Lending Platforms

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Crypto lending platform is a peer-to-peer (p2p) marketplace that directly connects a lender and borrower, without engaging a bank or another financial institution as an intermediary. Operating on blockchain technology, these platforms enable users to make extra income on the cryptocurrencies they are holding or borrow money on better terms (lower interest rates) compared to traditional financial service providers.

Crypto lending makes it possible for borrowers to utilize their crypto assets as collateral to get a loan, while lenders supply the assets for the requested loan at an agreed interest rate prior to the transaction. Crypto lending is often used for margin trading, meaning that a borrower takes a loan expecting the price of a coin to follow a particular path, which can potentially multiply the effectiveness of a borrower's trade in case of successful performance on exchanges.

According to Graychain Ltd, the estimated size of the crypto lending industry in 2019 reachedp[1] $4.7 billion in value. With over $220 million worth in 23,000 loans issued in the first six months of 2019 alone, lenders earned approximately $86 million in interests in this period.

Benefits of crypto assets lending

  • Less paperwork
  • Fewer middlemen
  • Lower (and generally more transparent) fees
  • Multiple currency options

For instance, a user can deposit fiat to take out a stablecoin loan, or use their ETH stake for a BTC loan that makes it possible for them to fund an exchange account in order to purchase more ETH

  • Higher collateral liquidity

Collateral deposited for loans on the crypto assets lending platforms are always in digital assets, which are more liquid than many types of collateral in traditional markets

Types of crypto lending

By currency pairs

  • Crypto-to-crypto lending

Crypto-to-crypto lending mechanisms enable lenders to earn extra BTC, ETH or altcoins in interest by lending their cryptocurrencies to other users at a fixed rate.

  • Crypto-to-fiat lending

Crypto-to-fiat lending platforms enable users to borrow cash from their peers by using their cryptocurrency (BTC, ETH or altcoins) as a collateral. For the collateral to be reimbursed, the borrower needs to pay the full amount back to the linked bank account.

By use of borrowed funds

  • Personal use

While crypto has not yet reached worldwide adoption as a payment method, some users prefer to borrow funds of crypto lending platforms instead of taking a loan in a regular bank. This decision is usually incentivized by three main criteria:

1) lower interest rates for a borrower without financial intermediaries involved,
2) democratized access to loans and
3) close-to-instant transactions.

Margin lending

Margin lending[2] enables borrowers (usually, crypto traders) to maximize their returns by investing the borrowed money in crypto tokens they expect to go up in price.

Typically, investors borrow money at a fixed rate from other users of the crypto exchange they are planning to trade on. Margin trading can significantly improve the returns but is considered very risky.

On the other hand, margin lending is considered safe for lenders, as the transactions can be automatically executed once the lending period is over, no matter if a borrower’s strategy succeeded or not. Examples: Bitfinex, Nuo

By level of centralization

  • Centralized

Centralized lending platforms are represented by crypto exchanges, margin lending platforms and several startups[3]. This type of platforms onboard clients, manage payments and custody assets selectively and sometimes manually, which makes the data not fully transparent. Examples: Celcius, Coincheck

  • Decentralized

In decentralized platforms, the loans and interest payments are distributed to users by smart contracts. These systems are usually non-custodial and supply the assets directly to customers' wallets. Compared to centralized lending, decentralized platforms provide transparent data, as the transactions are recorded on public blockchains.

In 2019, DeFi data platform LoanScan stated that over $600 million on-chain loans were issued.

Examples: MakerDAO,dYdX, Compound Finance, EOSREX, EOSDT etc.

Risks

Many of the crypto lending platforms are not regulated or insured, in which the collapse of a significant lender would send doubt throughout the system, as actual ownership and eventual recovery of deposited tokens would be unclear. Some of the players address this question, however: for instance, EOSDT has introduced[4] Equilibrium Stability Fund to support the system in case if underlying asset collapses. Transparency can also be a risk in decentralized lending, as others are able to see transactions and forensics and can potentially use this information to uncover identities and trading strategies.

References

[1]Crypto Lenders Have Earned Just 2% on $4.7 Billion in Loans: Report, Coindesk
[2]Margin Lending Cryptocurrencies, Medium.com
[3]A look at 20 Cryptocurrency Lending Websites from Decentralized to Centralized, Medium.com
[4] Introducing Equilibrium’s Stability Fund, Medium.com