Cryptocurrency-based lending has become one of the most widely used decentralized finance (DeFi) to emerge from the cryptoverse.
Cryptocurrency-based lending has become a mainstay of the decentralized finance (DeFi) universe ever since smart contract-based lending/crediting platforms began offering the service to cryptocurrency users. The Ethereum network, the first Blockchain to scale smart contract functionality, sees most of the total value locked (TVL) in DeFi protocols dominated by cryptocurrency lending platforms.
According to data from DeFi Pulse, the top 4 of the 10 DeFi protocols are lending protocols accounting for $37.04 billion in TVL, only 49% TVL of the entire DeFi market on the Ethereum Blockchain. Ethereum leads in terms of being the most used Blockchain for the DeFi and TVL market on the network. Maker and Aave are the biggest players here, with a TVL of $14.52 billion and $11.19 billion, respectively.
Even on other Blockchain networks like Terra, Avalanche, Solana, and BNB Chain, the adoption of cryptocurrency-based lending has been one of the major smart contract use cases in the DeFi world. There are around 138 protocols providing crypto loan-based services to users, amounting to a total TVL of $50.66 billion, according to DefiLlama. Apart from Aave and Maker, the other prominent players in this category of protocol on Blockchain networks are Compound, Anchor Protocol, Venus, JustLend, BENQI, and Solend.
Johnny Lyu, the CEO of crypto exchange KuCoin, spoke to Cointelegraph about choosing Blockchain networks for crypto lending. He said that, “the ideal Blockchain for lending and DeFi does not exist as each has its own advantages. At the same time, Ethereum’s leadership is undeniable due to many factors.”
Considering that the liquidity and reliability of the Ethereum platform is the highest now due to it being the most widely used Blockchain within DeFi, one might consider leveraging the same and making it the Blockchain of choice.
Prominent Players
To get started, the borrower must choose from the major lending protocols on the network, such as Maker, Aave, and Compound. Although there are a large number of cryptocurrency lending platforms, we consider the most prominent ones for easy explanation and relationship.
Cryptocurrency loans allow users to request and lend digital assets in exchange for a fee or interest. Borrowers need to post collateral that allows them to instantly take out a loan and use it for their portfolio goals. On platforms like Aave you can take loans without any collateral, known as flash loans. You must pay back these loans in the same block transaction and are primarily a feature intended for developers due to the technical skills required to run them. Furthermore, if you do not repay the amount borrowed and interest, they cancel the transaction even before its validation.
Since loans and credits are managed through smart contracts, there is no real age limit for the younger generation to get involved, which is traditionally not possible through a bank due to a lack of credit history.
Considerations and Risks
The main risk involved in crypto lending is that of smart contracts, as there is a smart contract in play that manages capital and collateral within each DeFi protocol. One way to mitigate this risk is through robust testing processes implemented by the DeFi protocols that deploy these assets.
The next risk to consider is liquidity/settlement. The liquidity threshold is a key factor in this case, defined as the percentage from which a loan is under-guaranteed and, therefore, gives rise to a margin call. The difference between the LTV and the liquidity threshold is the security cushion for the borrowers of these platforms.
Despite the risks mentioned, cryptocurrency-based lending is one of the most evolved spaces in the DeFi markets and still witnesses constant innovation and growth in technology.
By Audy Castaneda
