DeFi set to transform lending market

One of the most popular features of decentralized finance (DeFi) is lending. It is fair to say that this feature is expanding to take a significant share of global financial lending space simply because it is easy to use and removes the barriers to accessing loans in the traditional financial system.

Bank loans are not available to everyone

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. These are usually granted by banks, which take 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. It’s a system that is closed to those who cannot pass the banks’ requirements.

The role of smart contracts

DeFi, by contrast, is a system where lending and borrowing 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. That’s because DeFi uses smart contracts.

Crypto as loan collateral

A bank will not accept your crypto as collateral for a loan, whereas crypto is central to DeFi platforms. Users can deposit their coins into a DeFi protocol smart contract and become a lender – or a borrower. Usually, the loans are over-collateralized to account for unexpected expenses and risks associated with decentralized financing.

Choosing a DeFi platform for lending or borrowing

The best way to assess which DeFi platform is best for lending or borrowing is by looking at its TVL – total value locked. 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. 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. One of the best sources for checking TVLs is https://defillama.com/

Perhaps most importantly, the transparency provided by DeFi platforms is unmatched by any traditional financial institution. These platforms also allow permissionless access, signifying that any user with a crypto wallet can access services from any part of the world. Although you’ll need to check each platform, as some DeFi services are not available in certain jurisdictions, e.g. a European platform may not give access to US citizens, and vice versa.

Coinbase creates ‘crypto native think tank’

In a bid to be on the inside track when it comes to shaping polices for digital assets, Coinbase, a leading cryptocurrency exchange, has created a “crypto native think tank “to help shape the global conversation around policies for digital assets,” Cointelegraph reports. The new think tank will also publish research on Web 3.0, in addition to crypto.

The policy research department is to be headed by Hermine Wong, its current Director of Policy. She previously served in the Division of Economic and Risk Analysis at the United States Securities and Exchange Commission (SEC) and before that worked at the Department of State.

At the same time Coinbase has formed a Coinbase Institute Advisory Board with academics across law and finance from top universities such as Harvard, MIT, Duke and John Hopkins. It also has an academic partnership with the University of Michigan, which will partner with Coinbase on an annual U.S. based survey measuring the adoption of cryptocurrencies, as well as sentiment towards them. Its first publication, a “Crypto and the Climate” report is published today, 19th May.  It looks into the energy use of proof-of-work blockchains like Bitcoin.

It has also released today its first monthly insight report into crypto markets, comparing market movements in crypto and traditional finance. The formation of the institute is another example of Coinbase aiming to influence the conversation around cryptocurrencies, something it has done in the past with the launch last May of a fact checking blog “to combat misinformation and mischaracterizations about Coinbase or crypto being shared in the world.”

Coinbase also spent over $1.3bn lobbying in 2021, and created a political action committee in February 2022, ahead of the November midterm elections in the USA.

Will the LUNA rescue plan work?

Do Kwon plans a rescue mission for LUNA by way of forking the current Terra blockchain. There was substantial excitement about this on social media, and LUNA even managed to rise to as much as $0.00022 on Monday evening, 16th May. However, during the early hours of Asian trading it shed around 22% to sit at just over $0.00017. The data shows that some $2.1 billion worth of the tokens were traded over the past 24 hours alone.

Even worse for some LUNA holders, the token is now down more than 99% since its April highs of nearly $120. The dramatic  fall came as excess LUNA were put into circulation last week to prevent the collapse of terraUSD (UST), the Terra ecosystem stablecoin pegged to the US dollar, which we’ve all heard plenty about.

Do Kwon’s proposal on 16th May was to fork Terra to a new chain that would entirely cut out its failed UST product and instead focus on decentralized finance (DeFi) applications building on Terra. Calling the $40 billion implosion “a chance to rise up anew from the ashes,” Kwon said “the ecosystem and its community are worth preserving” as he pitched the second take revival plan as a “living document.”

In his plan, holders of LUNA on the “Classic” chain (the existing chain) would receive an airdrop of the new chain’s token under the plan. The old chain will continue to operate using the newly renamed Luna Classic (LUNC) token.

This is the second time Do Kwon has suggested a plan, although the latest one is less sketchy than last week’s. Compared to the earlier plan, the newer one places a larger percentage of the forked chain’s initial token distribution (25% versus 10%) into a “Community Pool” responsible for funding future development. The new plan also gives 5% of the tokens to “essential developers” – a group not mentioned in the original proposal. Indeed, the vast majority of new LUNA tokens would go to those who lost billions of dollars from last week’s UST collapse. The plan also indicated that smaller holders would get their full allocations faster than whales, and Terraform Labs would get nothing under the deal.

Despite LUNA’s and UST’s crash last week, some market observers remain upbeat on the longer-term outlook of algorithmic stablecoins. Brian Gallagher, co-founder of Partisia Blockchain, said on Telegram, “It is still the earliest days of algorithmic stablecoins. here will be many failures along the way to hold the peg, as they’re mostly in the experimental phase. We have to accept the failures along the path.”

Not everyone agrees with that. Billionaire and Pershing Square Capital founder Bill Ackman commented, “Schemes like Luna threaten the entire crypto ecosystem. The crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad.”

A crash is an opportunity, not a disaster

It’s hard not to panic when you’re surrounded by extreme fear. Yet some manage to see the bigger picture and don’t allow themselves to be swayed by the current fallout in the crypto markets. Arca, a crypto hedge fund is one of those.

Arca manages $500 million in assets, and is one f the firms likely to be feeling the squeeze from the sudden and dramatic collapse of the Terra blockchain’s LUNA-powered stablecoin, UST. It also runs a Digital Assets Fund, in which LUNA is a core holding, according to the note.

Yet it sent a note out on Tuesday this week saying that it had held an ad hoc investment and risk committee meeting to discuss the situation.

This came after UST fell to a low of 63 cents and LUNA was trading at $24.60 on Monday. By Wednesday, UST was still at 63 cents, but LUNA had dramatically fallen below $1.15.

Arca’s response may come as a surprise to some, but not to all. In the note published Tuesday, Arca’s CEO Rayne Steinberg said, “After this analysis, we felt, and continue to feel, that UST will ultimately maintain its peg and a number of attractive opportunities had become available. For example, we were able to purchase UST at a significant discount to par in the DYF (Digital Yield Fund) and then deposit with FTX who were paying 100% APY (annual percentage yield) given the buyer/seller imbalance during peak fear.”

Steinberg added, “We have significant experience in distressed situations from 2008/2009 up to and including SUSHI and LEO (Bitfinex) in recent years. We welcome these opportunities to be buyers when others are fearful.”

And in a similar story, three funds of Cathie Wood’s ARK Investment Management bought a combined total of 546,579 shares of Coinbase Global (COIN). Coinbase shares were down 26.4% to $52.35 in post-market trading on Wednesday.

Although the ‘extreme fear’ meter must be going off the scale right now for crypto investors, the moves by Arca and Ark demonstrate that belief is still strong. They see it as an opportunity to buy at a discount – there are bound to be many others who think the same way. Crypto is not over, no matter what some might say.