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Finding the Next Growth Engine for Crypto Lending Markets

New Huobi Research Institute Report Cites KYC, Risk Management and Risk Pricing as Key Challenges to Crypto Lending Growth

Crypto lending has emerged as a key trend in the decentralized finance (DeFi) market, but faces headwinds relating to Know Your Customer (KYC) considerations, risk management and risk pricing. However, these challenges can be addressed by limiting loans to on-chain legal persons, stepping up risk management, and using a market-based mechanism for risk pricing.

These were the key findings of leading blockchain research organization Huobi Research Institute’s new report (The Report), titled “Finding the Next Growth Engine for Crypto Lending Markets”. The latter is the first in Huobi Research Institute’s “Discovering the Unicorns of the Future” series of research reports, which will track key industry trends and provide insights on the industry outlook.

Decentralized lending protocols have always been an important part of DeFi, but the lending business in the DeFi market has stagnated recently due to the limited types of collateral. The crypto lending market, which has developed rapidly in the past year, mitigates the shortcomings of the DeFi lending market with its low threshold requirement and low costs.

The Report carries out a detailed analysis of the crypto lending market which identifies the following development challenges:

KYC: The anonymity of the blockchain network has been a key factor hindering the development of the crypto lending market. The lack of identity authentication and background checks on the borrower contributes to a high risk of default.

Risk management: Compared with traditional finance, the crypto lending market lacks a track record and data, and new technical models need to be developed to measure crypto credit risk and portfolio management. More importantly, traditional credit implements risk management off-chain. The execution of risk management for crypto credit on-chain is no small challenge.

Risk pricing: Due to the homogeneity of collateral, excess mortgages can complete interest rate pricing in accordance with market mechanisms. However, due to the differences in entities, the risk premium for crypto lending will be different, and pricing will be more difficult.

To strengthen the crypto lending market, Huobi Research Institute makes the following recommendations in the Report:

Lending to on-chain legal persons: Limit on-chain credit loans to only two types of borrowers — a natural person or legal person who has done KYC off-chain; and accountable corporates with substantial financial interests on-chain such as DeFi head protocols and Decentralized Autonomous Organisations (DAO).

Stepped-up risk management: Similar to traditional financial markets, future crypto lending markets can take guidance from the risk management framework of the Basel Accords. Credit risk management, credit default probability, default loss ratio and other indicators could be calculated through internal rating and credit risk measurement models.

Market-based mechanism for risk pricing: With detailed rating and credit risk metrics, the market can be given a pricing reference, and market pricing could be achieved through a Dutch auction.

To provide a fuller understanding of the on-chain crypto lending model, the Report also features an analysis of three current mainstream on-chain credit projects: TrueFi, Goldfinch and Maple. This includes the functions and cost-benefit considerations of all parties involved, as well as the strengths and weaknesses of their risk management and pricing models.

To download the full report, click here.

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About Huobi Research Institute

Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016. It is committed to researching and exploring new developments in the global blockchain industry. Its goal is to accelerate the research and development of blockchain technology, promote its applications, and improve the global blockchain industry ecosystem. Huobi Research Institute covers industry trends, emerging technologies, innovative applications, new business models, and more. Huobi Research Institute partners with governments, enterprises, universities and other institutions to build a research platform that covers the entire blockchain industry. Its professionals provide a solid theoretical basis and analyze new trends to promote the development of the industry.

Contact Huobi Research Institute:
E-mail: research@huobi.com
Official website: https://research.huobi.com/
Twitter: @Huobi_Research
Medium: medium.com/huobi-research
Telegram: t.me/HuobiResearchOfficial

Disclaimer

1. The author of this report and his organization do not have any relationship that affects the objectivity, independence, and fairness of the report with other third parties involved in this report.

3. The content of the report is for reference only, and the facts and opinions in the report do not constitute business, investment and other related recommendations. The author does not assume any responsibility for the losses caused by the use of the contents of this report, unless clearly stipulated by laws and regulations. Readers should not only make business and investment decisions based on this report, nor should they lose their ability to make independent judgments based on this report.

4. The information, opinions and inferences contained in this report only reflect the judgments of the researchers on the date of finalizing this report. In the future, based on industry changes and data and information updates, there is the possibility of updates of opinions and judgments.

5. The copyright of this report is only owned by Huobi Blockchain Research Institute. If you need to quote the content of this report, please indicate the source. If you need a large amount of reference, please inform in advance (see “About Huobi Blockchain Research Institute” for contact information), and use it within the allowed scope. Under no circumstances shall this report be quoted, deleted or modified contrary to the original intent.

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Huobi Research

Huobi Research

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Blockchain industry top think tank, affiliated to Huobi Group.