Decentralized Finance (DeFi): Reference Rates
Lending and borrowing rates for digital assets
Introduction
Traditional fixed income markets finance governments, companies, and individual borrowers. At the end of 2017 outstanding global debt stood at $184 trillion*. Given the size of this asset class and its versatility, it is not surprising to see fixed income applications with digital assets on blockchains.
As highlighted in this annual lending report 2018, lending, in particular secured lending, is the financial application seeing the greatest adoption with digital assets. There are currently ~$117 million loans outstanding issued and settled on the Ethereum blockchain. The open nature of public blockchains (e.g. Ethereum) and DeFi protocols (e.g. Compound, MakerDAO, dYdX, Dharma) is fantastic for accessibility and transparency. This sector and ecosystem are broadly defined as Decentralized Finance (DeFi).
Secured Lending on Blockchains
The emergence of secured lending in DeFi is in large part due to demand for margin loans from traders. Borrowers or traders need additional capital to take leveraged positions. Traditionally margin loans are facilitated by brokerage firms like Charles Schwab or Fidelity. The siloed nature of margin lending, with interest rates often priced off of LIBOR and Prime Rate, has changed in DeFi. In DeFi the banks and brokerages are replaced with a software code (also known as smart contracts) deployed to blockchains to manage funds.
Lending liquidity pools like Compound and dYdX have attracted capital allowing for $2–4 million daily loan origination volume at the time of publication. Anyone may supply (lend) to liquidity pools and borrow capital from liquidity pools. These loans are overcollateralized and borrowers have to maintain a minimum collateral ratio, otherwise loans will be margin called. Asset suppliers and lenders are earning 6–11% APR (at the time of this publication) on USD denominated stable-coins and other digital assets.
New Reference Rates for Digital Assets
We have recognized that there is a lack of information and awareness about this new financial system (Decentralized Finance/Open Finance). For this reason, we created LoanScan and now reference rates for the emerging Decentralized Finance. These reference rates were requested by the community and we are publishing them now and are distributing via our free API.
Why Reference Rates are Needed?
DeFi Reference Rates have been created to serve early Decentralized Finance adopters to reference cost of funds and benchmarking loan portfolio performance.
On the lender side, investors and savers can check to make sure they are getting market returns for their supplied (lent) digital assets. On the borrower side, lending platforms and protocol developers may seek reference rates to set cost of funds.
Reference Rates Index Methodology
These reference rates will be iterated upon as this nascent industry evolves. For the first iteration we have included Compound, dYdX, and MakerDAO open source decentralized lending protocols. We used the following criteria below for protocol inclusion in the reference rates.
- Open source lending protocols on permissionless blockchains such as Ethereum, EOS, Cosmos, Bitcoin, etc.
- Secured overcollateralized loans (e.g. no credit risk)
- Variable interest rates loans
- Open-ended loan term (puttable)
DAI Reference Rates
USDC Reference Rates
ETH Reference Rates
This is still very early on and we will continue to identify methodologies that best serve the numerous applications for borrowing and lending as DeFi grows.
SOLR, SOBR, and WABR for DAI, USDC, and ETH are live on LoanScan now. Additionally, DAI WABR is available on http://loans.descipher.io.
Thanks to Robert Leshner, Vishesh Choudhry, Matteo Leibowitz, Alex Bazhanau, Nick Cannon, Kacper Wikieł and many more from the DeFi Community for the input and helpful conversations.
Comments or questions about the report? Reach out contact@loanscan.io
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