DeFi’s Booming Crypto Lending, Almost ‘Certainly’ Won’t Materialize in this Bull Market: BitMEX CEO
2020 has been an explosive month for financial markets. Not only did the stock markets continue to go up and up, with no limit in sight, crypto markets are also having a blast.
As we have been seeing, it has been decentralized finance (DeFi) that has been especially enjoying a monster growth, recording an increase of nearly 940% YTD in the total value locked in this sector.
DeFi provides peer-to-peer cryptocurrency platforms for lenders and borrowers to transact without banks and the paperwork. Since March’s $3.7 billion TVL, loans on such platforms have risen over seven-fold, and much of this growth is driven by investors hunting returns as central banks around the world push interest rates below zero to prop up the pandemic battered economies.
DeFi offers cheaper and accessible ways to access and offer credit with the promise of high rewards. Most of these DeFi platforms are based on Ethereum blockchain and ask for collaterals worth more than the loans taken out.
Where is this demand & supply coming from?
Miners who borrow fiat to pay for electricity, rent, and salaries and speculators that need fiat or crypto to trade with leverage are the borrowers.
The lenders of Bitcoin and Ether are the holders who are waiting for the digital asset to the moon as they want to earn some yield passively.
As for fiat stablecoin lenders, “these days for those seeking to earn more than 0% or negative in Europe and Japan, take their dollars, buy Tether or another fiat stablecoin, and stake it somewhere,” said BitMEX co-founder and CEO Arthur Hayes in his latest blog.
Hayes, who has his “pocket rockets'” primed and ready with gold and bitcoin, has become a “crypto peasant” and currently “farming the latest and greatest shitcoin DeFi projects” notes how the savers are buckling under zero and negative rates and becoming risk seekers with their capital. He said,
“The crypto capital markets are the best place to earn serious positive yields if you are willing to take some modicum of risk.”
The Next Bubble?
With high rewards come high risks, including the potential fee revenue, which depends on the asset locked, impairment issues, and such sites are also vulnerable to bugs and hack. According to many, this is the next bubble of crypto, much like initial coin offerings (ICOs) in 2017. Preston Byrne of the law firm Anderson Kill in New York said,
“These are experiments in finance. They’re not necessarily legally compliant in a lot of cases, but that doesn’t mean that they can’t be in some future.”
According to Hayes, these lending platforms in crypto are closest to banks which bid for deposits by paying high rates of interest. In DeFi, a whole ecosystem of dApps are attempting to decentralize this with “programmable finance.”
For now, miner and speculator use cases for crypto stablecoin fixed income products is the first step where the “demand laid the groundwork for the rise of DeFi yield farming.” But faced with severe income inequality and free money, “financial speculation will surge.”
The rise of the DeFi proto-bank will usher in a wave of inclusive banking services for businesses and individuals who have been crowded out of the capital markets by corporate socialism. But it almost certainly won’t materialize during this bull market, he said.
Still, in the current market, the narrative will attract “hundreds of billions of USD capital into the ecosystem.”