When we put the digital currency market size (CoinMarketCap data) and DeFi lock-up value (DAppTotal data) into the "small economic cycle" of one and a half years, we will find an interesting thing: the development of DeFi does not seem to be very popular. currency price impact. 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 2018, the total value of DeFi locked positions increased by 112%. Total warehouse value rose 108 percent 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 in mind, the Odaily Research Institute is continuing to update a series of articles under "DeFi Topics". 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 "Finally someone clarified what DeFi is and what it can do | DeFi Series". After that, we will select several typical representatives of DeFi to analyze, so stay tuned.
The term DeFi comes from a blog "Announcing De.Fi, A Community for Decentralized Finance Platforms" on Medium in August 2018. The author is 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.
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.
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. Behind the fact that about 2 billion people in developing countries do not have bank accounts is the high barriers to entry of traditional financial services, high intermediate costs, low transparency of funds, and financial institutions that review personal credit or violate information privacy. 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.
Most decentralized lending platforms will launch stablecoins anchored to fiat currency or encrypted assets.
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 consultant Valerie Szczepanik said that over time, stablecoins may be included in the scope of securities regulation under 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 1990 U.S. Supreme Court 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".
Financial risks that cannot be ignored
Financial risks that cannot be ignored
In the traditional financial lending business, mortgage, pledge and credit systems 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.
single asset type
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" presuppose holding ETH, they have already excluded the public users.
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.
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 just borrow DAI with ETH at a mortgage rate of 150%, when the price of ETH drops, the platform will quickly perform liquidation.
User experience is not friendly
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 usage process is not very friendly.
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.
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.
It is true that the above-mentioned problems exist in the decentralized lending platform. Fortunately, the industry is still in the early stage of development, and the project party also recognizes the bottleneck that restricts development, and is actively adjusting and iterating. With the gradual maturity of blockchain technology and ecology, decentralized lending platforms will play more and more important roles. After all, it has opened up a wealth of open financial applications for the encrypted world, and it also provides users with more choices.
