Summary:
Editor | Hao Fangzhou
Produced | Odaily (ID: o-daily)
Summary:
Table of contents
Table of contents
1. Overview of Defi
2. Overview of Decentralized Lending
2.1 Background of decentralized lending
2.2 Features of decentralized lending
2.3 Decentralized lending service population
3. Comparison of decentralized lending models
3.1 Three modes of decentralized lending
3.2 Comparison of degree of decentralization
4. Development and future of decentralized lending
secondary title
1. Overview of DeFi
1.1 What is DeFi
DeFi is the abbreviation of Decentralized Finance (decentralized finance), also known as Open Finance. It actually refers to a decentralized protocol used to build an open financial system, designed to allow anyone in the world to conduct financial activities anytime, anywhere.
In the existing financial system, financial services are mainly controlled and regulated by the central system, whether it is the most basic transfer of deposits and withdrawals, or loans or derivatives transactions. DeFi hopes to establish a transparent, accessible and inclusive peer-to-peer financial system through distributed open source protocols, which will minimize trust risks and allow participants to obtain financing more easily and conveniently.
Compared with traditional centralized financial systems, these DeFi platforms have three major advantages:
a. Individuals with asset management needs do not need to trust any intermediary institutions. New trust is rebuilt on machines and codes;
b. Anyone has access, no one has central control;
c. All protocols are open source, so anyone can collaborate on the protocol to build new financial products and accelerate financial innovation under network effects.
DeFi is a relatively broad concept, including: currency issuance, currency trading, lending, asset trading, investment and financing, etc.
secondary title
2. Overview of Decentralized Lending
2.1 Background of decentralized lending
Previously, ICO was banned in China, and STO required a higher threshold, and it was still in the testing stage. For businesses, the cryptocurrency market requires new financing tools. According to Pan Chao, head of MakerDAO’s China market, the borrowers on MakerDAO are mainly enterprises, which also shows that the project party uses decentralized lending as a financial tool. For a mature financial market, more abundant financial instruments will bring higher market liquidity. It can be predicted that after decentralized lending, equity products and derivative products will gradually enter the public's field of vision. Lending and lending is an important step in bringing cryptocurrencies into financial services.
In addition, in the second half of 2018, the overall price of digital assets fell, and currency holders shifted from speculation to "financial management", lending, margin trading, etc., to increase and maintain value. The active loan balance on December 31, 2018 reached US$71 million, an increase of 1083% compared to US$6 million on December 31, 2017, which also reflects the significant increase in the acceptance of decentralized lending platforms.
2.2 Features of Decentralized Lending
Decentralized lending refers to the matching of borrowers and lenders through the decentralized lending agreement, and the real-time transfer of assets and completion of lending behaviors after the pledge is confirmed.
The decentralized lending protocol provides the platform with a standardized and interoperable technical foundation, and plays a role in security management during the lending process. Compared with the traditional lending model, the decentralized lending model has the following characteristics:
a. Combination of legal currency loans and digital asset loans (the stable currency model can be regarded as a combination of legal currency and digital assets).
b. Mortgage based on digital assets;
c. Realize instant transaction settlement through automation and reduce real costs;
d. Replace the credit check with the over-collateralization model, which also means that more groups who cannot use traditional services can be served.
The form of "mortgage loan" commonly used by decentralized lending platforms: Borrowers must use assets that are worth more than the loan as collateral to ensure that the lender can obtain collateral if the debt cannot be repaid. The business process of a mortgage loan is as follows:
2.3 Decentralized lending service population
secondary title
Borrowers: Including quantitative trading platforms, cryptocurrency hedge funds, blockchain project parties, mining farms, etc., they hope to obtain cash flow by mortgaging digital assets, or hedge risks through borrowing.
Lenders: including asset managers, family offices and high-net-worth individuals, etc., who hope to use the assets in their hands to obtain additional income through mortgage loans.
3. Comparison of decentralized lending models
3.1 Three modes of decentralized lending
The four most famous decentralized lending agreements are Compound, Dharma, dYdX, and MakerDAO. We summarize them into three models:
(1) P2P matching mode
Both Dharma and dYdX are peer-to-peer protocols that match borrowers and lenders. Therefore, the amount of loans and borrowings based on these two agreements is equal.
