Cryptoncruting boom and Defi-another bubble or new pulse for bitcoin industry?

The innovative cryptocredit market suddenly arose against the backdrop of last year’s collapse of bitcoin prices and most other assets. In an effort to avoid fixing losses, some holders in the midst of cryptosims occupied funds secured by digital assets, or deposited coins to receive a small, but passive income with minimal risk.

Undoubtedly, the very young market is still tiny compared to the traditional analogue. Nevertheless, this sector deserves attention, given the rate of its growth and the introduction of innovation, the value supply of services and the potential for the development of market infrastructure.

Recently, the Defi sphere, consisting of open source projects and designed to make the world of finances more open and free using blockchain and smart contracts, is rapidly gaining popularity.

FORKLOG magazine tried to figure out what advantages and disadvantages are in the field of cryptocurrency lending, and how actually the Defi sector is actually decentralized.

Unrestrained growth

According to the institutional OTC platform Genesis Global Trading, in the III quarter the volume of the issued cryptocredites rose to $ 870 million. Compared to the same period last year, this indicator increased 3.5 times, and the total volume of issued loans crossed the mark of $ 3 billion.

Data: Genesis Research Report by the Block (October 2019)

These data are harmonized with statistics from Messari, also indicating the rapid growth of the sector.

Crypto lending is growing like crazy… @CelsiusNetwork has doubled its loans issued with over $2 billion in the last 3 [email protected] started a lending desk and is on pace for $120m this [email protected]_Capital nearly tripled their loan book this year w > $ 3B Outstanding Pic.Twitter.COM/3bxorfzthl

– Jack Purdy (@jpurd17) november 14, 2019

Researcher Jack Pardy notes that the volume of loans issued by Celsius Network since the beginning of the year has doubled. The niche’s newcomer – Blockchain, which is the leading provider of cryptocurns, also started quite vigorously.

Features of cryptocurred

Cryptocurrency loans imply loans secured by digital assets. Centralized services like Blockfi and Crypto.COM often acts in the role of security, and in non-codial Defi applications-Ethereum.

The main spectrum of products of this market can be classified as follows:

• Cryptocurrency loans in a fiat dollar individual participants and companies with the transfer of funds directly to bank accounts. Funds are often used by borrowers to replenish liquidity deficiency, as an alternative to expensive banks. Prominent players in this niche are centralized Blockfi, Unchained Capital and Coventure.
• Decentralized platforms for trading derivatives. Examples: Dydx, Synthetix.
• Lending in cryptocurrency secured by digital assets.
• Necmphadial landing protocols (Defi), using smart contracts to reduce the risks of the counterparty and transaction costs. The key asset and protocol of Defi services is Ethereum, and tokens based on it recently began to be used as providing loans. Presumably the main users of such services are traders, ICO/IEO projects and borrowers experimenting with an alternative to expensive and bureaucratized banking services.
• Loan platforms with a native token. Many of them collaborate with third -party casteral services, including BitGo. Famous players Niche: Nexo, Celsius and Salt.

Famous players of the cryptocurred segment. Source: The Block

Credit market is an important source of resources for any industry. For participants in the cryptocurrency business-exchanges, funds, ICO/IEO projects, Bitcoin-Bankmeters and exchange services providers-access to inexpensive loans on the security of an asset predominant on the balance sheet allows you to expand the possibility of managing capital management.

New products for borrowers from countries with expensive bank loans are especially relevant. For example, in economically unstable Argentina, interest rates exceed 60%, and due to currency restrictions in the population, the possibilities of hedging inflation risks are very limited.

An annual rate (APR) in cryptocredit services is only a few percent. Consequently, the Argentinean holders of BTC, ETH and other crypto acts can not only get an inexpensive loan in a matter of minutes, but also count on interest income from free digital assets with minimal risk.

APR in various services may differ markedly. For example, as of 21.eleven.2019 on Compound floating rates for deposits and loans in SAI (the old version of the DAI multi -zaloic stableco multi -lobed stubbler) were 5.66% and 11.31%, respectively: respectively:

On the recently opened OASIS Defi Hab, the DAI deposit rate is only 2%, but this stabilcoin is to generate on the security of the Bat ether or token can be 4%, which is much more profitable than competitors.

