Produced | Odaily (ID: o-daily)
Editor | Hao Fangzhou
Produced | Odaily (ID: o-daily)
Editor's Note: When we take the digital currency market size (CoinMarketCap data) and the total locked value of DeFi (DAppTotal data) into the "small economic cycle" of one and a half years, you will find an interesting thing: the development of DeFi does not seem to be too affected by currency prices. When the total market value of digital currencies shrank from US$831.3 billion at the beginning of 2018 to US$104.3 billion at the end of the year, the total value of DeFi locked positions increased by 112%. The total value of positions rose by 108% to more than $1.2 billion.
What makes DeFi have the energy to "cross bull and bear" at a high speed? What factors are restricting the evolution of DeFi? What will the future hold?
With these questions, Odaily is "DeFi topic"Continue to update the series of articles. Today's article mainly introduces "general problems existing in decentralized lending platforms". Readers who are curious about the basic concepts of decentralized lending and the current market situation, please click on the previous article"Why we say decentralized lending is the most imaginative part of DeFi". After that, we will select several typical representatives of DeFi to analyze, so stay tuned.
The term DeFi comes from a blog on Medium in August 2018 "Announcing De.Fi , A Community for Decentralized Finance Platforms", authored by Brendan Forster, co-creator and COO of the lending agreement Dharma.
Among the many products in the DeFi ecosystem, the decentralized lending platform is relatively central. It links decentralized exchanges, stablecoins, trade finance platforms, custody and venture capital, and acts as a bridge and hub.
Among them, MakerDAO was launched in December 2017, which promoted the launch of decentralized lending business. Its emergence meets certain financing needs of encrypted asset investors. Today, MakerDAO is no longer the only option for borrowing and lending crypto assets. Dharma allows users to apply for or provide loans for any ERC20 or ERC721 encrypted assets, dYdX supports users to conduct derivatives and long/short margin transactions, and Compound provides money market loans for ETH, DAI and other encrypted assets.
In the context of the overall cooling of the encryption market in the past two years, decentralized lending helps currency holders to meet cash flow needs without losing ownership of encrypted assets, and supports the financial ecology of Ethereum on the supply side.
The project party is more accustomed to using the pain points of traditional financial services to demonstrate the existence of DeFi. About 2 billion people in developing countries around the world do not have bank accounts, because of the high barriers to entry of traditional financial services, high intermediate costs, low transparency of funds, and the violation of information privacy when financial institutions review personal credit. In contrast, decentralized lending platforms emphasize transparency, high efficiency, low financing costs, and anti-censorship, which can be said to be a useful supplement to traditional lending services.
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Unavoidable Regulatory Issues
Most decentralized lending platforms will launch stablecoins anchored to fiat currency or encrypted assets.
Stablecoins are usually classified into three types: stablecoins anchored to fiat currencies (such as USDT), unsecured stablecoins (such as Basis), and stablecoins that rely on collateralized encrypted assets (such as DAI). As the most widely used stable currency in the world, USDT has attracted the attention of agencies such as the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). If the relatively "decentralized" stablecoin DAI is favored by big capital, it may face stricter supervision and scrutiny.
Just at the SXSW conference in March this year, SEC senior advisor Valerie Szczepanik said that over time, stablecoins may be included in the scope of securities regulation according to the current securities laws. Given how stablecoins are redeemed, the SEC may define them as "demand notes," traditionally defined as two-party notes (where the debtor pays the note holder on demand). Pursuant to the U.S. Supreme Court's 1990 decision in Reves v. Ernst & Young, demand notes are deemed "securities" under Exchange Act Section 3(a)(10), unless otherwise exceptions or exclusions .
From the standpoint of the CFTC, according to Article 1(a)(47)(a) of the Commodity Exchange Act, stablecoins are “swaps”.
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Financial risks that cannot be ignored
In the traditional financial lending business, the mortgage and pledge and the credit system jointly prevent and control the risk of default.
Compared with traditional lending services, DeFi obviously lacks an applicable (on-chain) credit reporting system. This means that (at least in the short term) decentralized platforms cannot effectively combat credit risk. The current platform risk control mainly relies on encrypted asset mortgage lending contracts based on open protocols or peer-to-peer protocols (dYdX and Compound). But no matter which type it is, users still need to endorse with encrypted assets.
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single asset type
An important reason why the decentralized lending market is not doing well is that there is a lack of more options for high-quality assets, and it can only compete in the ETH stock market for a long time. "Why ETH" is not difficult to understand. Bitcoin is not Turing-complete, and only Ethereum carries valuable assets (thanks to ERC20) ecology and liquidity.
But the mortgage assets are too single, which is not a good thing for the lending platform. When the MakerDAOs who tell the story of "inclusiveness" use ETH as their premise, they have already excluded the public users.
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lack of liquidity
For decentralized lending platforms, setting the mortgage rate is an art. If the mortgage rate is too low, currency price fluctuations will weaken the stability and security of the lending system. If the mortgage rate is too high, it will affect the enthusiasm of users and the liquidity of assets.
Taking MakerDao as an example, if a user wants to obtain a loan worth $1,000, he needs to mortgage at least $1,500 worth of ETH. If you happen to borrow DAI with ETH at a mortgage rate of 150%, when the price of ETH drops, the platform will quickly perform liquidation.
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User experience is not friendly
In fact, from the perspective of Internet investment, decentralized lending does not quite meet the tastes of institutions. The reason is simple, it solves one pain point (asset liquidity), introduces more pain points, and then invents new solutions. It is not easy for ordinary users to learn and understand DAI, MKR, and CDP, and the entire use process is not very friendly.
Odaily once wrote an experience draft of MakerDAO "We experienced decentralized lending and finally understood why this industry still makes money in a bear market.”, Unfortunately, half of the author's time was spent on installing MetaMask...
Recalling the traditional centralized lending, the user experience is wasted on complicated materials and lengthy approval procedures. Although decentralized lending lacks these steps, the cumbersome learning and operation also limits the market size to a limited range (the same problem also exists in DAPP, making the number of users of Decentralized much smaller than that of Centralized).
On the other hand, although lending is not considered a high-frequency financial behavior, the basic public chain that the decentralized lending platform relies on still has congestion problems, and its processing power is weaker than that of the traditional Internet, which will bring poor user experience.
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