For example, in Dharma, the smart contract acts as a "guarantor" to evaluate the asset price and risk of the borrower. The creditor decides whether to lend to the borrower based on the evaluation result provided by the "guarantor". At the same time, when the borrower fails to repay on time, the "guarantor" automatically executes the liquidation procedure. The loan term on the Dharma platform is up to 90 days, and the loan interest is fixed. Lenders lock up funds for the duration of the loan and only start earning interest once they are matched with a borrower.
The dYdX protocol is also a P2P model, but the main difference between it and other lending platforms is that dYdX also supports other transactions besides borrowing and lending, such as futures trading. When a trader opens a position on dYdX, he will borrow margin, and agree with the lender on the terms and conditions through the platform to conduct margin trading. So the target customers of dYdX are mainly margin traders. Interest on the dYdX platform is variable, and there is no lock-in period or maximum term for users to borrow money on dYdX.
(2) Stable currency model
A typical example of this model is MakerDAO, where there are no lenders but only borrowers, and the only borrowable asset is DAI. Borrowers borrow newly created DAI by collateralizing digital assets (now ETH). DAI is a USD-pegged stablecoin issued by the MakerDAO platform. The pledge ratio of pledged assets and borrowings must be kept above 150%. And its interest is global and determined by MKR holders through voting. The interest rate has been erratic, rising from 2.5% to 19.5% in just over a month.
(3) Liquidity pool transactions
In the case of Compound, borrowers and lenders trade through liquidity pools rather than being matched with counterparties. The interest rate for each loan and borrow is determined by the liquidity of the pool, which fluctuates by the ratio between the total amount of money offered by lenders and the total amount demanded by borrowers. Compound does not set a fixed loan term. Lenders can deposit funds into the loan pool to earn interest continuously and withdraw assets at any time. Borrowers have an unlimited contract period.
3.2 Comparison of degree of decentralization
Different decentralized lending protocols contain common basic building blocks:
(1) Asset Custody: Refers to the management method of borrower’s pledge and lender’s funds, such as whether it is managed by the platform or by itself.
(2) Pledged asset additional notice: similar to margin call, because the price of pledged assets (digital currency) will fluctuate. When the value fluctuation causes the pledge rate to exceed a certain threshold, some projects will design additional notifications. The method of notification is divided into direct notification by the platform, incentives for others to notify by economic mechanism, and some platforms will directly liquidate.
(3) Provide additional liquidity for pledged assets: that is, the liquidation method of pledged assets, such as direct auction or sale by the platform, or liquidation by others through an incentive mechanism.
(4) Determination of liquidation price: that is, the pricing problem when liquidating pledged assets, whether it is centralized or decentralized.
(5) Interest setting: Whether the loan interest setting is centralized or decentralized.
(6) Protocol development: Whether the protocol is developed centrally or decentralized by a fixed team.
Taking traditional finance as an example, the third-party custody of the platform is still centralized. When the risk of default occurs, the bank will force liquidation, the asset value is determined by the bank, and the loan interest is also regulated by the bank. And these elements show different degrees of decentralization in different projects. Accordingly, DeFi can be classified into grades.
Examples: (1) Dharma
In Dharma, when a borrower initiates a loan request, an address for depositing collateral will be generated to keep the borrower's assets within the validity period of the contract. Private keys are kept by the borrower, so custody of funds is decentralized.
Dharma’s rates are set centrally and are currently subsidized by the platform’s operators.
The development of the Dharma core contract and the escrow contract is undertaken by the Dharma team, the escrow contract is open source, and the loan origination contract is closed source.
（2）MakerDAO
Escrow: The MakerDAO smart contract is open source and non-custodial from a loan origination perspective.
Initiate additional pledged asset notifications: pledged asset monitoring and additional notifications are authorization-free, incentivized and decentralized.
Additional pledged asset liquidity: providing liquidity is permissionless, decentralized and incentivized.
