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DeFi transforming lending routes on the blockchain

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DeFi transforming lending routes on the blockchain

The world of decentralized finance (DeFi) is gradually expanding to encompass a significant share of the global financial lending space by virtue of the inherently trustless manner of operation and the ease of accessing capital. As the crypto ecosystem has grown to a $2-trillion industry by market capitalization, new products and offerings have emerged thanks to burgeoning innovation in blockchain technology.

Lending and borrowing have become an integral part of the crypto ecosystem, especially with the emergence of DeFi. Lending and borrowing are one of the core offerings of the traditional financial system, and most people are familiar with the terms in the form of mortgages, student loans, etc.

In traditional borrowing and lending, a lender provides a loan to a borrower and earns interest in exchange for taking the risk, while the borrower provides assets such as real estate, jewelry, etc., as collateral to obtain the loan. Such a transaction in the traditional financial system is facilitated by financial institutions such as a bank, which takes measures to minimize the risks associated with providing a loan by conducting background checks such as Know Your Customer and credit scores before a loan is approved.

Related: Liquidity has driven DeFi’s growth to date, so what’s the future outlook?

Borrowing, lending and blockchain

In the blockchain ecosystem, lending and borrowing activities can be conducted in a decentralized manner wherein the parties involved in a transaction can deal directly with each other without an intermediary or a financial institution through smart contracts. Smart contracts are self-executing computer codes that have a certain logic where the rules of a transaction are embedded (coded) in them. These rules or loan terms can be fixed interest rates, the loan amount, or contract expiry date and are automatically executed when certain conditions are met.

Loans are obtained by providing crypto assets as collateral on a DeFi platform in exchange for other assets. Users can deposit their coins into a DeFi protocol smart contract and become a lender. In return, they are issued native tokens to the protocol, such as cTokens for Compound, aTokens for Have or Dai for MakerDao to name a few. These tokens are representative of the principal and the interest amount that can be redeemed later. Borrowers provide crypto assets as collateral in exchange for other crypto assets that they wish to borrow from one of the DeFi protocols. Usually, the loans are over-collateralized to account for unexpected expenses and risks associated with decentralized financing.

Related: Looking to take out a crypto loan? Here’s what you need to know

Borrowing, lending and total value locked

One can lend and borrow through various platforms in the decentralized world, but one way to gauge the performance of a protocol and select the right one is by observing the total value locked (TVL) on such platforms. TVL is a measure of the assets staked in smart contracts and is an important indicator used to evaluate the adoption scale of DeFi protocols as the higher the TVL, the more secure the protocol becomes.

Smart contract platforms have become a major part of the crypto ecosystem and make it easier to borrow and lend due to the efficiencies offered in the form of lower transaction cost, higher speed of execution and faster settlement time. Ethereum is used as a dominant smart contract platform and is also the first blockchain to introduce smart contracts. The TVL in DeFi protocols has grown by over 1,000% from just $18 billion in January 2021 to over $110 billion in May 2022.

Ethereum takes up more than 50% of the TVL at $114 billion as per DefiLlama. Many DeFi lending and borrowing protocols are built on top of Ethereum due to the first-mover advantage. However, other blockchains, such as Terra, Solana and Near Protocol, have also increased traction due to certain advantages over Ethereum such as lower fees, higher scalability and more interoperability.

Ethereum DeFi protocols such as Aave and Compound are some of the most prominent DeFi lending platforms. But one protocol that has grown significantly in the past year is Anchor, which is based on the Terra blockchain. The top DeFi lending protocols based on TVL can be seen in the graph below.

The transparency provided by DeFi platforms is unmatched by any traditional financial institution and also allows for permissionless access, implying that any user with a crypto wallet can access services from any part of the world.

