Lending is an indispensable part of the DeFi world, building up the foundation of the whole ecosystem.
In the early stage of decentralized lending, users need to deposit funds and can only withdraw them until the end of the locking period.And when the lender(depositer)withdraws money, the avaliable funds in the pool will become less.
A new type of token is therefore created which is interest- bearing token.
What is the interest-bearing token?
The pioneer decentralized lending protocol-Compound introduced the interest-bearing token. As I explained earlier, the earliest way of lending/borrowing is not that capital-efficient and liquid.
So, the platform introduced C-token to solve this pain point.
Simply saying, the C token is the proof of ownership of the loan or the representation of claims on your deposit. The value of the interest-bearing token should grow over time as the protocol collects payments from liquidity users/borrowers. You must deposit a certain amount of supported lending assets before getting C tokens at a 1:1 ratio.
There are two ways how you can handle these interest-bearing tokens:
- 1. Sell them in the secondary market；
- 2. Hold them and redeem your deposited funds by burning them
The elegant idea enhances the liquidity on the market to a large degree, and the trading of the interest-bearing tokens has no impact on the size of the available borrowing pool.
As people explore deeper interest-bearing tokens, use cases has also increased.
Apart from holding them and selling them in the secondary market, people are also using them as collateral, shaping them into structured products, or just sending them to the cold storage for safety.
Which protocols are utilizing interest - bearing tokens?
Lending protocols initially utilize the interest-bearing token mechanism. But as the value of CETH or CDAI equals ETH or DAI + potential interest. More and more protocols are joining the team, such as DEX, farm or vault, or even algorithm stablecoins. We list some examples below.
Aave’s aToken uses a unit increase model, meaning a holder’s balance of aTokens will increment up as the asset pool grows from interest payments made by borrowers. For example, if you deposit 1 ETH in the Aave ETH pool you’ll be minted 1 aETH token. As the pool accumulates interest your aETH token balance will increment up so that your aETH token balance is greater than 1, reflecting your claim on a growing pool of assets. When an aETH token holder goes to redeem the underlying ETH their aETH will be redeemed 1:1 with the underlying ETH.
Compound’s cToken uses an exchange rate increase model, meaning the exchange rate between the interest bearing cToken and the underlying asset should increment up over time as interest payments accumulate in the pool.
Depositors in Compound are not issued more cTokens over time like aToken holders are. The amount of cTokens, for any given deposit, stays the same. Instead, the exchange rate of the cTokens will be algorithmically pushed up as the pool accumulates interest payments from borrowers. Even though the amount of cTokens won’t change, the price or value of the holder’s cTokens will increase over time.
Dex is short for decentralized exchange and is a place to go if you want to trade your interest-bearing tokens.
Dex such as Uniswap is a perfect place to go to trade your interest-bearing tokens.
Farms and vaults
Farms and vaults are places to go if you want to earn an extra layer of interest using your interest-bearing tokens.
You can check Multifarm to find out which farms/vaults are available for your assets.
You can check Multifarm to find out which farms/vaults are available for your assets. For example, when you are holding aUSD and wanna find the best place for yield and return, you can type aUSD in the searching bank for asset farming. And we will tell you all the potential places and other critical information such as historical APY, TVL.
Algorithm stable coin
DeFi 2.0 protocol such as Abracadabra.money is a typical example here.
For example, a user may stake their $Sushi and get $xSushi (represent the right to share the transaction fee) in return, and they can use their $xSushi as collateral to borrow out $MIM, then swap MIM to other common stablecoin such as USDT.