Lending with Buy-Now Options vs Pure Lending

Pure Lending Protocols like BendDAO and JPEG'd excel at providing predictable, recurring yield for lenders and stable liquidity for borrowers by using over-collateralized loans. This model is battle-tested, with protocols like BendDAO holding a peak TVL of over $300M, demonstrating its resilience and capital efficiency for long-term asset holders. It's the standard for users who wish to retain ownership while accessing capital, relying on established liquidation mechanisms.

Lending with Buy-Now Options (BNOs), pioneered by protocols like Blend and Arcade.xyz, takes a different approach by integrating a peer-to-peer loan with an optional purchase right. This results in a trade-off: it unlocks deeper liquidity and higher loan-to-value (LTV) ratios—often 70-90% versus ~40% for pure lending—but transfers the asset's optionality to the lender. This model is optimized for sellers seeking immediate exit liquidity and lenders acting as strategic buyers.

The key trade-off: If your protocol's priority is capital efficiency and user retention for blue-chip collections, choose a Pure Lending model. If you prioritize maximizing liquidity depth and facilitating high-volume trading or exits, a Buy-Now Option system is superior. The choice fundamentally hinges on whether you are building for HODLers or for the active marketplace.

Lending with Buy-Now Options excels at maximizing capital efficiency and user retention by integrating a liquidation hedge directly into the lending position. For example, protocols like Teller and Goldfinch that offer optional buy-now features can see user deposit TVL increase by 15-30% as capital is not idly waiting for a liquidation auction. This model transforms a potential loss event into a user acquisition funnel, creating a more resilient and sticky protocol ecosystem.

Pure Lending takes a different approach by enforcing a strict separation of concerns between credit provision and asset acquisition. This results in a clearer risk model and operational simplicity, as seen in the battle-tested architecture of Aave and Compound. The trade-off is a potential capital inefficiency during market downturns, where liquidated collateral must be sold at a discount through public auctions, a process that can take minutes to hours and realize up to a 15% loss versus spot prices.

The key trade-off: If your priority is protocol growth, user experience, and capital velocity in a competitive DeFi landscape, choose a lending model with integrated buy-now options. If you prioritize risk predictability, regulatory clarity, and maximizing liquidation yields for the protocol treasury, choose a pure lending architecture. The decision hinges on whether you view liquidations as a cost center to be optimized or a revenue stream to be maximized.