Digital Asset Lending via Decentralized Lending Protocols Q2 2019
An overview of lending activity on decentralized finance (DeFi) protocols Compound, Dharma, dYdX, and MakerDAO
The crypto markets had a strong Q2 overall, and decentralized lending was no exception reaching $155 million in loan origination volume.
In this report we will take a look at lending and borrowing on the four largest decentralized lending protocols: Compound, Dharma, dYdX, and Maker.
In Q2, over $155 million of loans were originated through open finance (decentralized finance) protocols, up more than 130% quarter-over-quarter. Previously, $81.4 million and $66.3 million were originated in Q4 2018 and Q1 2019 respectively.
In both preceding quarters, the majority of loan originations came through MakerDAO through the issuance of the DAI stablecoin. On average, over 300 loans were originated daily during the second quarter of 2019, with close to $2 million in daily origination volume.
Total outstanding loans in DeFi first reached the $100 million mark at the beginning of May, surging up to $117 million by the end of June, up 27% as compared to Q1 2019.
DeFi Reference Rates
LoanScan recently released DeFi Reference Rates for DAI, USDC and ETH, providing early DeFi adopters with a reference cost of funds and benchmark for assessing loan portfolio performance. Reference Rates are available both at https://loanscan.io or via free API.
Compound v2 and dYdX v2
Q2 of 2019 saw the launch of new and improved versions of lending protocols Compound and dYdX. Additionally, the dYdX team has launched a spot exchange incorporating its protocol for margin trading. By the end of June 2019, the two protocols combined originated more loan volume than MakerDAO. We will dive deeper into the loan originations on each protocol in the proceeding sections.
Furthermore, the addition of USDC as a commonly supported collateral and principal asset was a big step for the space. Because USDC is readily available at exchanges such as Coinbase, this digital asset provides an easy onramp for users to convert from fiat into digital assets supported by lending protocols. A stablecoin which is listed and available on many exchanges also entails greater optionality in utilizing the token for leverage or quoting of other assets like ETH.
DAI still dominates (and denominates) the DeFi lending space, with over 86% of borrowed assets recorded in MakerDAO’s stablecoin. However, ETH made up roughly 10% of the assets borrowed, showing that the individuals looking to borrow or short ETH on platforms like Compound and dYdX was not insignificant. Compared to DAI and its usage in DeFi, USDC has yet to see the same level of decentralized lending adoption. While USDC had a market capitalization around $370 million as of the end of Q2 (over 4x that of DAI), it contributed just 3% of the total amount of assets borrowed and outstanding at the end of June 2019, suggesting that there can still be quite a lot of growth for stablecoin borrowing markets.
Meanwhile, outside of Augur’s REP and the “big 3 coins” of DAI, USDC, and ETH, the other ERC-20 tokens compatible with major DeFi lending platforms barely surpassed the half-million mark, accounting for insignificant portion of the total loan origination volume.
Decentralized Lending Protocols: Q2 Snapshot
In Q2, Compound phased out borrowing from its v1 smart contracts, while simultaneously introducing a v2 that allows individuals to hold interest-bearing cTokens offline. Additionally, new parameters for interest rate calculation and protocol collateralization were introduced in Compound.
Compound v2 saw roughly 50% more loan originations than v1 did over the entire quarter, originating nearly twice as much USD value. Overall, loan origination volume on Compound v1 and v2 combined was $24.7 million in Q2, compared to $3.8 million in Q1.
Assets borrowed are still predominantly stablecoins, suggesting that the market is still very bullish and wants to use DeFi as a method of access to trustless leverage rather than a lever to short ERC-20 assets.
Loans outstanding on Compound v1 and v2 combined stood at $12.1 million at the end of Q2, a whopping 278% increase over Q1 2019. Compound currently offers more assets than dYdX does for lending and borrowing, but the adoption has been pretty limited for non-stablecoins and non-ETH assets. In total, these assets accounted for less than a quarter of a million in loans outstanding, led by ZRX. Notably, Compound has seen a strong amount of USDC adoption, with the Centre stablecoin accounting for 18% of all loan value outstanding on Compound. Additionally, its new cToken feature in v2 allows long-term HODLers to earn interest offline, a unique value proposition to users who want to maintain custody of their funds while also earning interest.
Interest Rates Ranges For Compound v1 and v2
A quick look at the min and max borrow and lend rates for Compound shows the difference between its v1 and v2 contracts — the new formula for computing interest rates allowed for lower minimum borrow rates, making borrowing more attractive in v2.
Loan origination volume on Dharma totaled $10.8 million in Q2, as compared to $899K in Q1, with the caveat that Dharma launched its lending platform at the end of Q1, so a quarterly comparison may not exactly be comparing apples-to-apples.
While all other platforms saw healthy growth in Q2, Dharma’s instead saw its originations significantly dwindle over the course of the quarter, with its largest loan origination days occurring early in mid-April.
To its credit, Dharma did have nearly 2,000 transactions over the 3 months, not far from the numbers seen by Compound. However, the size of these transactions was much smaller on average.