Such conditions may seem extremely attractive, for example, for residents of post -Soviet countries, where bank loans rates are quite high. In addition, loans from traditional sources are fraught with hidden commissions, paperwork and other rudiments of traditional finance.

Decentralized landing protocols not only minimize the risk of a counterparty, but also provide transparent access to borrowed funds in 24/7 mode.

Defi and a new round of popularity Ethereum

Recently, the market of decentralized financial services is growing rapidly and developing, expanding the list of supported assets and enriching additional functions.

If a year ago the cost of a broadcast of the air was $ 189 million, then to date, this figure exceeded $ 600 million:

Data: Defi Pulse as of 21.eleven.2019

The absolute leader in this segment has long been Maker, on the smart contracts of which 2.1 million ETH are blocked (> $ 300 million). The dominance index of this service in the Defi ecosystem is close to 50%.

In August, Maker stakeholders raised a stabilization fee to 20.5%to reduce the DAI offer and thus regain parity with the US dollar.

After achieving this goal, the collection rate was steadily reduced, which led to a revival of user activity and the growth of the DAI market proposal to historical maximums.

Also recently, Synthetix service is rapidly gaining popularity. He offers decentralized trade in synthetic assets, which are derivatives of digital currencies and traditional instruments (fiat money, gold, silver, etc. D.). The service has a Native SNX token, whose holders can block it to create an ERC20 standard assets called Synths and their subsequent trade.

The third place of the Defi Pulse rating is occupied by the functionality with Maker Compound, which has recently attracted $ 25 million from Bain Capital Ventures, PolyChain Capital and Paradigm.

How decentralized Defi?

Despite the rapid growth of the sector and the expansion of the spectrum of assets involved in it, it would seem decentralized Defi services are influenced by large players: Namely, Polychain Capital, A16Z, 1Confirmation and unidentified MKR-Kits.

According to Coindesk, on November 18, 150 unique addresses voted for a proposal for the transition of Maker to the multisaling system. However, 80,000 MKR worth $ 662 at that time belonged to only five addresses, which accounted for more than 50% of the vote. In the conditions of such oligopoly, the participation of small players in the votes is symbolic in nature, and the process itself is actually devoid of real decentralization and represents only an imitation of democracy.

The main strategist Coinshares Melm Demirors completely believes that in the current form, the Defi ecosystem consists mainly of “centralized products and services”. Their advantage is only in more perfect user experience in comparison with blockchain protocols.

“We hope that over time it will become possible to eliminate intermediaries”, – emphasized Demirors.

In the article of the Strategic Director of the BZX DEFI platform, Kyla Kintner is classified by landing protocols for the degree of decentralization.

Classification of landing protocols according to the degree of decentralization

According to the author, MakerDao, for example, is more decentralized than Compound and even more so – than Eth Lend or Dharma. Services such as Salt, BlockFi, Nexo and Celsius are fully centralized, since “tops” are established “from above”, the requirements to increase the provision, and so on. Kintner emphasizes that so far there are no examples of Defi services with complete decentralization of each component of the protocol.

Meltem Demirors is convinced that such services should not be hung up on the idea of ​​rapid decentralization, but it is better to focus on the transparency of the processes and revealing the roles of the ecosystem participants.

On the other hand, the co -founder of Tether William Kuili considers the DAI ecosystem much more decentralized than USDT.

“I would say that the DAI is quite decentralized, with the exception of its oracle system. ONCHIN-Crediting is a fantastic development and I am grateful to MakerDao for this “, He said.

The creation of a hype around such services is facilitated by the statements of famous personalities in the world of cryptocurrencies. So, in November, the founder of Ethereum Vitalik Buterin said that Defi creates considerable value for consumers.

A little earlier, the head of Coinbase, Brian Armstrong, spoke of the exponential growth of the Defi segment. Probably, for a reason, in the listing of its exchanges, the BAT, 0X, AUGUR and USDC and DAI stabblecoirs are actively used in decentralized finances.

