Cryptocurrencies rates may be in red zones from time to time, global and local regulations might influence its global image and adoption, but the digital asset market is still at large and use cases beyond speculation are growing. Regardless of the fact that a crypto market is a chaotic place – an infamous crypto winter of 2018-19 and the latest harsh market decline due to coronavirus widespread which caused global panic throughout global financial markets only prove it – the entrepreneurs actively seek use cases. The number of directions to capitalize on is quite lucrative – whether it’s the latest Bakkt-Starbucks Integration initiative, an emergence of crypto ATMs for safe transactions during the global crisis or the launch of the marketplace for blockchain digital art. Another viable opportunity that had continued to emerge in such circumstances was crypto lending. There was a so-called “stealth bull trend” in this niche, and it has expanded into something mainstream these days. I truly believe that this ongoing trend will last long due to significant interest rate arbitrage available that drives the speed of this segment development – the DeFi p2p lending market grew over 7 times in 2019! If we consider specific milestones during the way of the global cryptocurrency adoption, the 2019-2020 period could definitely be called the years of DeFi advent.
Decentralized Finance: the latest lucrative opportunity
Crypto lending works similar to traditional crowdlending p2p-services, the core difference being that loans are issued on decentralized platforms that lock up cryptocurrencies via smart-contracts deployed on public blockchains. This is a special kind of DApps of its own complexity, the true attractiveness of these services come from several opportunities.
Firstly, it brings bank-like products to the digital assets marketplace: the new kind of asset has been created, but there are no banks and no necessary infrastructure. Such products arise in the DeFi field, allowing more people to engage in the crypto industry segment of loans – natural banking services that arise during any kind of market emerges.
Next, it removes the paperwork burden due to the use of smart-contracts, and such apps are cheap. This is an on-demand service, where one counterparty interacts with another, and the blockchain is a transparent intermediary here that records all operations and guarantees the fulfillment of contract terms.
Finally, lending is one of the ways to earn on cryptocurrencies and a real big-time opportunity for the next cycle of industry attraction of institutional capital. At the moment, traditional lenders are at the very beginning of their learning curve and the 150+ billion digital asset market has matured to starve for new directions of development. Fact is, nowadays, more than 45 million crypto wallet users need some use cases for their crypto besides HODLing or just trading assets.
What makes DeFi so tempting?
There are numerous reasons why DeFi lending has become such a lucrative investment opportunity. Let’s consider the specific points:
For institutional capital – it is an opportunity to place funds in highly liquid, 24-on-7 traded loans with a significant level of over-collateralization which are impossible in the traditional world because markets are already very efficient there.
For crypto holder’s side, it present’s a box full of exciting opportunities:
1. Margin trading without counterparty risk – the exchanges are hacked constantly, and the transparent balance of the smart-contract is here to save the day.
2. Tax arbitrage/deferral – No more need to fix the event tax if one can take a loan right now.
3. Short term cash need – due for various cases, such option is convenient when urgent spendings arise – such as medical / marriage/travel, etc. (such analog as pawnshop could be named).
For crypto lender’s side:
1. Crypto lending has a significant margin of safety – Collateral is traded 24/7/365
2. Interest rate arbitrage – There is a significant carry-trade opportunity to capture by providing over-collateralized loans against these digital assets.
Moreover, this carry-trade opportunity is available due to the fact that the stablecoin backed by the funding currency – EURO – with a very low rate has already been created.
There are some drawbacks of this segment such as clumsy interfaces that reduce the efficiency of user experience, as well as lack of institutional capital, which makes holes in durations because retail often panics and does not commit for a long time.
However, better interfaces that can provide smooth user experience are in works – for example, Stasis Wallet, fully integrated into the Single Euro Payments Area (SEPA), would offer regulated financial institutions, in both business-to-business and business-to-consumer markets, a new gateway into cryptocurrencies. Moreover, the infrastructure for institutional investors is in development.
The amazing potential of new market
The first crypto-loan had its origins in December 2017 – back when the crypto market had seen it’s best days, and overall capitalization was skyrocketing to a trillion-dollar milestone. Since then, this niche completely ignored the downward trend of the 2018-Q1 2019 in cryptocurrencies, and only accelerated at a high pace. This segment of the digital asset market is the fastest growing one in the crypto segment and is set to quadruple in size by 2021!
Centralized platforms such as market players such as Genesis, BlockFi, and CelsiBack were first to prove the hypothesis with lending, and the next breakthrough will follow in decentralized, but institutional-friendly solutions. The continually shifting cryptocurrency market is not even close in terms of growth, as the total value locked in DeFi applications reached its all-time peak and hit a new record with $1,23 billion locked in smart-contracts in February 2020 according to DefiPulse data!
The prominent potential of crypto lending in DeFi has already been recognized by many global investment companies. The firstcomers have stepped upon many mistakes, which can now be avoided to craft a better solution with smoother user experience and better usability, taking into regard the negative experience of the firstcomers.
Prominent firms include Dragonfly Capital Partners, Paradigm Capital, Robot Ventures, Abstract Ventures, a16z, Bain Capital Ventures, Coinbase Ventures, DHVC, Polychain Capital, Craft Ventures, Vy Capital, 1Confirmation, 9Yards Capital, and Passport Capital.
Nowadays, the most significant players in DeFi include Maker, Compound Labs, dYdX, Dharma Labs, Nuo Network, Zerion, and Kava Labs.
Capitalizing on EU ultra-low interest rates DeFi Lending opportunity
Crypto loans are overpriced vs traditional collateralized loans right now. There is no doubt that digital asset lending itself is attractive for both investors and cryptocurrency developers as it allows them to establish mutually beneficial relationships, attract attention and investment, which contributes to the rapid growth of capitalization. Moreover, the DeFi market growth rate is set to accelerate 33 Billion of Euro by 2021 against 7,5 billion issued back in 2019!
Moreover, while crypto rewrites the infrastructure around traditional finance, there are still foundational concepts like credit risk and regulation that cannot be ignored. Even though the digital assets market is still significantly small when compared with traditional asset classes, many DLT-field companies are increasing their efforts and capabilities to facilitate more efficient trading as well as new products and services.
The problem with crypto-collateralized stablecoin for DeFi, which initially seemed like an ideal instrument for this niche, is that having certain issues with high volatility rejects this kind of stablecoin as the ultimate choice to proceed with. Such problems open a new way though: maybe fiat-collateralized stablecoin will do the trick. This is the right time for experiments to go further with the fiat-collateralized stablecoin, which is institutional-grade and institutional-friendly and will ultimately help institutional capital to capture this interest-rate arbitrage.
The foundation for a new financial system can be built upon the existing blockchain network, which can be further scaled and expanded with the introduction of new solutions. This approach is not about throwing out the old financial system, but rather integrating with the currently existing one. Bridging a gap between the traditional financial market and cryptocurrencies is just the task that the STASIS team took upon itself.