Bitcoin Collateral Loans and Ethereum infrastructure — The Next Step For Cross-Chain DeFi. Part 2
As you had learned from the first part of our story about the prospects of DeFi on Swap.online, the decentralized financial ecosystems themselves in the current sense are the most technologically advanced attempts at “bridging the gap” between cryptocurrencies and the world of classic financial instruments. The simplest and most common example is loans secured by cryptocurrencies in DeFi ecosystems.
Cryptocurrency Loans: Decentralize It!
The very idea of loans secured by cryptocurrencies can hardly be considered a novelty. The first such services, for example, Nexo, were (and still are) a kind of cryptocurrency pawn shops. The user enters the cryptocurrency they have on their account, get the right to withdraw a certain amount in fiat currency (which is significantly less than the exchange value of the tokens) against their tokens and pay the service a certain amount for each day of using the loan.
Everything seems to be clear and convenient: a simple interface, no KYC / AML checks, no credit history, a lot of currencies — from Bitcoin to Nexo’s own tokens and even Binance. But there is one caveat. This is a centralized service. You transfer your money to someone and they store it. Anything can happen to them: the service can be hacked, the team may turn out to be dishonest, and law enforcement agencies can stop the service’s operations by a court or prosecutor’s decision. The latter is especially likely, as the withdrawal of fiat without complex KYC / AML checks will sooner or later attract the attention of those who are paid to do so.
And it is hard to call such a proposal very profitable. This, of course, is more attractive than consumer loans or microloans in Russia, Belarus or third world countries. But, for example, in the Czech Republic, ordinary consumer loans are also provided at 3.9% per annum, which is 2–3 times cheaper than centralized cryptocurrency pawnshops. Is your pseudonymity and “lack of obligatory payments” worth it, when coupled with the risks of triple overpayment?
Centralization is always both dangerous and expensive. Moreover, the very nature of loans secured by cryptocurrencies most often does not imply large transactions. This means that this industry can be easily decentralized.
The Pioneers Of Decentralized Cryptocurrency Loans.
It is widely believed that the decentralized cryptocurrency loan market is about one and a half years old. The first solutions here were proposed by Maker DAO and were related to their DAI stablecoin. This stablecoin works on top of the Ethereum network and acts as a kind of analogue of the US dollar while being tied to its exchange rate. At the time of publication of the article, the platform “blocked”, i.e. offered its customers to borrow $309 million in DAI stablecoins. The mechanism of decentralized loan platforms involves mutual lending among users. The “lenders” can thus receive passive income. The closest competitor, the open-source Compound platform, blocked $87.6 million. The Dharma startup demonstrated the biggest growth values in the industry. It entered the market only on April 8, 2019, but it was already able to attract more than $10 million in user assets in the first month. Interestingly, Dharma Labs and Maker DAO have a common investor — Polychain Capital. Maker offers loans secured by the DAI cryptocurrency, and its competitors offers them in Ether, WETH (wrapped Ethereum), REP, BAT tokens, USDC stablecoin and several other currencies.
The most logical next stage in the evolution of the market is loans secured by Bitcoin.
Bitcoin collateral loans: Swap.online comes into play
The most dynamically developing market player — Dharma — is already announcing plans to issue loans secured by Bitcoins in p2p mode. In an interview with Coindesk, Dharma Labs operations director Brandon Forster said his team’s key goal was to add support for Bitcoin and the less common PAX type stablecoins.
Swap.online has extensive experience in integrating Bitcoin into decentralized exchange processes. In 2018, shortly after the first BTC <> ETH exchanges, the Swap Online team added exchange operations for 45 ERC-20 tokens (including DAI, by the way) in very a short time period.
Decentralized credit services are now following the path of the first decentralized exchangers, as they are excessively tied to one blockchain. Most often, they are tied to Ethereum, but the largest service by the sum of operations — EOSREX, which has occupied up to half of this segment according to various estimates, is tied to the EOS blockchain. Swap Online will offer decentralized lending tools on various blockchains.
Such loans can be a source of passive income. The scheme resembles margin trading with leverage. The amount of collateral will always be less than the amount of the loan. However, if the collateral lender is confident that the currency that they are transferring as a deposit will depreciate more than the currency being borrowed against the loan, then they will win.
What comes next? More Use Cases For DeFi
As observers have noted, decentralized finance can solve two problems: financial censorship and unequal access to financial instruments. This is probably the closest to the true Satoshi-vision in terms of decentralizing the interaction of different blockchains. So far, the following use cases have been invented for the given scenario:
1. Ready-made payment systems. Some DeFi applications allow users to quickly deploy payment system on top of the Bitcoin or Ethereum blockchain, even for a very small business.
2. Tokenization of existing assets. For example, the Harbor startup offers the release of digital securities backed by assets from the world of the classical economy.
3. Decentralized exchange services. Undoubtedly, all truly decentralized exchangers can be considered representatives of the world of DeFi.
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