Arbitrum is a layer-2 scaling solution for Ethereum that has rapidly become a hub for decentralized finance (DeFi) applications thanks to its high throughput and low transaction costs. It has over 300 DeFi projects currently listed, with 46 of them geared directly towards lending. Several lending protocols stand out by offering users a way to earn interest on their assets or borrow funds by using their crypto holdings as collateral. This type of DeFi service has begun to thrive, which has created some tough competition between DApps when it comes to making the most out of your crypto investments. Curious to know which are the best to use?
How Do Lending Protocols Work?
There are four main components of a lending protocol:
Supply and Borrow
Users supply assets to their protocol of choice, which are then aggregated into liquidity pools. In return, they will generally receive a token that represents their stake in that pool and allows them to begin earning interest.
Earning Interest
Suppliers will earn interest on the assets they deposit. The interest rate is generally determined algorithmically based on the supply and demand of the asset they have added to the pool.
Borrowing Assets
Users may also borrow assets, and use their supplied assets as collateral to do so.
Interest Rates
Borrowers pay interest on the assets they borrow, which is also determined algorithmically. The interest is then distributed to the suppliers of the respective assets that were borrowed.
There are also a few shared features that generally span protocols:
- Liquidation: If a borrower’s collateral falls below a certain value threshold, their collateral can be liquidated in order to repay the loan and maintain the system’s solvency.
- Decentralization: Thanks to Arbitrum’s blockchain network, all protocols run decentralized and rely on smart contracts to automate the lending and borrowing process.
- Interest Rates: As mentioned, these rates are dynamically adjusted depending on supply and demand for each asset.
- Transparency: Another fantastic feature of blockchain technology, all transactions and interest rates are transparent and verifiable on the blockchain.
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These are some popular lending protocols on Arbitrum and what sets them apart.
Aave
Aave is differentiated from other protocols thanks to its flexibility in rates. Users can switch between stable and variable rates through their dashboard. This helps investors choose the strategy that best matches their risk tolerance and best interests.
Radiant
What makes Radiant different is that it supports lending and borrowing across multiple blockchains, allowing users to leverage assets from different ecosystems. They also offer yield farming opportunities, allowing users to stake their tokens to earn additional rewards (generally distributed as a native token), and a decentralized governance model, where token holders can propose and vote on upgrades, features, and other decisions.
Dolomite
Dolomite is unique because it allows users to perform marginal trading, where they can leverage their transactions by borrowing additional funds against their collateral. It also boasts a portfolio management tool to help optimize users’ crypto portfolios.
Qonstant
Qonstant is a standout DeFi lending protocol developed by Steadily. Thanks to fixed-rate loans, it offers a unique approach to lending, providing users with much-wanted certainty and predictability in their risk management of crypto assets.
There are a few other ways Qonstant stands out from the crowd:
- Fixed Rates:
Unlike many DeFi lending platforms, where variable interest rates are the norm, Qonstant provides fixed-rate loans. This feature is critical for users seeking stability and predictability in their income and borrowing costs. Locking at a fixed rate allows users to plan their finances more effectively without worrying about unexpected increases in their repayment amounts.
- Transparency and Security:
Thanks to the blockchain’s nature, all protocol operations are transparent and can be independently checked by anyone using the Arbitrum explorer. The leading Web3 security firm, Halborn Security, audited Qonstant’s smart contracts.
- Competitive Interest Rates:
Qonstant aims to provide competitive interest rates for both lenders and borrowers. Optimizing the platform on Arbitrum means Qonstant can offer attractive rates while keeping operational costs low. For those looking to maximize returns or minimize borrowing costs, Qonstant is an appealing choice.
Why Arbitrum?
The expansion of DeFi lending protocols onto Arbitrum represented a significant advancement in the crypto finance landscape. Users now have access to efficient and cost-effective lending and borrowing solutions for their crypto portfolios. Qonstant stands out thanks to its unique fixed-rate loans, which provide stability and predictability in a volatile market. As Arbitrum continues to grow, these protocols are likely to continue to play an important role in the DeFi ecosystem.