUSD loan rates and provider profits higher than in uBTC.
Why Borrow In Crypto
At first glance, a cryptocurrency loan looks useless: the user gives $200 in tez and receives $100. But the point of the transaction is to turn idle capital into working capital.
Let’s say an investor wants to simultaneously hold tez in the hope of growth, but also make money from liquidity farming. If they borrow in stablecoins against tez, they can exchange them for the desired tokens and make a profit on the farming while tez is growing more expensive.
Similarly, loans can be used to open a long position or diversify a portfolio. The user borrows in stabelcoins against tez and buys more tez or other tokens with them.
The most interesting way to use loans is to open a short position. To do this, the user borrows tez against stablecoins and immediately sells tez for stablecoins. When the market goes down, they buy tez at a lower rate, repay the loan and make a profit in stabelcoins.
How the Lending Protocol Yupana Works
Yupana is now available only on ithacanet, so the yield of 167% in tez and tzBTC liquidity of 7.5 * 10^101 are not real. MadFish Solutions invites everyone to join in the testing and bug detection. You can learn more about it on the MadFish blog.
The developers have laid out the entire interface on one screen. At the top side of the screen, you can see your deposit in Yupana protocol, the cost of borrowed funds, the available loan amount, and the liquidation limit.
In the lower part of the screen, there is a working interface containing deposits in the left hand-side table and credits in the right hand-side one. To deposit assets, click the arrow under the token you’re interested in and then press Supply. After that, specify the amount and confirm the transaction in your wallet.
After depositing funds, you’ll get y-wTEZ that show your share in Yupana. In essence, it’s LP tokens.
To take out a loan, first allow using your deposit as collateral. To do that, activate Collateral in the Your supply assets table and confirm the transaction.
Then select the token you want from Borrow assets, tap Borrow, specify the amount, and confirm the transaction in your wallet.
This is enough for most use cases of lending protocols, which are passive income from deposits, capital engagement, and opening long/short positions away from centralised exchanges. Users can also earn from liquidating positions that are ‘under the water.’ Sometimes you can find positions open for liquidation on testnet, so you can practice.
Aside from that, Yupana features advance analytics on the available assets, including the amount of available tokens, liquidation thresholds, profitability model, etc.
Yupana looks simple, but powerful platform. We firmly believe it can rattle up Tezos’s DeFi ecosystem.
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