DeFi Lending Platform: A Bridge to Parallel Worlds

Original title: "DeFi Lending Platforms: Current Status, Trends and Opportunities"

Original source: Charlie knows

Lending platform is one of the main models of DeFi, its future development direction and innovation opportunities It has always been the focus of attention of DeFi practitioners. Some people have tried to introduce "credit lending" and new collaterals. This article analyzes the characteristics of DeFi lending platforms and market liquidity needs, and gives the recent development of lending platforms. The idea of mid-to-long-term development, and specific design suggestions for the mortgage lending model of some assets, for the reference of platform developers and operators.

 

1. What exactly is a DeFi lending platform

Interest rate agreement and money market

Some time ago, Jake Chervinsky, General Counsel of Compound, passed an article "DeFi interest rate agreement ≠ lending agreement" (DeFi Protocols Don『t Do「Lending」) describes the difference between the concept of "interest rate agreement" or "money market" and the concept of "borrowing" in the traditional financial industry. This article clarifies some misunderstandings about DeFi lending agreements, and to a certain extent explains the status quo of "DeFi lending" agreements: most existing DeFi lending agreements follow the interest rate agreement/money market model described in the article development, rather than the traditional credit lending model.

However, the article does not fully answer a series of questions people have about this market: why do participants enter this interest rate market; What is the value? Why is the pledge rate generally set at 50-75%, which is a rate similar to mortgage loans, rather than higher or lower.

pawn agreement

In my opinion, all kinds of The "DeFi lending" platform is closer to a pawn agreement at the protocol level. The pawn model has the characteristics of both mortgage lending and the money market. Simply emphasizing a certain aspect may lead to misunderstanding and deviation from the development direction.

On the one hand, as mentioned in the above article, if we understand this business model more as lending, it will inevitably spread to a wider range of The development of lending models, such as credit (unsecured) lending, is indeed what some DeFi platforms claim to do. From this point of view, the author agrees with Chervinsky: this is an area where DeFi protocols should not be involved. At least for now, smart contracts know nothing about people's credit and repayment ability in the real world, and it is far from easy to put credit information on the chain. It is not as effective as the centralized big data + risk control model.

On the other hand, one-sided emphasis on the fact that borrowers do not need to repay their loans does not fully describe their real motivation for borrowing, and thus fails to explain this market the value of. For example: if the money market only reflects the supply and demand relationship and interest rate differences between different currencies, why not imitate the foreign exchange market, which is the model of the stable currency exchange market, they are essentially exchanges, not the current mortgage lending model . Therefore, we cannot deny that users of DeFi loans essentially use excess collateralized assets as a guarantee for their borrowing behavior, and obtain the value brought by the borrowed assets-whether it is to obtain liquidity to purchase value-added assets or to obtain benefits through short selling, ultimately must Repayment is the only way to realize real benefits. Chervinsky's statement that "borrowers are free to walk away, never repaying the assets they have borrowed without incurring any additional risk to lenders" is merely a possible outcome rather than an incentive.

The above characteristics are very similar to pawn. On the one hand, pawn is a standard pledge model, and pawnshops generally do not have bank Therefore, its source of funds is nothing more than its own funds or third-party funds (on the surface, housing mortgage loans are similar to DeFi lending agreements and pawn models, but in essence they involve credit derivatives, so they are completely different financial models, here Do not expand), the source of the DeFi platform fund pool is consistent with this. On the other hand, the pawnbroker is essentially a model of pledging low-liquidity assets in exchange for liquidity. In the end, if the pawns cannot be redeemed in time, the assets will be liquidated. The difference from DeFi lending is only in the liquidation conditions, counterparty and process different. The latter point is very important. Although on the surface, pawnshops and DeFi lending platforms play completely different roles in the process of fund provision and liquidation, there is no essential difference in the direction of asset and fund transfer. It can be compared to self-operated e-commerce Differences from platform e-commerce. Therefore, the existing DeFi lending system/interest rate agreement/money market is essentially a "third-party pawn platform business". The platform provides agreement infrastructure, connects supply and demand, and charges interest rate difference and service fees.

