What Crypto and DeFi lending has to offer.
One thing you can do with your Bitcoin, Ethereum, or whatever coin you believe in is to hold it and hope the price goes up. Alternatively, you can make those assets work for you and multiply them. If you’re not that keen on learning how to trade, crypto lending can come in handy.
The digital asset lending market is growing in parallel with crypto expansion. It hasn’t reached the scale of other credit markets yet. However, the widespread appreciation of the DeFi space, its overall value for companies and growing crypto market cap drive the industry.
How Crypto Credits Market Work
The crypto credits market is a new development – participants are still trying to determine how to price and sell risks sensibly. Until now, the key focus of industry participants was on secured lending.
The borrowers would offer coins as collateral and get fiat money or stablecoins in return. Usually, the borrower would have to overcollaterize (provide an amount exceeding the loan’s value) to make up for the possible price fluctuations.
The loans can be taken out through one of the centralized finance institutions or one of the DeFi protocols.
Traditional centralized finance offering leverage is represented by mainstream crypto derivatives exchanges trading Bitcoin futures or options, as well as various credit brokers.
Trending DeFi platforms often simulate based on the same principles as centralized platforms, but they indeed do differ. For example, you don’t have to panic sell your assets attempting to chase the timely profit. Instead, you can lend the coins and get them back later with interest. Another difference is that a smart contract will control the process, so that lenders won’t have to provide numerous documents.
Aave, Compound, and Maker are some of the well-established DeFi protocols known for their lending services.
- Aave provides a wide range of lending products, including uncollateralized loans, rate switching, and flash loans.
- Compound enables tokenization of assets using cTokens. Users can trade, lend, and operate with a digital representation of their assets.
- Maker is one of the oldest lending and borrowing protocols in the DeFi space. The platform works with two tokens: a USD-pegged stablecoin Dai for lending and borrowing and Maker, the governance token.
Non-custodial leverage supported by DeFi platforms allows users to use their collateral within the ecosystem. For instance, they can trade assets on DEXes, stake their coins, and trade derivatives.
The size of the DeFi lending market keeps growing exponentially. At the time of writing, the total value locked in DeFi protocols is over $83 billion with 15.01% Aave dominance ($14 billion locked). This growth promises new exciting opportunities for the crypto credits ecosystem.
Seizing the Opportunities: Crypto Credits’ Prospects
The chances are that the crypto credits industry will help to create new subindustries. With billions locked in various DeFi protocols, the need for capital efficiency and risk managing solutions is as relevant as ever. Services that provide interoperability, risk mitigation toolkits, and alternative funding are just a few of the blind spots that need to be filled.
The market can also benefit from connecting centralized and decentralized credits platforms for lowering cost funding and earning more attractive yields. And some of the CeFi platforms are already looking into or currently integrating DeFi elements into their systems.
For instance, Coinbase Custody rolled out support for Compound’s and MakerDAO’s governance processes. It allows users to take part in important decisions or delegate their votes within the exchange platform. OKEx can earn interest on Compound or via MakerDAO’s Dai Saving Rate and provide liquidity on Uniswap.
Another advantage of the crypto credits industry is the ability to get loans from several sources. It lowers the risks that come with trusting a third party with complete visibility and control of your positions.
The Bottom Line
The world of credits, just like all the other traditional financial markets, is on the verge of major reformation. The opportunities offered by crypto platforms, both centralized and decentralized, might be a bit risky but too tempting to be ignored. With the proper set of regulations, the DeFi space is promising a bright future for investment opportunities alongside improved lending services.