Comparing and Contrasting Lending Protocols
If you‘re familiar with decentralized finance, then you’ve most likely heard of the several lending protocols within the ecosystem. At first glance, it may seem unimportant as to which asset on which platform you utilize for lending, however, you might also find more nuance than expected.
There are a few possible decisions to be made when choosing your ideal lending protocol and asset. While Compound hosts the lowest yields among the bunch, it has a significant advantage in supplied funds, a strong community, and confidence in security, holding the highest rewards for bug bounties. Alternatively, DDEX boasts a nearly 8% average APR for 2020 with USDT lending, but has a lesser supply of funds. Between these options, sits dYdX and Aave, holding strong supply amounts, yet striking a happy medium with security and interest rates.
For yield, prior to the launches of DDEX and Aave in late 2019 and early 2020, Compound and dYdX held extremely high interest rates. Unfortunately, these figures dropped dramatically after the new year.
In this same period, Aave maintained a decent average for both Dai and USDC, while DDEX displayed slightly lower APR figures. This DDEX Dai interest rate is deceiving, as we will explain later. Different from Compound and dYdX, however, is the ability to lend with USDT on Aave and DDEX. This asset is where DDEX shines, reigning as the highest average APR.
When assessing the risks of lending protocols, security comes first. As all four protocols have public audits, another strong indicator of smart contract safety is the presence of bug bounties, programs offering rewards to individuals reporting bugs or opportunities for hacks in code. Compound leads the group with the highest range for rewards.
An overlooked risk vector is the size of borrowed funds and supplied funds. If the amount of borrowed funds exceeds that of the lending supply, funds can unfortunately be frozen and stuck, as seen with the protocol bZx. The amount of funds supplied is also an indicator of community support and trust. Compound leads this category, having the largest supply, followed by dYdX, Aave, and DDEX. Interestingly, DDEX has a healthy supply for USDT, yet the lack of lending supply for Dai currently invalidates Dai lending from being a safe opportunity.
Even more neglected remains the token risk. While often small, stablecoin risk can be profound. Although USDT holds the highest average APR, it carries definite risk. There are concerns over its legality within the community, even leading to a class-action lawsuit against Bitfinex, the creator of Tether. However, these concerns aren’t likely to impact the token for years to come. Realistically, it is more likely for Dai to be a subject of pursuit by the government because of its decentralization and the government’s desire to shed bad light on decentralization to maintain their monopoly over our money.
Although the tool DeFi Score is excellent for understanding individual protocol risk with quantitative information on liquidity, audits, and even a synthesized overall score, it lacks qualitative analysis, a valuable instrument for comparison.
For example, community and ecosystem comfort. The Compound Finance community is ecstatic about their lending platform with it being one of the base layers of all of DeFi (with products like Dharma). It is also a great example in progressive decentralization that many teams should take note of. Similar to Compound, dYdX and Aave have strong support, with many avid members raving about the rapid growth of Aave. In contrast, some users have expressed concerns surrounding the recent hacks and exploits of bZx.
While this review provided insight on individual protocols and their comparisons, Rari Capital offers another option for DeFi earnings. Our rebalancer automatically allocates across assets and protocols, maximizing yield to provide the highest possible return for our users.
With the first version of Rari Capital set to launch soon, you can sign up for our waitlist here. To learn more about Rari Capital, visit rari.capital, or read our announcement article. Also make sure to follow us on Twitter or reach out to help@rari.capital!