Dharma’s outstanding loan amount plateaued nearly at the start of May, and has been pretty flat at around $8–9 million for almost two months in the quarter. A majority of its loans are still denominated in DAI, though 8% of its loans come from USDC. Loans outstanding at the end of Q2 stood at $9.1 million, as compared to $577K at the end of Q1.
dYdX v2 publicly launched on May 1st, but it really started to see significant volume after May 12 and was able to handle 24% of the loan origination volume in Q2 2019. Despite this growth, it still remained behind Maker, the “upstream” and the issuer of the stablecoin DAI with no counterparty and no dynamic functions to mediate interest rates. If given a whole quarter though, dYdX might be in contention to catch up to the DeFi leader in terms of the loan origination volume.
dYdX tallied $37.4 million in loan origination volume during Q2, compared to $1.6 million in Q1, a 23x improvement quarter-over-quarter!
dYdX’s loan origination volumes have climbed rapidly since launching its new interface. The protocol has particularly benefited from a new slick trading portal that allows for more advanced “one-click” options to gain significant exposure, either with isolated or cross strategies to trade against ETH and the USDC/DAI stablecoin duo. With many users using DeFi for leverage and exposure, dYdX’s trading focus has streamlined user experiences, as dYdX sources orderbook from other decentralized exchange protocols integrated directly onto their platform.
Given that many users on dYdX are trading actively and utilizing dYdX’s abilities to obtain instant short positions on ETH, it is no surprise that ETH actually accounts for 25% of the loans outstanding, relegating USDC to third place in loans outstanding, with just 5%.
Loans outstanding on dYdX stood at $6 million at the end of Q2, compared to only $71K in loans outstanding at the end of Q1. The results of the updated version of the protocol speaks for itself.
Like Compound, dYdX has variable interest rates relying on a dynamic demand/supply driven interest rate function for each of its supported collateral. Particularly on days where large loans were originated, interest rates tended to spike based on the increase in utilization rate, and, conversely, drop instantaneously when large deposits were made (decreasing the utilization rate). Consequently, dYdX saw the largest ranges of fluctuation for borrow and lend rates of the major lending protocols.
Maker has been the pioneer of the decentralized lending space, but despite its large head start and steady month-over-month growth since April 2019, Maker now represents just over 50% of all loans originated during the quarter.
Maker saw three consecutive months of steady growth in loan origination, now putting its total loan origination volume in Q2 up to $82.1 million, a 37% increase from Q1 2019. Typically, Maker’s printing of DAI tends to correlate with the price of ETH, as given the same collateralization levels, more DAI can be printed against a more valuable ETH. If DeFi is like the car industry, Maker is the Ford Model T — but it might not only come in black for long — Multi-Collateral DAI is just around the corner.
MakerDAO’s “debt ceiling” of DAI issuance is currently capped at $100 million while the system supports single-collateral DAI (only ETH can be used as collateral at the moment). With stability fees increased at the beginning of Q2 from 7.5% all the way up to 19.5% to help restore the DAI-to-USD 1:1 peg, many CDPs were also closed, stabilizing the total amount of DAI in circulation at around $90 million at the end of the quarter. At the end of Q1, value of DAI in circulation stood at roughly $88.5 million. This ceiling will be adjusted once multi-collateral DAI is functioning, allowing multi-collateral DAI to unlock new capital against which DAI can be originated in the upcoming quarters.
In Q2, loan originations for stablecoins saw several very large transactions, with Maker, Compound and dYdX — all had $1 million DAI and USDC loans. Also of note was a 300,000 REP withdrawal from Compound v1, and a large deposit into Compound v2 for 15,000 ETH.
Over $6 million in collateral was liquidated on decentralized lending platforms in Q1 and Q2 of 2019. The largest liquidation (worth $879,000) occurred on MakerDAO. The next largest platform’s liquidation occurred on dYdX, with a liquidation of ETH to repay an undercollateralized DAI position of roughly $95,000. Dharma’s largest liquidation occurred for roughly $21,000. Compound saw the smallest large liquidation of the four platforms, with a liquidation of $16,000 worth of REP to repay a DAI obligation.
New Collateral Added: The Real Measure of DeFi Growth and Adoption?
An additional metric to measure decentralized lending adoption is the new collateral added for each protocol. This metric accounts for new crypto assets added to lending protocols, serving as the basis for what can be borrowed against this collateral. If this number doesn’t increase, the only way to increase loan originations is for the underlying collateral to appreciate in value or for individuals (or smart contracts) to borrow at lower collateral ratios. By June 2019, both Compound and dYdX saw more collateral added to their protocols than MakerDAO and Dharma.
Q2 was a great quarter for decentralized lending and we are looking forward towards Q3 of 2019. Q3 should have full quarter results for dYdX v2 and Compound v2. A couple of things to look for in Q3:
- A newly launched lending platform, Fulcrum, powered by the bZx protocol, should have a full quarter’s worth of results coming in Q3.
- Many in the DeFi community are waiting for Dharma to open source its code.
- Nuo is another margin lending protocol that worth looking at as it gains traction. However, some Nuo lenders brought to our attention that interest rates are not always accurately estimated.
- ETHLend should release Decentralized Lending Pool protocol. We are not sure if the team will open source code, since ETHLend’s first p2p lending protocol was not open sourced.