The de centralised finance market has seen a phenomenal increase in the last two years. In this short two years, the total number of defi lock positions has exceeded $65billion from $2 million to now, with a growth rate of up to ten thousand times. Then, the decentralized finance industry has ushered in explosive growth of NFT in 2021. It is found that the relevance between decentralized finance and real-world use cases is getting higher and higher.
Now, another use case "perfectly fit" with traditional markets, financial lending, has emerged in the cryptocurrency world. Decentralized lending market is a network system based on Intelligent contracts where cryptocurrency holders can borrow their assets on the chain or pass certificates to others for profit.
Since june2020, the decentralized lending market has started to grow rapidly, and then continues to rise. This time is almost in sync with the development of decentralized financial market. Until March 30, the total borrowing volume of the crypto lending market reached a record high of $13.31 billion. If the trajectory of decentralization finance is taken into account, it is not impossible to reach the level of hundreds of billion dollars in the future. Although the scale of the crypto lending market is still relatively small compared with the traditional financial field, the traditional financial field is limited by geographical obstacles, high transaction costs and liquidity restrictions, while the encryption lending market has no such troubles, which can be said to contain huge opportunities and market potential.
In the past year alone, the number of decentralized lending platforms has grown from 2 to 10. At present, the largest decentralized exchange with the largest borrowing scale is compound, with total borrowing amount of over 5.5 billion US dollars, accounting for 43.2% of the total market of all decentralized lending; in addition, the competition between new and old loan agreements such as maker, Venus and AAVE has become increasingly fierce.
With the development of the cryptocurrency market, which mainly based on bitcoin, has gradually stepped out of the decline and has been rising from the middle of last year, more and more investors have begun to explore more income channels. In addition, lending products have been very mature in the traditional financial field, so they are more easily accepted by users, and may even attract a group of traditional financial users to the encryption market.
But most users will still keep their encrypted currency in the exchange, but this way will not generate interest. Obviously, both individual and institutional users want to earn more revenue while retaining their own cryptocurrency, and have realized that the cryptocurrency they store on the exchange may be an excellent source of collateral and can use stock cryptocurrency to lend and get more returns. In addition, many users are more willing to borrow assets to improve their leverage rate in order to enlarge investment income in the bull market environment, thus obtaining higher income, which also increases the demand of the encryption lending market. However, the leverage provided by the exchange is limited, and customers need products such as borrowing if they have higher funding needs.
Central exchange is not willing to show weakness in the encrypted lending market
At present, some head exchanges have begun to attach importance to the crypto lending market. They are beginning to add code to the crypto lending market.
Full position means that all assets in leveraged accounts can be used as collateral and no currency is needed to borrow in a currency. In this full position mode, the more leveraged currencies are actually more advantageous. In the position by position mode, the margin and profit and loss of each position are calculated separately, and the risk and income of each position are independent. If one position bursts, it will not affect other positions in the leverage account.
We found that some exchanges have recently launched decentralized C2C lending products, which allow users to borrow idle encrypted assets to obtain stable benefits. Of course, they can borrow encrypted assets and use them for leveraged transactions through the platform to enlarge investment income. In this mode, the borrower and the lender can directly complete the loan, and the platform does not earn interest margin.
However, although C2C lending ensures that the "middleman margin" issue does not occur, the lender may have prepayment, which is not very friendly for the borrower because they need to manually register again to borrow the cryptocurrency. In order to solve this problem, the exchange is also struggling. Users only need to configure relevant parameters. Even if the borrower prepays the loan, the system will borrow at the market optimal rate according to the conditions set in advance by the user. If the current market optimal interest rate is lower than the user's acceptable minimum daily interest rate, the system will register the loan according to the acceptable minimum daily interest rate. This function not only improves the utilization of funds, but also improves the experience. In addition, investors can also enjoy compound interest income, especially for investors with large capital, can bring more profits.
In fact, the logic of encrypted lending is similar to the equity pledge loan, and the asset liquidity is high and easy to realize. For platform side, the biggest advantage is safety and low risk control difficulty. For borrowers, the credit loan limit is limited, the real estate loan and vehicle mortgage process is complex, the economic cost and time cost are high. However, the digital currency can be completed in ten minutes according to the process. One of the biggest advantages is that it can be realized quickly after closing the warehouse, unlike the low exchange efficiency of traditional loan collateral. In addition, due to the low entry threshold and large openness, the decentralized exchange has seized a lot of market share in the field of encrypted lending in a short time.
With the advent of the bull market in the encryption market, more and more users choose leverage transactions to enlarge their income, which greatly increases the demand of users to borrow assets. As the demand for borrowing money increases, people will also consider the risk. However, generally speaking, the borrower needs to have enough margin when borrowing the encrypted assets, which ensures that the lender can fully recover its principal and interest.
In the big cake of encrypted lending, every exchange wants to have a slice. The central exchange, of course, is not willing to show weakness, and is still the main force of the crypto lending market. From the perspective of active lending, the market share of centralized platform is close to 90%, much larger than that of decentralized platform.
It is worth mentioning that the reason why the centralized cryptocurrency exchange can maintain a leading position in the encrypted lending market is that risk control is better. In contrast, due to anonymity, the decentralized trading platform cannot verify the real identity and credit of users. In addition, due to the high volatility of the crypto market, it is easy to improve the fund risk of borrowers. In contrast, the requirements of risk control of central exchanges are more strict, and some exchanges even reduce the risk of default through comprehensive due diligence. On the other hand, the de centralized exchange lending activities are mainly driven by liquidity mining and governance tokens, and most of them cannot provide French currency lending. Therefore, the willingness of users to bear debt is relatively small. In contrast, the users of the centralized lending platform are more due to transaction requirements, including liquidity and leverage. They usually have higher leverage demand.
With the development of financial services launched by the central cryptocurrency exchange, more and more young people have begun to choose to switch to the arms of crypto exchange instead of traditional financial institutions such as banks. Of course, at the same time, more new investors will rush into this field. After all, we can get extra interest income while enjoying potential capital gains. Why not?
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