DeFi solved a pain point and brought more pain points.

When we put the digital currency market size (CoinMarketCap data) and DeFi lock total value (DAppTotal data) into the “small economic cycle” for a year and a half, we will find an interesting thing: the development of DeFi does not seem to be too much Currency price impact. The total market capitalization of digital currencies shrank from $833.3 billion at the beginning of 2018 to $104.3 billion at the end of the year. The total value of DeFi locks increased by 112%. The total market value of digital currencies rose by 55% last month, breaking through $277.1 billion, DeFi locks. The total value of warehouses increased by 108%, exceeding $1.2 billion.

What makes DeFi have the energy to grow at a high speed? What other factors are constraining the evolution of DeFi? What will happen in the future?

With these questions, the Odaily Planet Daily Research Institute is continuously updating the series under the “DeFi Feature”. Today's article introduces the "general problems of the decentralized lending platform." Readers who are curious about the basic concepts of decentralized lending and the current market situation, please click on the previous article. "At last, some people have clearly explained what DeFi is and what it can do." | DeFi Series ". After that, we will also select a few typical representatives of DeFi to analyze, so stay tuned.

The word DeFi comes from a blog on the August 2018, "Announcing De.Fi, A Community for Decentralized Finance Platforms," ​​by Dharma's Lender and COO Brendan Forster.

Among the many products of DeFi Ecology, the center of the decentralized lending platform is relatively core. It will link decentralized exchanges, stable currencies, trade finance platforms, custody and venture capital to serve as bridges and hubs.

The MakerDAO was launched in December 2017, which drove the departure of the decentralized lending business. Its emergence meets certain financing needs of crypto-investors. Today, MakerDAO is no longer the only option to borrow and lend crypto assets. Dharma allows users to apply for or offer loans for any ERC20 or ERC721 standard cryptographic assets, dYdX supports users for derivatives and long/short margin transactions, and Compound provides money market lending for ETH, DAI and other cryptographic assets.

In the context of the overall coldening of the encryption market in the past two years, decentralized lending helps the holders to solve the cash flow demand without losing the ownership of the encrypted assets, and support the financial ecology of the Ethereum on the supply side.

The project side is also using the pain points of traditional financial services to demonstrate the existence of DeFi. Behind the fact that about 2 billion people in developing countries do not have bank accounts, the barriers to entry of traditional financial services are high, the intermediate costs are high, the transparency of funds is low, financial institutions review personal credits or violate information privacy. In contrast, decentralized lending platforms emphasize transparency, efficiency, low financing costs and anti-censorship, which can be said to be a useful complement to traditional lending services.

But objectively speaking, issues such as regulatory policies, financial risks, social needs, market liquidity, user education, and public chain performance are all constraining the further development of decentralized lending platforms.

Regulatory issues that cannot be avoided

Most decentralized lending platforms will launch stable coins that anchor legal currency or encrypted assets.

Stabilizing coins are usually grouped into three types: stable coins that anchor legal currency (such as USDT), unsecured stable coins (such as Basis), and stable coins that rely on mortgages to encrypt assets (such as DAI). The USDT, the most widely used stable currency in the world, is highly regarded by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). If the relatively “decentralized” stable currency DAI is favored by big capital, it may face stricter regulation and review.

At the SXSW conference in March this year, Valerie Szczepanik, senior adviser to the SEC, said that over time, under the current securities laws, stable currencies may be included in the scope of securities regulation. Considering the way in which stable currency is redeemed, the SEC may define it as a “spot note”, a two-party note traditionally defined (the debtor should require payment to the note holder at any time). According to the US Supreme Court’s 1990 decision against Reves v. Ernst & Young, spot bills were recognized as “securities” under section 3(a)(10) of the Exchange Act, unless there were exceptions or exclusions. .

In the position of the CFTC, according to Article 1(a)(47)(a) of the Commodity Exchange Act, the stable currency is a “swaps”.