Nevertheless, the potential for growth of the DeFi lending space is massive, and the use of Web3 crypto wallets additionally ensures that DeFi participants maintain a hold over their assets and have complete control over their data by virtue of the cryptographic security provided by blockchain architecture.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Neeraj Khandelwal is a co-founder of CoinDCX, an Indian crypto exchange. Neeraj believes that crypto and blockchain can bring about a revolution in the traditional finance space. He aims to build products that make crypto accessible to and easy for global audiences. His areas of expertise lie in the crypto macro space, and he also has a keen eye for global crypto developments such as CBDCs and DeFi, among others. Neeraj holds a degree in electrical engineering from the prestigious Indian Institute of Technology Bombay.

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Grayscale Launches New Investment Product While Bitcoin Trust Crashes to 35%

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Grayscale Launches New Investment Product While Bitcoin Trust Crashes to 35%

Grayscale Investments is offering investors an opportunity to invest in Bitcoin mining hardware in the bear market.

The new investment opportunity, called the Grayscale Digital Infrastructure Opportunities LLC (GDIO), is now open to qualified individual and institutional investors, even as the asset manager allows ETF-related court proceedings to run their course.

Grayscale putting capital to work

Grayscale will use investor capital from the GDIO to buy mining hardware for a minimum of three years. It will use the hardware to mine and subsequently sell bitcoin. Mining is the energy-intensive process undertaken by a computer network to create a new transaction block and verify it. The node in the network that creates the block is known as a miner. A miner is rewarded in bitcoin for his effort, which typically requires large amounts of cheap electricity and computing power.

Part of the proceeds Grayscale will earn from its efforts will be paid out quarterly to GDIO investors.

“Grayscale’s unique position at the center of the crypto ecosystem enables us to create offerings that allow investors to put capital to work through differing market cycles,” stated Michael Sonnenshein, Grayscale’s chief executive.

GDIO represents another way the company has sought to provide investors with exposure to bitcoin without directly holding the asset.

Investors can also purchase shares from its GBTC trust and gain exposure to bitcoin through Grayscale’s legally regulated business in the U.S.

But Grayscale has a problem. Because investors cannot redeem shares in the trust for bitcoin, the price per share has dropped drastically, trading at a discount of 35% to its Net Asset Value. 

At the close of the trading day on Oct. 5, shares were trading at a shade over $12, despite being backed by $18.45 worth of bitcoin.

To mitigate this discount, Grayscale has pursued the conversion of GBTC into a spot bitcoin exchange-traded fund, which has so far been unsuccessful. The U.S. Securities and Exchange Commission denied the company’s latest application in June 2022, prompting Grayscale to pursue legal action against the federal agency. 

Nic Carter of Castle Island Ventures, a venture capital firm focused on early-stage public blockchain startups, said that Grayscale could wind down the ETF:

watching the GBTC discount. looks like ATL at -35%. on top of discounted spot BTC. paths to breaking open the piggy bank: SEC can approve ETF conversion, or Grayscale can wind down the trust themselves if they so choose.

— nic carter (@nic__carter) June 17, 2022

The SEC maintains that spot bitcoin ETFs are prone to underlying market manipulation.

Grayscale undeterred by SEC rejection

Despite consistent resistance from U.S. regulators, Grayscale launched its first European ETF in May 2022, which tracks the Bloomberg Grayscale Future of Finance Index, offering customers exposure to institutions at the crossroads of finance, technology, and cryptocurrencies.

Grayscale raised investors’ eyebrows recently when it announced that it had applied with the SEC to distribute 3 million ETHPoW tokens that were distributed to all Ethereum (ETH) holders after the controversial proof-of-work fork went live. 

At the time, Grayscale said it was seeking the rights to sell the tokens and pay out shareholders. 

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Colorado is accepting crypto for tax payments — it could be a mess or a shining example

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Colorado is accepting crypto for tax payments —  it could be a mess or a shining example

Colorado is now accepting crypto for tax payments — but if you choose to use that option, it could change the amount you owe…
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BNB Chain confirms BSC halt due to ‘potential exploit’

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BNB Chain confirms BSC halt due to ‘potential exploit’

Rumors of a significant hack on the BNB Chain were confirmed by the blockchain’s team, with all deposits and withdrawals suspended on the network…
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