The overarching trend that marked the beginning of 2020 has been fear and uncertainty driven by the outbreak of the deadly coronavirus in China, devastating bushfires in Australia, US-Iran brinkmanship, widespread citizen protests in various nations and more. As a result, money across geographies has been moving towards safe haven assets such as gold and bitcoin.
Consequently, financial platforms that thrive on cryptocurrencies have been the flavour of the season.
Decentralised finance (or DeFi), which is also often referred to as open finance, presents alternatives to regular financial products in the crypto space. DeFi platforms offer lending, borrowing, staking, trading, investment and custodial services without a centralised actor or middleman – that is, banking or financial services through trustless protocols. Due to their interoperable nature and customisation possibilities, the DeFi space has seen a surge of developers and early stage adopters flocking to it. As on 7th February 2020, these platforms crossed USD 1 bn worth of assets locked on them, with crypto lending being the most profitable segment as per a recent study. In this article, Rohit and I explore 5 such new age “money lending platforms” that are poised to have a great run in 2020.
Uniswap is a decentralised liquidity platform that offers trading (swap/send) and staking (pool) services for Ethereum and ERC20 tokens.
An Ethereum Foundation grants recipient in 2018, Uniswap now sees nearly 50% of total Dex activity on Ethereum as per Etherscan. The trading features on the platform are enabled through liquidity pools of ETH and tokens which are created when users stake Ethereum-based assets. Users who wish to exchange tokens use these pools for their activity and pay a 0.3% fee for each transaction which goes to the pool creators based on their share of the pool’s liquidity.
Uniswap has gradually taken over lion's share in the Dex space (source)
Launched in 2018, Uniswap deploys a unique exchange contract for each ERC20 token. Each of these contracts are linked through a factory contract which acts a public registry and allows ERC20-ERC20 swaps using $ETH as a middle layer.
So, each ERC20 token can only have one exchange contract on Uniswap. If a particular token is not listed on Uniswap yet, anyone can create its pool by staking Ethereum and an equivalent amount of the tokens.
This automatically creates the token’s corresponding exchange contract and kickstarts its market on Uniswap which others can trade from. Pool creators can be essentially considered as lenders on the platform providing liquidity to traders in exchange for a fee, similar to a savings account in a bank.
Uniswap currently has USD 72M+ worth of ETH and ERC20 tokens staked in its pools. This figure has seen an exponential growth over the past couple of months with no signs of slowing down. The platform has no native token and interacts purely through $ETH acting as an intermediary between the pools. Because of its decentralised nature, Uniswap can be accessed from anywhere using a Web3 wallet such as Metamask. Unlike Idex, Uniswap is not geo-restricted in the US.
Liquidity on Uniswap continues to grow month-on-month (source)
Cred is a lending and borrowing ecosystem that facilitates access to credit for both retailers and institutions by using digital assets as collateral. What sets Cred apart from other such platforms is that not only can users avail of crypto-to-crypto loans, but they can also secure fiat loans in return for their pledged digital assets.
Cred has established partnerships with financial institutions, crypto exchanges and KYC verification providers, to create a complete lending-borrowing ecosystem.
Cred is also a founding member of the Universal Protocol Alliance, a coalition of blockchain enterprises working towards accelerating the mainstream financial adoption of blockchain by making digital assets more accessible. Bittrex International, Omisego and Uphold are some of the other members of this alliance.
Users who want to borrow crypto/fiat through Cred’s platform first have to undergo a KYC authentication process, overseen by one of the identity verification partners (Civic or uPort). Once verified, the user can deposit the assets into Cred’s partner e-wallet (Jaxx or Bread) or partner exchange account (OKEx or Bithumb). Assets are secured by BitGo, which provides custodial services for institutional investors.