Second, flow Sexual provision is the core value of the DeFi protocol

All financial systems are essentially liquidity provision mechanisms, such as exchanges, lending, insurance and derivatives. Pawn business is also one of the standard liquidity provision mechanisms. The author has explained in many articles and courses that DeFi is a better liquidity provision model and thus a better financial service system because of its liquidity transparency, borderless nature, and contract certainty. . Therefore, we should analyze the role of the DeFi platform from the perspective of liquidity provision and judge its future development direction.

Who is the real demander of mortgage loan/pawn

The author believes that DeFi lending, as a pawn model, can only meet their needs by giving pledgers the ability to exchange low-liquidity assets for high-liquidity assets, which is also the fundamental reason for them to enter this market.

Looking at mainstream lending platforms such as Compound from this perspective, we will find that these platforms generally only support a few basic currencies for mutual "mortgage lending". (Even if some other currencies have been added recently, the amount of deposits is still very small) These currencies are actually highly liquid assets that can be cashed out at any time, and even used as the base currency to purchase other assets (such as: ETH) in the exchange . Therefore, storing these basic currencies as collateral to borrow other basic currencies actually reduces their total liquidity (because the pledge rate is generally 50-75%, which is significantly smaller than the original asset value). Therefore, those who store these assets for borrowing are not real liquidity demanders, but many are arbitrageurs who carry out circular pledges based on the logic of rising currency prices. For the entire market, the overall liquidity has actually shrunk (more liquidity has been locked and has not entered the market), the leverage ratio has increased, and the risk of assets being liquidated has increased, which may not be a healthy model.

So who are the real liquidity demanders in the DeFi market? At this stage, there are generally two types of people: one is people who own non-mainstream currencies, such as those who have invested in some projects and hold a large number of tokens of the projects (generally also called "small currencies"), but the price is not suitable for liquidation stage. One of the other liquidity demand groups is DEX market makers. Their funds are provided in DEX and they can obtain market-making benefits, but the certificate (LP) of the liquidity pool they obtain is itself an illiquid asset. ——If you sell it in the secondary market, you will lose the underlying assets, income rights and all other rights. Therefore, their liquidity is terminated due to market making.

For both groups, mortgage lending is clearly the main, if not the only, mode of accessing liquidity. But for the platform, the asset price of the former type of users is very unstable, and it is obviously inappropriate to use it as a mortgage asset. All platforms are basically very cautious about starting lending with small currencies, at least setting their pledge rate very low . For DEX LPs, the asset value of mainstream currency trading pairs is obviously guaranteed. Even if "XXX-USDT" is half of the small currency and half of the mainstream currency trading pairs, the volatility of its LP It is also less volatile than a single currency, and at least 50% of the value is guaranteed. At the same time, considering that this kind of LP has market-making income, it is allowed to use LP to mortgage loans, which is similar to the model of stock pledge: assets, rights, and income still belong to itself, but it has obtained new liquidity, and can further invest in other assets. In the future, only need It can be redeemed by paying interest, which is a model that really improves liquidity.

For this reason, we can draw a conclusion that in the current DeFi market, there are assets that are suitable for mortgage lending (pawn) and have liquidity The demand group is the DEX market maker. The lending platform should design a mortgage lending model for this asset and encourage this group to borrow.

LP Mortgage Lending Status and Improvement Measures

We observe now In the mortgage lending market, you will find an obvious phenomenon: LP mortgage lending has hardly been developed: Compound has not opened the mortgage lending of this asset at all, and AAVE has opened some UNISWAP LP lending pools, but almost no one cares about it—the status quo seems to be Contradicts with our conclusion above. To this end, we need to analyze from the perspective of the platform and the staker:

First of all, from a platform perspective, LP is a low-flow In other words, they are less likely to be lent out—after all, people who borrow assets invest in other assets in order to obtain liquidity. In this way, LP depositors become pure "liquidity takers" without providing liquidity to the platform, which will lead to a discrepancy between TVL and total liquidity. If the difference is large, it can be considered that there is a risk of liquidity imbalance on the entire platform, that is, there is a relative shortage of borrowable funds. Of course, this situation can be improved by adjusting the algorithm and parameters: for example, reducing the pledge rate of LP assets, or putting such assets into a separate pool like AAVE, which does not occupy the loan quota of other pools and can Raise its lending rate. As we discussed earlier, LP mortgage lending is a “just need” for DEX market makers, and obviously these measures will not affect their lending needs.

