The Advantages Of Equilibrium
We’ve previously discussed the big-picture fundamentals of Equilibrium and how it works. Now we’re going to dig into the specific advantages the platform offers that differentiate it from the rest.
Equilibrium seems to be the most comprehensive platform among today’s variety of DeFi solutions. It gracefully combines a lending platform with a cross-chain decentralized exchange — they complement each other by enhancing liquidity in Equilibrium’s non-custodial cross-chain liquidity pools and making the system more stable.
Beyond that, our system offers several advantages that make it something truly unique. Let’s dive into each of these advantages to learn how they set Equilibrium apart from the pack.
One word: interoperability!
We believe crypto should work easily with other crypto, and Equilibrium is the only DeFi platform of its type to offer true cross-chain compatibility. Our system can move value across siloed blockchains that would otherwise not be able to communicate with each other. You might transact in BTC while the counterparty receives ETH, for example, and it all takes place in a trustless environment without any centralized point of failure.
Interoperability enhances financial freedom in the crypto world. While it’s a technically complex undertaking, we believe it will inevitably become the norm in the future. We are proud to let our users transact in the currencies of their choice until then.
Enhanced system stability
DeFi users are going to wonder how reliable their chosen protocol might be. A platform’s reliability largely depends on the architecture and financial model that supports it. We all remember in March this year when MakerDAO lost more than $7.5 million of crypto assets as they were extracted from the protocol during market turmoil. This was caused by the obvious drawbacks of liquidating debt via auctions. Even though auctions have so far been the norm for liquidating debt within DeFi platforms, this mechanic has proved to be too risky and passive in adverse markets.
Equilibrium introduces a bailout mechanism in which users fill a “bailsman” role, providing the system with more liquidity when necessary and earning interest on the funds they inject into the
bailout pool. In case of margin calls, collateral and debt are transferred to the bailout pool of advanced liquidity and spread across it. It’s a far more active solution for keeping DeFi platforms afloat during times of market decline.
The lowest collateralization requirements, and a true collateral basket
Overcollateralization is a common methodology in the DeFi space across many platforms. Users can overcollateralize their digital assets in smart contracts and get crypto loans or decentralized stablecoins in return. The only question is: how much will it cost you?
Synthetix asks its users for a minimum 600% collateralization — if you want to get $100 in stablecoins there, you have to put up at least $700 of crypto. MakerDAO wants 150%. Compound wants 133%. We knew we could do better, so our collateralization requirement is just 105%. It’s the most affordable way to get a crypto loan or generate decentralized stablecoins in DeFi today.
Our system design even allows for reducing collateralization requirements down to 100%. Liquidating a position at 100% may seem risky at first glance, perhaps resulting in system insolvency. But with advanced liquidity in the bailout pool, the system will still remain solvent — this is the beauty of our bailout mechanism.
Furthermore, we offer collateralization on a basket of crypto as opposed to opening a position in just one currency. This is essential for fund management in traditional finance, but remains a novelty within the DeFi space. Equilibrium users can lock a tailored portfolio of assets in collateral and significantly mitigate their volatility risks.
We’re the only platform offering programmatic interest rates
Beyond the expense of putting up their collateral, DeFi users are subject to paying annual interest. Most projects offer a flat interest rate that’s usually set by governance (often quite randomly) and has nothing to do with risks or objective reality.
But Equilibrium’s flexible interest rates work algorithmically to reflect system solvency and let borrowers find a balance between risk and collateralization. If they choose to do so, users can reduce their interest fees anytime they want by fronting more collateral and making their positions safer. It’s one more angle of attack toward making DeFi more affordable.
Other advantages worth mentioning
Cybersecurity is another important aspect of DeFi reliability, and we have something to say in this arena as well: the blockchain security professionals at Quantstamp have been auditing our codebase to make sure there are no opportunities for security breaches.
Equilibrium has a unique risk management algorithm that works to achieve, monitor, and maintain maximum liquidity and maintain normal operations. You can think of it as a figurative security guard for the platform, watching system liquidity across blockchains in real time, from an individual’s multi-asset portfolio all the way to total system solvency.
Beyond that, we are building a decentralized exchange facility that enables users to trade the spot market on margin. Then we will introduce initial and maintenance margining that is widely used in professional trading platforms.
We imbued Equilibrium with these distinct advantages because we believe this is what it will take to unlock DeFi’s full potential. Users who hold Equilibrium’s core system asset, the EQ token, can use it to gain access to the full functionality of the system. Our next article is going to explain the key functionality of our EQ token, the figurative star of Equilibrium’s DeFi show.
Read the previous article The fundamentals of Equilibrium
The outline of our series:
- The Fundamentals Of Equilibrium
- Advantages of Equilibrium
- Key Functionality of The EQ Token
- Bailouts vs. Auctions (Bailout Mechanism)
- Equilibrium’s Risk Model
- Equilibrium DeFi Parachain & the Initial Parachain Offering
- Liquidity Farming