An AI-based credit assessment algorithm computes terms of borrowing for each individual. The value of the collateral has to be higher than the borrowed asset. If the market value of the collateral falls below a given threshold, the borrower is notified and provided a certain amount of time
to deposit more assets and increase the collateral value. If the borrower fails to do so, the deposited assets are liquidated. The entire process is controlled through smart contracts.
The process is similar for lenders too, who can pledge their digital assets with partner institutions like Uphold, Bitcoin.com or Bitbuy. Through the CredEarn program, lenders can deposit and earn interest on not only crypto, but also fiat currencies (US dollar, Euro and British pound). Both borrowers and lenders can receive the loan/interest in the form of supported tokens, Stablecoin (DAI from MakerDAO) or fiat (deposited into their bank account).
Cred supports 30 different digital cryptocurrencies, including Bitcoin, Ethereum, Ripple, Tether, and so on, which is the highest among all such decentralized lending/borrowing platforms. Recently, Litecoin Foundation has partnered with Cred to let LTC holders earn interest passively.
Cred now has a lending license in more US states than it doesn't (source)
Cred’s utility token LBA is the fuel of the ecosystem. The token is used as a medium of payment on the Cred platform, and also for providing governance rights in the Cred community. Apart from this, LBA token holders earn higher interest rate while lending and pay lower interest rates when borrowing.
iearn.finance, the newest entrant in this list, is a DeFi aggregator that lets users choose the best yield from multiple crypto lending platforms. With a rapidly growing liquidity pool, iearn.finance has been gaining momentum over the past few weeks and grabbing eyeballs. Current liquidity on the platform is USD 6M+ which is quite impressive for a just released service.
As an aggregator, iearn.finance allows lenders to find the best ROI from Uniswap, DDEX, dYdX, Fulcrum (currently disabled), Compound, and Aave which are its on-chain oracles. It currently supports $DAI, $USDC, $USDT, $SUSD, $wBTC (wrapped BTC) and $TUSD. In light of the recent flash loan attack on another DeFi platform, it makes sense to have multiple oracles to receive price data to avoid such an event. Moreover, staked positions on iearn.finance can be insured through Nexus Mutual and opyn’s coverage services.
iearn.finance offers some of the most competitive rates in the DeFi space
Using the platform is easy since there is no sign up or login process. Simply connect your wallet and get going with its swap (“zap”) or stake (“earn”) features to find the best opportunities.
There are two types of tokens on the platform – iTokens and yTokens. iTokens are minted when you invest in other protocols through the platform. yTokens are its own wrapped tokens and are minted when you invest directly in its native liquidity pools.
iearn.finance is ideal for passive investors as it has its own algorithms to secure the highest yields on behalf of users. A user provides an asset he/she wishes to earn interest on and gets iTokens in return. The underlying asset is then deployed based on the platform’s logic to find an optimal strategy from available options of pooling or swapping from the available list of oracles. It doesn’t charge any platform fee for the service -it’s completely free to use.
The platform is open sourced and is the brainchild of Cryptobriefing’s chief crypto code reviewer and Fantom technical advisor Andre Cronje. As a non-profit venture, it is also decentralised from an admin key perspective. Like Uniswap, there are no admin keys on iearn.finance, which means the project dev cannot lock the platform or close it down or force changes at will. In a recent discussion on their Telegram channel, Andre also expressed his intent to do away with the website and convert iearn.finance into a protocol after securing a few integrations.
Compound is a decentralised protocol that allows peer-to-peer crypto lending and borrowing through liquidity pools (like Uniswap and Aave). Lenders earn interest while borrowers accrue debt.
Backed by industry giants such as Andreessen Horowitz’s a16z crypto fund, Bain Capital Ventures, Polychain Capital, Coinbase Ventures and Paradigm Capital, Compound has so far raised USD 33M+ in its seed and series A rounds.
Compound’s lending protocol is also integrated into other popular DeFi platforms such as Coinbase Wallet, InstaDapp, Argent, Dharma and Pool Together to name a few.