Secondly, from the perspective of LP holders, there are two issues that may affect their storage willingness (after all, AAVE has launched LP loans but not mass storage). One is that LP has fee income. From a contract perspective, LP is not in your own hands during the mortgage period. There will be doubts about whether the platform contract will obtain the fee assets corresponding to LP. In addition, after liquidity mining is launched on platforms such as UNISWAP, some LPs can mortgage to these platforms for mining. If the lending platform does not have this ability to help users mortgage, LP holders will lose potential mining income. The second is that if LP assets can be lent out, the above problems will become more serious: the lender can enjoy the service fee income and mining income before returning it, which is certainly a good thing for the borrower, but the original holder will lose income. In addition, for borrowers, borrowing LP will also be a bit troublesome, because the loan interest will be denominated in LP, so the borrower must operate by himself to increase liquidity in order to fully return the borrowed assets, which is also a troublesome process. To solve these problems, you can consider marking LP as a "non-borrowable" asset, so that holders have no risk of transaction fees or mining losses. At the same time, the platform should be able to transfer these assets to the corresponding mining platform to obtain mining income for users (this also depends on the premise that LP assets cannot be borrowed). In this way, the lending platform has the same capabilities as some platforms that specialize in helping users LP mining, and at the same time allows users to borrow and increase liquidity, which will reflect a clear competitive advantage.

3. DeFi Lending platform development direction and opportunities

In general, the DeFi lending platform is a platform that provides users with liquidity through the mortgage loan/pawn model, and finds liquidity needs users, and designing corresponding mortgage lending models for their low-liquidity assets should be the main direction of platform development.

The second part of this article takes the LP assets of DEX market makers as an example, analyzes the liquidity needs of holders, and gives The idea and key points of designing mortgage lending products for LP assets are analyzed. Under this basic model, DeFi lending platforms should develop in the direction of finding other mortgageable assets to serve a wider user group. At present, we have seen that although platforms like MakerDAO are not lending models, they are also greatly expanding the types of mortgage assets, especially the introduction of "real world assets" instead of native digital assets as collateral. This is a very important step. For DeFi lending platforms, those who own such assets are obviously also liquidity demanders, and it is only natural to provide them with mortgage lending services. At the same time, their demands for asset mortgage schemes are closer to LP assets than high-liquidity assets. For example, if a person wants to mortgage a house to obtain liquidity, he obviously does not want his house to be "borrowed" by others on the platform. live". Therefore, the design of LP can basically be extended to the digital certificate mortgage lending model of some real-world assets.

As we all know, "linking physical assets to the chain" is an old-fashioned problem. There is no perfect Trustless solution, and it must rely on credible asset managers. For example, when a house is chained, it must be coordinated by a real estate management agency to ensure that when the assets are liquidated, the ownership of the house can be transferred to the liquidator. Assets such as gold and U.S. dollars must also be digitized through the financial institutions that manage these assets before they can enter the DeFi world. In this process, financial institutions similar to the concept of "digital banks" should have inherent advantages. The so-called digital bank here refers to having a commercial bank license on the one hand and being able to engage in asset management, mortgage, and currency issuance businesses; Financial institutions that digitize certificates such as real estate.

Such a financial institution is a bridge between the real world and the digital world. The cooperation of financial institutions can further improve the efficiency of liquidity provision, which is a major opportunity for the development of DeFi lending platforms and the only way for the continuous improvement of the overall scale of DeFi in the future.

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