What does the future hold for crypto lending? It’s a question on many people’s lips as the runaway train that is decentralized finance (defi) continues to gather speed.
Earlier this year, with most of the planet on the verge of lockdown, the value locked in the booming defi market crossed the symbolic $1 billion barrier, before smashing the $2 billion mark at the start of this month. It’s now closing in on $2.5B.
While lending platforms represent just one pillar of the defi movement, alongside open finance protocols, DEXs and micropayment products, demand for collateralized lending is surging, with decentralized heavyweights Compound and Maker sitting at #1 and #2 in terms of value locked ($1.3 billion total).
Crypto Loans Let Hodlers Have Their Cake and Eat It
Given the ubiquity of the hodling mindset, crypto lending ostensibly lets individuals lend their digital assets while making a return, with attractive interest rates. It is not uncommon for people to now borrow against 5, 10 or even 20% of their holdings. Crypto users can have their cake and eat it, retaining their BTC or ETH as a long-term investment while creating a residual income stream from interest payments.
Of course, retail interest has also been strong, with investors availing themselves of crypto-denominated loans to short assets. In any case, stablecoins are intimately tied to this expanding market, with Maker’s collateralized Dai – pegged to the dollar but backed by ETH locked in publicly viewable contracts – underpinning many defi projects. In June, the market capitalization for stablecoins surpassed $11 billion for the first time, with its value doubling since February.
“Сrypto-lending has become a highly-competitive, multi-billion-dollar market,” notes Alex Faliushin, Founder and CEO of CoinLoan, an Estonian lending platform that lets members use both fiat and stablecoins as loan collateral. “Dozens of new actors are appearing on the market and we can see growing interest from large institutional lenders and borrowers, too.”
With Stablecoins, Banks Are Cut Out of the Picture
As for stablecoins, Faliushin is unsurprised by their success. “They help to replace fiat money in lending and therefore exclude banks from the lending process,” he says simply. “You can borrow some USD-backed stablecoins and buy crypto on the exchange instantly using stablecoins to leverage yourself. Users outside the European region and the US get an opportunity to borrow in stablecoins and convert their loans into fiat in local exchanges.”
They needn’t be backed by USD, either: “Stablecoins backed by gold can be used as low-volatility assets and convenient loan collateral. CoinLoan already supports one EUR-backed coin and the main USD-backed ones. Shortly, we’re going to add some stablecoins backed by gold.”
Centralized, Decentralized or Peer to Peer?
Defi lending is often touted as opening finance up to a much wider market of customers – individuals who struggle to obtain a bank loan, for example, as well as those who would balk at the idea of doing so for various reasons. Most platforms also allow for greater customization, with the consumer deciding the cost of the loan and the duration while breezing past the credit check. But debates rage about which model is best: centralized (NEXO, Celsius), decentralized (Compound, Maker) or peer-to-peer (Blockfi, Finwhalex).
“Only centralized (lending) platforms have a promising future,” Alex Faliushin opines. “With the P2P market, the liquidity is spread among the many loan offers – but large borrowers don’t want to get dozens of small loans from different lenders. They’d be better getting a single big loan. And most existing defi platforms are not really decentralized, since they can be turned off if several servers are disabled.
“Centralized platforms offer greater functionality and speed, with simple and more predictable services. You can borrow at fixed rates or earn fixed interest on your deposit. In the case of defi, it all depends on a market that fluctuates unpredictably. Centralized platforms also usually have simple interfaces and low barriers to entry; users don’t need to know what smart contracts are and how self-managed crypto wallets work.”
But aren’t centralized lenders inherently risky? “Using a centralized platform requires the user to trust his coins to some people behind it, yes, and there’s always the risk of an exit scam. However, there hasn’t been one scam centralized crypto-lending platform so far. Nor has a single centralized platform from the sector been hacked, since almost everyone uses custodians with insurance and multi-signatures. Decentralized platforms have already lost a ton of money due to bugs in smart contracts, and they are prone to technical errors.
“Moreover, users have the flexibility to work with different currencies and blockchains by using centralized lenders. You can get a loan, secured by an anonymous asset such as Monero. Or you can use a combination of different currencies as collateral. With decentralized platforms, only an asset within one blockchain can act as collateral.”
Is the Crypto Credit Bubble About to Burst?
It’s natural to be bullish about crypto lending given what has been achieved in a relatively short period of time. But with the traditional credit market sitting at $6.7 trillion, it has a long way to go. On the other hand, some have claimed it’s expanded too quickly and is headed for a devastating blow-up. What does CoinLoan’s CEO think about the health of the market?
“The flow of new users is an all-time high on CoinLoan. Since the beginning of 2020, we have grown by 600% in terms of lending. The pandemic hasn’t harmed us. In fact, times of instability tend to fuel the demand in our services and the growth of the crypto-lending market. More and more people come to store funds in an Interest Account and earn interest safely. Crypto holders don’t want to sell their virtual coins at current prices and prefer to get long-term loans while waiting for their assets to grow.”
And in the mid-term? “The strong interest that institutional actors have in digital assets increases demand for lending services. We’re continuously monitoring the market to analyze customer and market needs. Based on these data, the institutional capital inflows can be expected to grow in the next 1-2 years.
“There are the two services that are necessary for institutional actors, margin lending and multi-collateral credit lines – both of which are in our roadmap. Furthermore, users’ trust is essential for further market development, especially when it comes to long-term custody of the assets.
“The company’s experience and reputation, the supervision of the financial regulator and relevant licenses, and the presence of a serious custodian for the storage of client assets play a vital role.”
Ultimately, no-one knows what will happen next in the world of defi and crypto lending, save for a further increase in the total value locked. For platforms like CoinLoan and defi dApps built on Compound and Maker, credit lines will remain open so long as creditors and debtors keep up the demand.