DeFi lending market hits $13 billion, where did your crypto assets go? -

CEX remains the main force in the crypto lending market.

Author: Bai Ye

If we go back two years, I believe no one could have predicted such huge growth in the DeFi market.

In 2019, the total locked amount of DeFi was only 2 million US dollars, but now it has exceeded 65 billion US dollars, achieving a ten-thousand-fold growth; in 2021, the decentralized financial industry has ushered in the explosive growth of NFT, and people have found that DeFi is increasingly related to actual use cases in the real world. In addition to NFT, there is another use case in the cryptocurrency world that is a "perfect fit" with the traditional market: financial lending.

Simply put, the decentralized lending market is a network system based on smart contracts where cryptocurrency holders can lend their on-chain assets/tokens to others to make a profit. In fact, the explosive growth in this field is almost in sync with the development trend of the DeFi market, starting in June 2020 and continuing to rise, as shown in the following figure:

On March 30, the total borrowing volume of the decentralized lending market reached a record high of $13.01 billion. Compound is currently the DeFi protocol with the largest lending volume, with a total loan volume of more than $5.5 billion, accounting for about 43.2% of the total decentralized lending market. In addition, competition between new and old lending protocols such as Maker, Venus, and Aave has become increasingly fierce. In the past year alone, the number of decentralized lending platforms has grown from 2 to 10 - there is no doubt that the crypto lending market is heating up.

If we refer to the explosive growth trajectory of DeFi, it is not impossible for the crypto lending market to reach the level of 100 billion US dollars in the future. Looking at the traditional financial field, the global lending market size is expected to grow from 6036.37 billion US dollars in 2020 to 6932.29 billion US dollars in 2021, with a verified annual growth rate of 14.8%. In contrast, the size of the crypto lending market is still relatively small, coupled with traditional financial shackles such as geographical barriers, high transaction costs and liquidity restrictions, it can be said that the crypto lending market contains huge opportunities and market potential.

In fact, it is no accident that the crypto lending market has exploded since 2020. From the perspective of the overall market environment, as the cryptocurrency market dominated by Bitcoin has gradually emerged from its slump since the middle of last year and continued to rise, more and more investors have begun to try to explore more income channels (after all, under the Fed's zero interest rate policy, keeping money in traditional banks can hardly get much extra income). In addition, lending products are already very mature in the traditional financial field, so they are more easily accepted by users, and may even attract a group of traditional financial users to the crypto market.

But at this stage, most users will still store their cryptocurrencies in exchanges, but this method does not generate interest. With the increase in capital in the cryptocurrency market, both individual and institutional users realize that the cryptocurrencies they store in exchanges may be an excellent source of collateral. As cryptocurrency holders, they obviously want to earn more income while retaining their cryptocurrencies, so they can use their existing assets to lend and get more returns. On the other hand, as KuCoin CEO Johnny LYU said, in a bull market environment, many users are more willing to borrow assets to increase their leverage ratio in order to amplify their investment returns, thereby obtaining higher returns, which actually increases the demand for the crypto lending market.

01

Centralized exchanges begin to pay attention to the crypto lending market

The logic of crypto lending is similar to that of equity pledge loans, with high asset liquidity and easy cash conversion. For borrowers, credit loan quotas are limited, and the process of mortgage and car mortgage loans is complicated, with high economic and time costs. Digital currency can be transferred to the account within ten minutes according to the process. One of its biggest advantages is that it can be quickly converted into cash after closing the position, unlike the low exchange efficiency of traditional loan collateral. For the platform, the biggest advantage is security and low risk control difficulty.

Due to its low entry threshold, greater openness, and market-determined interest rates, decentralized exchanges have captured a lot of market share in the field of crypto lending in a short period of time. It seems that every exchange wants to get a piece of this big pie, which has obviously aroused the "vigilance" of centralized cryptocurrency exchanges.

