Defi (a form of decentralized finance) is being mentioned a lot in recent times. It is based on blockchain technology and is expected to have the potential to contribute to the economy more open and peer. The cost savings and transaction speed have helped a new type of lending be born and quickly show the advantages compared to traditional finance.
1. The birth of Crypto lending
In the current financial market, complicated procedures exist, along with the strict standards in the Credit check makes many people unable to borrow money easily. Many people who don’t have a good credit history even find it difficult to borrow small amounts. Therefore, some people have chosen cryptocurrency as alternative option for accessing loans. If coin holders need fiat currency they can choose to sell that crypto either they take that crypto asset as collateral for cash. At present, optimists will prefer the collateral option because they believe their crypto assets will be worth more in the future.
One benefit of crypto loans is low interest rates. Banks often offer relatively high interest rates which can be up to 20% while the average loan in the crypto market is about 12%. A number of unbanked people who can’t provide documents to borrow money from the bank, then crypto loans is a great solution for them. In addition, while financial institutions usually only offer lending to clients in certain territories, with crypto lending there are advantages of cross-country capabilities will help borrow connections from anywhere.
There are several types of lending available
Crypto-crypto lending: The crypto assets will be used as collateral for another type of crypto asset.
Margin lending: lenders will be allowed to top up a fixed asset and receive interest offered by the borrower. For example, you can deposit bitcoins and receive a 0.25% annual interest on the binance platform.
Crypto-fiat lending: Crypto assets (bitcoin, eth, altcoin) will be used as collateral and you will receive cash into your bank account. You usually have to pay monthly interest rates and will get your coin back after paying the full amount. This is quite a popular type today.
2. The current situation of the Lending market
According to the report of Genesis capital. $ 870 million was loaned in the third quarter of 2019 while this figure was only $ 746 million in the second quarter. However, this market still has many potential risks
Lack of a clear legal framework
In November 2019, the investment alert unit at Indonesia’s Financial Services Authority know as OJK, along with the IT ministry and local police, closed 270 illegal peer-to-peer lending platforms and
one cryptocurrency platform. An important reason for the closure is the lack of a business license which is a mandatory requirement for businesses operating in the traditional sector of lending. On
November 7, 2019, Global banking regulator the Basel Committee on Banking Supervision (BCBS) which includes banking regulators from the United States, Europe and Japan — agreed to publish a paper on the prudential treatment of crypto assets. The final consultation paper will come into force in January 2022.
Risky from platform
With intermediary lending platforms — collecting brokerage fees from the difference between the lender and the borrower fee. A potential risk is the protection of data from attacks. With these exchanges we need to learn about the previous attacks that they have suffered as well as the policies to protect assets in case of being hacked. In contrast to peer-to-peer platforms where borrowers will be directly connected to lenders, borrowers will have less support in debating disputes and risk of fraud.
Lot of loans have been make but not reaped a lot of profit
The fact shows that many loans are opened and closed very quickly so there is not enough time to generate interest. As reported by Graychain Q2 2019, estimating that $ 4.7 billion has been lent out
over the history of the sector, but only $ 86 million has been earned back in interest. That’s a 1.8 percent return, despite the fact that loans typically cost borrowers 6 to 10 percent on an annual basis.
3. Lending market prediction in 2020
Many people believe 2020 continues to be a thriving year for the lending market with the greater participation of venture capital funds. Lawmakers and governments will participate in drafting legal frameworks to protect the assets of participants in this market.
A few examples of growth from the Graychain 2019 report:
In the first quarter , Graychain found 5,462 new loans; in the second quarter, there were 18,562 new loans.
Those loans in the first quarter amounted to $64.8 million; in the second quarter, that figure grew to $159.3 million.
The second-ranked public protocol, Compound, started the year with $13 million locked in the protocol and broke $100 million in early August.
We cannot forget that the 2008 global financial crisis stems from an underestimation of the credit score, or more specifically, the banks have misjudged borrowers’ ability to repay debt so they offered people more money than the safe limit. It seems that the strong growth of crypto lending market currently has similar factors. In order to attract new customers, many existing lenders willing to reduce collateral (usually crypto) to lower levels, along with the strong price volatility of the crypto market, Some borrowers could willing to accept liquidate the contract because of inability to pay interests.
Tran Hung
Uquid — CEO
