Introduction to BENQI

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25 Feb 2024

What is BENQI?

BENQI is a suite of decentralized finance protocols built on Avalanche. It consists of the BENQI Markets, BENQI Liquid Staking and Ignite.
BENQI Markets enables users to effortlessly lend, borrow, and earn interest with their digital assets. Depositors providing liquidity to the protocol earn yield, while borrowers are able to borrow in an over-collateralized manner.
It is permissionless to use and allows DeFi users to:

Instantly supply 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

BENQI Liquid Staking is an Avalanche liquid staking solution that tokenizes staked AVAX. By tokenizing AVAX through liquid staking, users are given the ability to use, swap or collateralize the yield-bearing asset within Decentralized Finance applications.
It is a capital efficient staking product that allows Avalanche users to:

Freely transfer locked up capital (staked AVAX) staked in validators in securing the Avalanche network
Gain additional utility on their yield-generating asset by utilizing it within Decentralized Finance by trading it or using it as collateral
Seamlessly stake their AVAX on the Avalanche Contract Chain (C-Chain) with no tedious cross-chain transfers or server hosting

Ignite is a protocol designed to bootstrap Avalanche validators and Subnets — designed for everyone, ranging from institutions to individual developers and Web3 natives.
It is permissionless to use and allows builders and users to:

Launch Avalanche validators with minimal capital required
Affordably launch blockchains through Subnets to bootstrap the next big Web3 idea

Storage of funds

Funds are administered by Smart Contracts.

Risks

No protocol within the blockchain space can be considered entirely risk free. The risks related to the protocol may potentially include Smart Contract risks and Liquidation risks. The team has taken necessary steps to minimize these risks as much as possible by undergoing audits and keeping the protocol public and open sourced.

Depositing

Using the protocol

To use the protocol, the user deposits their preferred asset that is accepted by the protocol. Users will be able to earn interest based on the asset's market demand for borrowing. Additionally, deposited assets can be used as collateral to allow the user to borrow other assets. Interest earned by depositing funds offsets the accumulated interest rates from borrowing.
Additional token pools will be added as the platform grows. The additions into the protocol will be initially decided by the core team and as the protocol's governance transitions into a Decentralized Autonomous Organization (DAO), additional pools will be approved based on community votes and proposals using the QI governance token.

Depositors will be given tokenized yield-bearing tokens (qiTokens) which will be required to withdraw supplied assets from the BENQI Liquidity Market when required.
qiTokens can be transferred and traded as any other crypto-asset on Avalanche.

Borrowing

Why borrow?

A user may want exposure on their current asset appreciating (going long) while looking to enter another position with additional capital.
As a result, the user would be able to borrow, using the current asset being deposited in the protocol instead of fully selling it off. This provides the user liquidity (working capital) without the need to sell their current asset.
Example:
Satoshi requires additional liquidity to enter a new position but does not want to sell his $AVAX tokens as he expects his AVAX tokens to increase in value.
He may do the following:

1.Deposit AVAX into the BENQI protocol as collateral
2.Borrow USDt using his AVAX as collateral
3.Uses the borrowed USDt to enter his desired positions

Before borrowing, the user is required to deposit an accepted asset to be used as collateral. Ensure that the "Use as Collateral" tab is enabled in the "Supply" section as shown in the image below:
The maximum amount that can be borrowed depends on the value deposited and the available liquidity. The user cannot borrow an asset if there is not enough liquidity or if their Health doesn’t permit them to.

Borrowing Assets

Click on the Markets tab on the menu and click on Borrow
Select the type of asset from the drop box menu in the Borrow dashboard
Enter the desired amount to borrow and click Borrow
Once the transaction is confirmed, the borrow is successful and it starts accruing payable interest

Collateral factor

The Collateral factor varies across each asset. It is the maximum amount that can be borrowed from the protocol using this specific asset as collateral.

Repayments

The repayments tab is located under the Borrow dashboard. Click on Repay, enter your desired amount to repay and confirm your transaction.

Repayments are only able to be done with the same asset borrowed

Time period for loan repayments

There is no fixed period to repay loans.
As long as the user's position is safe (Health > 1), borrowing can be done for an undefined period. However, accrued interest may grow causing the user's Health to decrease which might result in deposited assets becoming more likely to be liquidated.

Avoiding liquidation

In order to avoid the reduction of the user's Health leading to liquidation, the user can repay the loan or deposit more assets in order to increase their Health .

Health

Health is a numeric representation of the degree of safety of user assets deposited as collateral. A higher value indicates that the user's funds have greater safety from liquidation.
If Health goes below 1, a portion of the user's collateral can be liquidated.
The Health of a user's funds is a dynamic state, and depends on the liquidation limit of the collateralized position against the value of the loan.

Health fluctuations

Health is how “safe” your loan is, defined as the proportion of total 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.

Health > 2 : Green
Health < 1.99: Orange
Health <1.1: Red
At Health < 1, liquidations will occur

Liquidations

Liquidation happens when a borrower’s Health drops below 1 due to the value of their collateral not properly covering their loan/borrowed value.
This happens when the collateral decreases in value or when the borrowed debt increases in value against the collateral.
The collateral vs loan value ratio is shown as Health. In a liquidation, a borrower’s debt is repaid and that value plus a liquidation fee is taken from the available collateral.