Regardless of whether it is ultimately classified as “securities” or “exchange contracts”, strong supervision will substantially increase the compliance costs of stable currencies, thereby delaying the market growth of decentralized lending.

Financial risks that cannot be ignored

In the traditional financial lending business, the offset, pledge and credit system jointly prevent and control the risk of default.

DeFi clearly lacks a suitable (chain) credit system compared to traditional lending services. This means that (at least in the short term) decentralized platforms are not effective against credit risk. Today's platform risk control relies primarily on crypto asset-backed lending contracts based on open protocols or peer-to-peer protocols (dYdX and Compound). But regardless of the type, users still need to endorse with encrypted assets.

On the other hand, the price of crypto assets tends to fluctuate a lot. If the crypto assets that are mortgaged plung 50% or more in a short period of time, the “bad debt rate” of the entire system will climb and the platform will face insolvency. In this regard, MakerDAO will respond to this “black swan” event through the launch of “Global Delivery Protection Measures”, but can this system regain the trust of users?

Single asset type

An important reason why the decentralized lending market is not big is that the lack of more quality assets has only been smothered in the ETH stock market for a long time. “Why is ETH” is not difficult to understand. Bitcoin is not Turing-complete. Only Ethereum carries valuable assets (thanks to ERC20) for ecology and mobility.

But the mortgage assets are too singular, which is not a good thing for the lending platform. When the MakerDAOs who talked about the “Pu Hui” story used the premise of holding ETH, they had already excluded the public users.

Looking to the distance, the decentralized lending platform will inevitably be combined with high-quality assets in the real world, such as mapping or hosting offline or Internet assets to the chain to increase the richness of the assets. Even as the day approaches, the lending market still needs to verify that the new asset class is effective and may be at the expense of the decentralization of the platform.

Lack of liquidity

For the decentralized lending platform, setting the mortgage rate is the art of the door. If the mortgage rate is too low, currency price fluctuations will weaken the stability and security of the lending system. If the mortgage rate is too high, it will affect the user's enthusiasm and asset liquidity.

Taking MakerDao as an example, if a user wants to get a loan worth $1,000, they need to mortgage at least $1,500 worth of ETH. If you borrow DAI at ETH at a mortgage rate of 150%, the platform will soon perform liquidation when the ETH price drops.

Currently, the average mortgage rate in MakerDAO has reached 300%. Although this value can maintain the overall stability of the system, the way of over-collateralization still reduces the liquidity of assets, and the enthusiasm of users to mortgage assets is affected.

User experience is not friendly

In fact, from the perspective of Internet investment, decentralized lending is not in line with the taste of the organization. The reason is simple. It solves a pain point (asset mobility), introduces more pain points, and invents new solutions. It is not easy for ordinary users to learn and understand DAI, MKR, and CDP, and the whole process is not friendly.

The Odaily Planet Daily has written a MakerDAO experience draft. "We experienced decentralized lending and finally understood that this industry is still making money in a bear market." Unfortunately, the author spent half of the time on installing MetaMask… …

Recalling traditional centralized lending, the user experience is squandered by complex materials and lengthy approval processes. Decentralized lending, although these steps are missing, the tedious learning and operation also limits the market size to a limited extent (the same problem also exists in DAPP, making Decentralized users smaller than Centralized).

On the other hand, although borrowing is not a high-frequency financial behavior, the basic public chain relied on by the decentralized lending platform still has congestion problems. The weaker processing power of the traditional Internet will bring a worse user experience.

It is true that the decentralized lending platform has the above problems. Fortunately, the industry is still in the early stage of development, and the project side also recognizes the bottleneck restricting development and is actively adjusting and iterating. With the gradual maturity of blockchain technology and ecology, the decentralized lending platform will play a more and more important role. After all, it has opened up a wealth of open financial applications for the encryption world, and it offers users more choices.

Analyst | Li Xueting Operations | Gai Yao Edit | Hao Fangzhou

Produced | Odaily Planet Daily (ID: o-daily)