Compound is one of the most popular DeFi platforms out there (source)
Digital assets currently supported on Compound are Ethereum, $DAI, $USDC, Augur, $SAI, Wrapped BTC, 0x and $BAT. Even though Compound has a limited number of supported assets, it still hosts USD 140M+ worth of cryptocurrencies on its platform. Compound mints cTokens during each deposit transaction which act as an intermediary and represent the staked underlying assets in a specific market or pool and earn compound interest. At the time of redemption, the cTokens are liquidated to release the pegged crypto assets from the respective pool (along with any accrued interest earnings).
Due to the compounding effect of deposits, each cToken becomes equivalent to an increasing amount of underlying asset over time based on market movements.
In a recent stress test conducted by Gauntlet Network, it was found that Compound can scale 10x its borrowed quantum with less than 1% chance of default even when Ethereum reaches its maximum historical volatility. This is a significant vindication of the robustness of its protocol.
Aave is an open-source and non-custodial protocol, which allows users to borrow or lend digital assets. Aave comes from the same team as the one which had developed ETHLend, one of the first decentralized peer-to-peer digital asset-backed lending platforms.
Aave Protocol is implemented through a set of smart contracts built on top of the Ethereum blockchain. While ETHLend facilitated direct transfer of assets between the lender and the borrower (overseen by the smart contract), Aave supports a pool-based strategy.
Lenders deposit their assets into a pool contract, and borrowers borrow funds from the same contract by depositing a collateral of greater value. The use of an asset pool removes the necessity of directly matching the loans individually.
Since Aave is built on Ethereum, it supports only $ETH and 15 other ERC20 tokens, including Stablecoins like USDT, USDC and TUSD. The interest rates for both borrowing and lending depend on the amount of funds present in the pool. Users are provided the flexibility of borrowing assets at a combination of ‘stable’ and ‘variable’ borrow rates, using Aave’s Rate Switching function, to get the best possible interest rate on their loans.
In order to guarantee that assets can be withdrawn at any time, an algorithm keeps track of the liquidity reserve. If the value of a collateral drops below a threshold due to price fluctuations, the borrow position gets liquidated, and liquidators can purchase the collateral at a discounted price. This ensures that the contract pool always maintains a certain minimum amount of liquidity.
Users can connect to Aave’s protocol through browser wallets (such as Metamask), mobile wallets (such as Trust), email or phone. Aave’s protocol tokenizes the lent assets through ERC20 tokens known as Aave Tokens (or aTokens).
For example, on making a deposit of 100 USDT, the depositor receives 100 aUSDT, whose value is pegged 1:1 to the asset. aTokens are minted upon deposit, and burned when the deposited assets are redeemed.
They are also used to pay interest to lenders. Apart from aTokens, Aave’s ecosystem comprises of LEND tokens, which grant voting rights to holders for decisions related to protocol parameters and smart contract upgrades.
Aave's aTokens work just like Uniswap's exchange contracts
Aave’s most unique offering is Flash Loan, which can be taken without depositing any collateral. The catch is that the borrowed assets have to be returned within the same Ethereum block in which the loan was issued, otherwise the loan is cancelled. Aave believes that flash loans will make it easier and safer to make use of arbitrage opportunities within the Ethereum DeFi ecosystem.
With crypto lending/borrowing markets roaring past the USD 1bn mark, there is sufficient reason to believe that DeFi platforms will continue to gain adoption and slowly move to mainstream use. This will, in part, be powered by simpler ease-of-usage and cross platform integrations. We can’t wait to see what 2020 holds for DeFi. Let us know which platform engages you the most. Rohit and I are always reachable on Telegram for any questions.
This article is a repost of our recent Hackernoon article.
About the Authors:
Rohit Chatterjee is an Analog Design Engineer working at Texas Instruments. Abhijoy Sarkar is a banker-turned-entrepreneur. They are high school friends who lost contact years ago. They reunited over crypto in early 2018 and have been investing through mutual research and shared knowledge.
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