ZVC DeFi Research | Introduction to Crypto-lending.
The growth of stablecoin ecosystem has allowed for more applications for digital asset transactions blockchain technologies. In Report 1:Stable coin, we have seen the example of use cases of stablecoin.
In this issue, we will be featuring the idea of cryptolending, a mechanism that allows borrowers to use cryptocurrency from willing lenders, in exchange for paying interest.
Paying interest for an asset is old news back in traditional finance. We have a USD 100 trillion market on such debt instruments. And now, stablecoins are facilitating debt financing with blockchain technology, allowing for efficient and decentralised lending and borrowing (Peer-to-Peer Lending).
Similar to fiat cash, stablecoins do not generate any interest of their own. As they are nominally backed by real assets, the number of stablecoins is determined by the value of the real assets backing it. Therefore, lending became a useful approach to monetise from stablecoins, since they bear interest, and depending on the timing or the lending platform, returns can exceed prevailing fiat interest rates.
What Do Borrowers Want to Borrow Stablecoins?
According to Binance, there are two mainstream cases why borrowers would like to borrow stablecoins. With the expansion of more use cases in the future, we will no doubt see more borrowing for different uses.
- It is used as a tool for complex cryptocurrency trading. Traders can:
- Borrow a cryptocurrency and then trade them for stablecoins, expecting that the price of the borrowed cryptocurrency will be lower in the future. This is called shorting in the stock market.
Borrow a stablecoin and trade them for cryptocurrency, expecting that the price of the invested cryptocurrency will be higher in the future. This is called leverage in the stock market.
These two strategies are the common use cases for traders in the traditional stock market or cryptocurrency exchanges.
- It is to borrow cryptocurrency to have a stake in the coin’s governance.
- Similar to normal cryptocurrency, decentralised stablecoins does allow holders to have a say in how the token would develop. Those interested in voting may borrow the stablecoins from those who are less interested in doing so, and therefore allowing these borrowers to have more say in this issue.
How is the Cryptolending Industry Like?
Most of these new cryptolending start-ups rely on the Ethereum platform, performing their smart contract applications there and collecting Ether (ETH) as collateral, with around 2% of the outstanding Ether supply being locked as collateral for such cryptolending contracts. The figure below shows an overview of these cryptolending start-ups.
Image Credits: Paul Veradittakit (medium.com/@veradittakit)
How Does Cryptolending Work?
Cryptolenders usually have their ideas about cryptolending. As an example, we shall look into the cryptolending operations of one of the largest players in the cryptolending market, MakerDAO.
MakerDAO lends out their stablecoin, DAI, to their borrowers. The borrowers’ collateralized debt positions are required to maintain at least 150% of the issued DAI value staked in Ether (ETH) as collateral, and such holders pay a ‘stability fee’, effectively an interest rate, payable in their cryptocurrency, MKR.
The firm attracts third-party potential lenders by offering them a share of the interest paid by the borrower, known as “governance fees”. With the lion’s share of ETH sent to their collateralized debt position, this operational structure is quite similar to deposit and lending functions of a major bank.
Quick Side Note
ZV Chain does have a similar function known as Trust Mining, where users can lend their ZVC to mining pool, which returns interest in ZVC at the stipulated time based on the smart contract. The main difference between this function and stablecoin cryptolending is that the interest rates on ZVC is based on mining rewards, while interest rates on stablecoins are based on the prevailing supply and demand for the stablecoin itself. As such, there can be major differences on their prevailing interest rates.
This research article is co-published by ZV Launch, to research about DeFi Industry Applications and Market Trend — http://zvlaunch.com/ If you like this report, do make sure to clap for this article, and post on the comments on what you would you like to feature in the following issues!
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