Price determination: The MakerDAO price supply is semi-centralized and determined by MKR holder votes.
Interest: Voted by MKR holders, this is a semi-decentralized method.
Development: The MakerDAO contract is centrally developed and open source.
（3）Compound
Custody: Compound smart contracts are open-source and non-custodial from a loan origination perspective.
Initiate additional pledged asset notifications: monitoring and additional notifications are decentralized.
Additional pledged asset liquidity: providing liquidity is permissionless, decentralized and incentivized. Compound uses 5% of collateral liquidation as an incentive to monitor, initiate and provide liquidity for additional pledged assets.
Price Feedback: Price supply is calculated directly from the owners of whitelisted addresses controlled by compound.
Interest: Interest rates are currently determined centrally.
Development: Centralized development and open source.
（4）dYdX
Custody: From a loan origination perspective, dYdX smart contracts are non-custodial.
Initiate additional pledged asset notifications: Additional notifications can be initiated by anyone. 5% at collateral liquidation is used to incentivize originators.
Additional pledge asset liquidity: Anyone can provide additional pledge asset notification liquidity, making this function decentralized.
Price determination: dYdX's price feed is anchored to the price feed mechanisms of MakerDAO, Uniswap, and ETH2DAI, and for this reason, we believe that dYdX's price feed should be considered decentralized, but not fully decentralized.
Interest: dYdX sets the parameters of the interest rate model, enabling it to centrally control interest rates.
secondary title
4. The development and future of decentralized lending
Decentralized lending took off in December 2017 with the launch of MakerDAO's dollar-pegged stablecoin DAI. As of December 31, 2018, nearly 97% of active loans were conducted through the MakerDAO protocol, and the main users were enterprises. Compound was launched in September 2018, mainly serving small loan users. MakerDAO only supports the lending of one asset, AI, and Compound has become the second.
Total borrowing and lending increased in Q3 and Q4 2018 due to the emergence of Compound and dYdX to provide users with new borrowing channels.
Among them, DAI became the most borrowed asset in 2018 ($207 million), accounting for nearly 98% of all borrowed assets.
At the same time, the distribution of loan assets on different platforms is also different:
While lenders provided $39 million in assets in 2018, 96% of which went through Compound, followed by dYdX and the least centralized Dharma:
The emergence of Compound and dYdX provided new lending opportunities, and lending volumes took off from Q3 2018:
The pledge ratio is an important indicator to measure the security of the lender in the loan. Compound has the highest pledge ratio among the four major protocols, which is one of the reasons why it is the most popular platform for lenders:
The above decentralized lending markets are all based on the Ethereum ecosystem. Some people classify the recently popular EOS REX as decentralized lending based on the EOS ecosystem. However, we believe that EOS REX is a resource leasing mechanism within the EOS ecosystem. The difference between leasing and lending is that there is no risk of asset loss in leasing. You need to use collateral to guarantee the loss risk of the loaned assets, and the two are not the same. I won’t go into details here, we will focus on analyzing the EOS REX mechanism in the next article. Of course, this also shows that decentralized lending based on EOS and other ecosystems is still blank, and there is a lot of room for imagination for entrepreneurs.
In general, decentralized lending is the second step of DeFi after cryptocurrencies. Against the backdrop of closed corporate financing channels and lack of asset circulation channels, the three models of platforms have gradually opened up the market with their respective advantages, and have begun to show scale since the beginning of last year. Various projects have centralized links to varying degrees (of course, decentralization is not necessarily better than centralization. For example, in the case of lack of liquidity in the market, companies like Tether still have great advantages in providing a centralized lending platform),.
secondary title
Can encrypted lending become the next online lending scale market?
Digital Asset Lending via Open Protocols 2018
Decentralized Lending: An Overview
How Decentralized is DeFi? A Framework for Classifying Lending Protocols
Recommended reading:
Can encrypted lending become the next online lending scale market?
I'm Odaily Little Parker, looking for reports on high-quality blockchain projects, you can add WeChat lmm662381, please note the company + name + reason. For reprint/content cooperation, please email report@odaily.com.