At present, leading exchanges including KuCoin, Binance, and Huobi have also begun to increase their investment in the crypto lending market. Let us do a brief review below:

(Carbon Chain Value Note: Full position means that all assets in the leveraged account can be used as collateral. And when borrowing a certain currency, you do not need to have any other currency to borrow. In this full position mode, the more leveraged currencies you have, the more advantages you have. In the position-by-position mode, the margin and profit and loss of each position are calculated separately, and the risk and return of each position are independent. If a position is liquidated, it will not affect other positions in the leveraged account. In addition, the borrowing interest rate only selects two mainstream currencies, BTC and USDT, for comparison.)

From the above comparison, we can see that all major platforms have laid out the lending market, and the products are similar. However, some exchanges have introduced some new ways of playing. At present, the financial products of major trading platforms are similar to traditional bank lending products, with a high degree of centralization (similar to collecting deposits while lending to earn interest spreads), and the interest rates provided to users are centralized. KuCoin Exchange has launched a lending product called "Idle Coin Earn Interest", which not only supports users to borrow crypto assets through the platform and use them for leveraged trading, thereby amplifying investment returns. It also allows users to lend idle crypto assets to earn income. So in comparison, KuCoin's "Idle Coin Earn Interest" as a C2C lending product can provide users with market-based interest rates, and borrowers and lenders can directly complete lending and borrowing, and the platform does not earn interest spreads.

Of course, centralized lending platforms are also constantly innovating. For example, after launching the "Idle Coin Earn Interest" platform, KuCoin recently upgraded its "Smart Lending" function (as shown in the figure below). Users only need to configure the relevant parameters, and the system will lend at the market's best interest rate according to the conditions set in advance by the user. If the current market's best interest rate is lower than your acceptable minimum daily interest rate, the system will place an order to lend at the acceptable minimum daily interest rate. You will find that compared to XXbao on other platforms, KuCoin's "Smart Lending" function not only improves the experience of lending assets, but also improves users' capital utilization and yield. In addition, after turning on the "Smart Lending" function, you can also enjoy compound interest income, which is a considerable income for investors with large amounts of funds.

As mentioned above, due to the recent bull market in the crypto market, more users have chosen leveraged trading in order to maximize their returns, which has greatly increased the demand for users to borrow assets, and also brought with it the risk of borrowing. In this regard, many centralized exchanges including Binance, Huobi and KuCoin have adopted a similar mortgage lending model. When borrowing crypto assets, users need to have sufficient margin, which ensures that the lender can fully recover their principal and interest.

02

Centralized exchanges are still the main force in the crypto lending market

Judging from the active lending situation, the market share of centralized platforms is close to 90%, which is much larger than the market share of decentralized platforms. It can be said that centralized exchanges are still the main force in the crypto lending market.

There are two main reasons why centralized cryptocurrency exchanges can maintain their leading position in the crypto lending market:

• On the one hand, it is because the risk control is better. The decentralized trading platform is anonymous and cannot verify the real identity and credit of the user. In addition, the high volatility of the crypto market can easily increase the financial risk of borrowers. In contrast, centralized exchanges have stricter risk control requirements, and some exchanges even reduce the risk of default through comprehensive due diligence;

• On the other hand, users of centralized lending platforms are more motivated by trading needs, including providing liquidity and using leverage. They usually have higher leverage requirements, while decentralized exchange lending activities are mainly driven by liquidity mining and governance tokens, and most of them are unable to provide fiat currency lending, so users are less willing to take on debt.

03

Summarize

Nowadays, more and more young people do not like to use the services provided by traditional financial institutions such as banks, while the lending products of cryptocurrency exchanges such as KuCoin and Huobi are more likely to be favored by young people. For those more mature cryptocurrency investors, if they can obtain additional interest income while enjoying potential capital gains while holding crypto assets, then they will be more interested in holding crypto assets.

There is no doubt that as the financial services launched by centralized cryptocurrency exchanges become more and more attractive, more new investors are expected to enter this field. Can the scale of the crypto lending market really reach hundreds of billions or even trillions of dollars? Let us wait and see.