Article By Yoav Vilner
According to a recent research report by Bloqboard, focusing on digital asset lending in 2018 via open protocols, active loans have skyrocketed by 1,200 percent from December 31st, 2017 to December 31st, 2018 – equating to $72 million at the end of the year.
Similarly, Bloqboard’s analysis follows recent disclosures by Genesis Capital – the investment arm of Grayscale – that detailed how they originated $1.1 billion in cryptocurrency loans in 2018.
Decentralized lending protocols operate as open-source standards, that enable wider access to lending tools and interoperability. Platforms deploy various methods for managing the lending/borrowing process, and represent ways for mainstream audiences to tap into public blockchains.
While open lending protocols remain obscure to the mainstream and are comparatively just a fraction of the traditional credit market, they are increasing in adoption. The report highlights how out of the four primary protocols they analyzed – MakerDAO, Compound, dYdX, and Dharma – roughly $251.4 million was originated in lending throughout 2018. They measured originations as the total sum of borrowed and loaned digital assets.
MakerDAO dominated among the other platforms in total originations, accounting for roughly 81.4 percent (~$204.6 million) of the total. MakerDAO is one of the more intriguing open protocols as it employs a stablecoin Dai (pegged to the USD) that is ‘minted’ when users send the underlying collateral, Ether, to the collateralized debt positions (CDPs) of Maker – a collection of smart contracts that lock the over-collateralized Ether in exchange for Dai.
Maker CDPs currently have locked up approximately 1.9 percent of the total circulating supply of Ether, equating to more than 2 million ETH in collateral.
Interestingly, there are no lenders on Maker, precluding the origination of loans through the protocol, only allowing for borrowed Dai. Bloqboard also details how MakerDAO is responsible for 96.7 percent (~$69.4 million) of the total $71.8 million in outstanding active loans through the four analyzed protocols.
Compound is second, representing 3.2 percent (~$2.3 million) and uses a fundamentally different protocol for managing the credit lifecycle. Compound employs a pooled liquidity model, similar to Celsius Network, where lenders contribute digital assets to a pool that borrowers draw from rather than matching lenders and borrowers directly, known as P2P lending.
According to Bloqboard, Compound accounts for 96 percent (~$37 million) of the total $39 million loaned across the decentralized lending protocols in 2018.
Compound only recently launched in September 2018 and began Dai stablecoin lending in November. According to a recent analysis by Diar, almost 10 percent of all outstanding Dai on Compound is available for supply or borrowed against other digital assets on the platform.
Contrary to both Compound and MakerDAO, Dharma and dYdX are open P2P lending protocols that match lenders and borrowers directly without any intermediaries. Subsequently, their overall volumes are significantly lower than MakerDAO and Compound, stemming from the disproportionate demand for lending on Compound which has a higher collateral ratio (780 percent) than both Dharma (123 percent) and dYdX (123 percent).
Users can access these services as long as they have an Internet connection, and they represent a dynamic shift in the ability to wield cryptocurrencies for conventional financial services outside of traditional credit structures.
The prevalence of these on-chain financial tools is rapidly emerging as one of the most compelling trends to evaluate in 2019 and provides unique insights into the further development of open financial tools not strictly limited to secured lending. Many of these projects are still building out the necessary infrastructure to support better services, but their rapid adoption is indicative of their potential.
Censorship-resistant prediction markets, security token issuance platforms, and a flood of new stablecoins are all part of the developing infrastructure for an open financial system.
Gnosis and Augur are Ethereum-based prediction markets that confer censorship-resistance due to their existence on the decentralized Ethereum network. Users can make markets for sports events, price discovery, financial market research, and even micro-insurance products. Their ability to leverage free market dynamics for converging on accurate information is a powerful characteristic of traditional prediction markets but instead are not prone to outside control or undue influence.
While their offering sounds promising, there’s a need for improved UX and larger scale adoption.
Security tokens are another emerging development innovating at the edge of the convergence of traditional markets and blockchain-based digital assets. Platforms like Polymath and Harbor are already making headway among issuers and institutions, and the long-term implications of a more flexible class of security tokens are appealing. Harbor was already used by real-estate firm Convexity Properties to issue security tokens for a residential building in Columbia, South Carolina in November last year.
Mt Pelerin, a Swiss-based company, is building a bank with its balance sheet on-chain. As a result, it would create a compliant blockchain banking ecosystem that would bridge traditional banking frameworks and a tokenized, digital economy of open finance. Drawing inspiration from the Mont Pelerin Society formed by FA Hayek, Pelerin is targeting a modular, open-source design where open protocols can be tailored towards specific markets as part of an ecosystem.
The movement towards a more open and accessible environment of decentralized financial tools is quickly gaining traction despite their more obscure nature.
That said, significant development is still required to build the requisite foundation for an open financial system, one that the public could adapt to and replace traditional tools with.