Author: Nick Man Tuoni (Nick Mantoni), he is a writer and analyst encryption assets in the market, with 3 years experience in a block chain start-up company as public relations and events manager. His research has been reported by Forbes, Finance Magnates and Hackernoon and CCN.com.
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The MVIS CryptoCompare Digital Asset 100 Index shows that after the price of most crypto assets plummeted last year, the cryptocurrency market full of innovation has suddenly recovered.
In order to make up for the losses in the winter of cryptocurrencies, some holders obtain a small but passive income with a small risk by lending funds secured by digital assets or currency deposits.
This profit model is now making Decentralized Finance (DeFi) rapidly popular. DeFi includes open source projects designed to make the financial world open and free with the help of blockchain and smart contracts.
According to estimates from broker-dealer Genesis Global Trading, the total amount of cryptocurrency loans issued in the third quarter of this year increased to $ 870 million. Compared with the same period of the previous year, this indicator has increased by 3.5 times, and the total amount of issued loans has now exceeded US $ 3 billion.
Researcher Jack Purdy pointed out that since the beginning of this year, the volume of loans issued by Celsius Network alone has doubled. The Celsius Network is just one of many platforms in the DeFi space that allows users to earn interest on the cryptocurrencies they hold.
New popular stages of DeFi and Ethereum
The DeFi service market has been growing and developing rapidly, and the list of types of supported assets is expanding and providing more features. A year ago, the total value locked by DeFi was only close to $ 200 million. That number now exceeds $ 689 million.
Ethereum Express is a platform that provides a specialized platform for the thousands of crypto experts and enthusiast communities. The platform's chief executive Vlad Miller said,
"In the past year, the scale of decentralized finance (DeFi) has more than tripled-the size of lockups has grown from about 900,000 Ethereum (ETH) to about 3.3 million Ethereum ($ 599 million). The future of DeFi is very promising: previously unavailable investment opportunities are opening up. A variety of financial instruments will generate more demand and promote the large-scale adoption of cryptocurrencies-borrowing or investing in a certain proportion, users do not need identity Certificate, just having a crypto wallet is enough. "
How decentralized is DeFi?
Despite the rapid growth of the industry and the expanding range of assets involved, the seemingly decentralized DeFi services are still affected by large companies including Namely, Polychain Capital and a16z.
According to CoinDesk, on November 18, 150 special addresses voted in favor of a proposal to switch Maker to a multi-collateral system. However, at the time, only 5 addresses held 80,000 MKR (worth $ 662 each), accounting for more than 50% of the vote.
In view of this oligopoly, the participation of small participants in the voting process is only symbolic, and the process itself does not actually seem to be truly decentralized, just a parody of democracy.
CoinShares Chief Strategy Officer Meltem Demirors even believes that in its current form, the DeFi ecosystem is mainly composed of "centralized products and services". Compared with blockchain protocols, their advantages are only in a more advanced user experience:
"We hope that over time, it will become possible to eliminate middlemen."
Another ICO-like bubble?
The development of crypto loans and DeFi may trigger increased demand for tokens used as collateral. Those who desperately need money but don't want to sell digital assets at low prices will most actively borrow through these services.
Borrowers will include residents and companies from countries with high bank interest rates, cryptocurrency traders, and those trying to hide their financial activities from a state.
According to Bloomberg, the crypto loan market is now considered a $ 5 billion industry, and former Wall Street traders who are seeking a new field are actively conducting research.
In one of the latest Youtube blockchain podcasts, a Wings representative said:
"The market does show signs of a bubble. But we all know that cryptocurrencies are a favorite market for gamblers. This does get the attention of regulators. In any country, loan activity and the proceeds of that loan are always regulated.
But don't forget that cryptocurrencies are not part of a parallel world. The region is inevitably affected by economic laws and the credit cycle, where there is not only recovery and expansion, but also depression and stagnation.
Crypto-lending, including DeFi, is becoming a popular alternative to traditional finance. The profitability of financial instruments has declined when traditional financial interest rates are extremely low.
DeFi provides flexibility for finance, where its users can earn a small portion of the proceeds in a bear market and can borrow funds at acceptable interest rates. In addition, the decentralized market for synthetic assets is also steadily developing, providing new opportunities for traders.
However, there are risks in any area, and loan services are no exception. Until now, there is no 100% decentralized DeFi application, and the influence of large participants has been felt during the voting process of asset mortgage loans.
Nonetheless, this market segment is still underdeveloped and not large. Compared with the traditional banking system with high borrowing costs and low deposit returns, DeFi's advantages are undeniable, which means that the market has potential for growth.