The roles of industry participants are often intertwined, for example:

• The same Buterin financed at the early stage of the Ethereum platform Uniswap. Then, the co -founder of Coinbase Fred Ersam invested in the same service.
• In the recent round of financing of the series A in the Defi-startup, Compound invested ParadigM hedge fund, which previously invested in MakerDao. Both rounds headed the A16Z crypt Fund from the famous venture company Andreessen Horowitz.
• At the beginning of this year, the Dharma startup attracted the funds from the PolyChain Capital startup, headed by the former Coinbase employee Olaf Karlson-Ui, as well as from Coinbase Ventures.
• In early October, Coinbase announced that it would be charged users 1.25% on their deposits in the USDC stabilcoin tied to the dollar. Before that, in May, the American exchange has concluded a partnership with Compound.

“Compound is a landing protocol open to each. He eliminates intermediaries in the person of banks and allows everyone to earn a percentage of their own expense “, -said Chris Dixon, partner of the venture fund Andreessen Horowitz, who previously invested in Coinbase and the aforementioned Defi-Startap.

Thus, Defi services are not only not decentralized enough, but also affected by whales, “Coinbase”, influential hedge funds and other stakeholders.

Another bubble like ICO?

It is likely that the development of cryptocurred and Defi will provoke an increase in demand for coins used as collateral. Most likely, the most actively occupying through such services will be those who urgently need money, but there is no desire to sell digital assets at a low price. These are, first of all, residents and companies from countries with high bank interest rates, cryptocurrency traders, as well as those who are trying to hide their financial activity from the ubiquitous state.

The almost five Gagarin News millionth industry arose from nowhere only two years ago and the number of credit platforms continues to grow. According to Bloomberg, former traders with Wall Street are actively interested in this area, striving to master a new field.

However, do not forget that cryptocurrencies are not some parallel universe. This area is inevitably subject to economic laws and credit cycles, where there is not only revival and expansion, but also depression and stagnation.

“I do not allow me to sleep at night not mass acceptance and not even regulatory uncertainty, but credit risk”, – emphasized the former DRW Holdings and Goldman Sachs trader Jason Urban, now heads of the Chicago cryptocredit company Drawbridge Lending.

According to Michael Moro, the head of Genesis Global Trading, it is difficult to predict the damage to a wider market that can occur due to a sharp drop in the market that can provoke a wave of liquidation of the debt positions secured by the collateral (CDP).

According to experts, during periods of strong volatility, Defi users can be motivated to pay higher commissions for the timely implementation of the necessary actions, for example, an increase in collateral support in order to avoid the elimination of CDP. This can lead to an abnormal growth of commissions on the Ethereum network.

Thus, despite the advanced technologies and impressive requirements for ensuring loans, one should not discount fundamental concepts, such as volatility and closely related credit risk.

“Crypt is still a small market in comparison with traditional classes of assets. However, there is a feeling of deja vu: insufficient regulation, cheap loans with minimal Due-Diligence and excessive optimism ”, – shared the opinion of Matthew Duval, developing landing solutions for the Coinlist Fandraise Platform.

While some are worried that the new market is growing too fast, others are saying that there are no special risks. For example, the founder of Celsius Network Alex Mashinsky emphasizes that his company issues loans only to companies strictly observing risk management and compliance procedures. According to him, for unexpected investors, cryptoderivative platforms that offer trade with a credit shoulder represent a truly great risk.

The head of Blockfi Zak Prince said his company adheres to strict standards and has never encountered payments and losses. In turn, the co -founder of NEXO Anthony Trenchev noted that in his company the ratio of the loan to the pledge value does not exceed 50%.

Cryptokotkrediti, including on the basis of Defi, is a rapidly growing and developing sphere. It becomes a popular alternative to bureaucratized traditional finance, where the profitability of tools falls against the background of extremely low interest rates.
Defi gives finances flexibility and the ability to earn a small percentage in the conditions of a bear market, as well as occupy funds at an acceptable percentage. In addition, decentralized markets of synthetic assets are being confident, opening new opportunities for traders.

Nevertheless, there are risks in any field, and landing services are no exception. There is still no 100% decentralized Defi applications, the influence of large players during votes for assets to ensure loans, according to the “amazing coincidence” present in Coinbase, is also felt.

Be that as it may, this segment is still insufficiently mastered and not so great. Its advantages over the traditional banking system with expensive loans and low -profit deposits are undeniable. This means that there is a market growth potential, and considerable.