DeFi platforms have created an alternate financial system, DeFi protocols are accessible by anyone from anywhere. Now, you might question what are the main financial services provided by DeFi. Basically, lending and borrowing are the most sought financial service on the DeFi Protocol.
Now in a traditional banking system, party A would visit the bank and apply for a loan, and for A’s loan request to be sanctioned, mountains of paperwork would have to be filled and submitted and other KYC procedures would have to be executed. Paperwork for securing the loan or property that will be mortgaged would have to be submitted to the banks. Any of A’s assets would have to be given as collateral for the Bank to secure the loan and A would have to pay back the loan amount borrowed with the interest accrued on such loan.
DeFi offers lenders a higher rate of interest than legacy systems while eliminating the need for paperwork and making the whole process paperless but at the same time making it secure for the lenders to lend money to borrowers. Now you might wonder how is that possible? How will we be able to catch hold of borrowers who abscond or make good the losses suffered by lenders due to the borrower’s fault on DeFi where there is no audit trail or paperwork. Why would users even participate in DeFi? To answer that let me walk you through the process of lending and borrowing in DeFi.
DeFi lending platforms are decentralized platforms that match the borrower’s requirement with a lender offering the same. Lenders earn interest after depositing their crypto assets on the DeFi platforms. Since DeFi protocols offer a higher APY than bank savings account it is a much more attractive money-making opportunity for users or investors.
Even though the lending and borrowing are completely decentralized and paperless that does not mean the investors will be hung out to dry. Here comes the concept of collateralization.
What is collateralization?
It is the core of lending and borrowing. Every time a borrower wants to borrow crypto-assets from a lender the borrower will have to first provide collateral on the DeFi protocol by depositing another crypto-asset as collateral. For eg, if a lender borrows 100 DAI collateral of 150 ETH will have to be deposited by the borrower.
But the collateral deposited should always have a value higher than what they borrow. This concept is known as an over-collateralized loan.
The functionality of DeFi lending platforms like Compound, Aave, C.R.E.A.M., and MakerDAO remains stable by relying on overcollateralized accounts.
In a truer sense, the debt is as good as the value of the collateralized crypto-asset but a lot of times the value of the collateralized crypto-assets falls lower than the value of the crypto-asset borrowed and this makes the loan insolvent.
It is in the best interest of the protocol to trigger the liquidation process before the value of the collateral falls below the value of the loan borrowed.
What is liquidation?
Liquidation is triggered the moment the value of the overcollateralized loan falls. It is the process of selling the collateral deposited through smart contracts for covering the debt. It acts as a Stop-loss for DeFi lenders as it protects them from a sharp decline in the value of the collateral making it an undercollateralized loan.
Once the collateral’s value falls the protocol allows someone else on the protocol to repay the debt at a discount in exchange for the asset deposited as collateral. Huge incentives are provided to liquidators to buy the discounted collateral and cover the account’s debt.
But in gas wars between liquidators, a huge chunk of these incentives goes to the Ethereum miners as they are the ones who decide which liquidator gets to win the transaction and the offered discount.
Due to the gas wars, the great value is enjoyed by the miners and shifted away from the lenders and borrowers.
This is where the B.protocol comes in handy.
What is B.protocol?
B.protocol is a decentralized backstop liquidity protocol, where in Backstop liquidity providers share their profits with the users of the DeFi protocol and buy their right to liquidate the under-collateralized loans.
This makes sure that the lender’s receive more than just the interest accrued on the amount lent by them ensuring that the great value derived from the liquidation process is in the user’s hands and eliminates the need for gas wars between the liquidators.
The franchise winners on B.protocol are selected through a periodic auction process in which the liquidators bid on the percentage of profit sharing. These profits are accumulated and disbursed to users in proportion to their ratings.
B.protocol is integrated with existing lending platforms by allowing users to interact with the lending platforms through a dedicated smart contract interface thus ensuring that priority is given to B.protocol users in the liquidation process by providing a cushion to the user account when it is getting close to the liquidation price.
Collaboration between B.protocol and EPNS
B.protocol aims to provide better security guarantees to its underlying lending platforms, higher returns to its users, and a higher share of profits to its liquidators all without the need of making any changes to its underlying lending platform. This is achieved by shifting the power from miners to a smart contract mechanism in deciding who will be the liquidator best fit to hold the liquidation franchise.
Now, to achieve its aim in doing so the protocol needs a robust and direct communication set in place. With the collaboration between B.protocol and EPNS, an efficient and seamless communication gateway will be created between B.protocol and its users.
Since B.protocol connects different lending platforms, managing the lending and liquidation process will involve receiving notifications from several platforms without a single dedicated messaging service, the collaboration between B.protocol and EPNS becomes a no-brainer.
EPNS will send notifications to B.protocol users from different lending protocols in one place and owing to its decentralized nature, it will never pull any data from the user’s digital wallet making it secure and safe for the users to receive the real-time push notifications which in return will help the users in taking prompt actions on important lending notifications, bid auctions, updated about the liquidation process while allowing the users to maintain their data privacy.
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