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Why Will DeFi Lending Surge in 2020?

Michiel Mulders
June 7, 2020

DeFi Lending also known as P2P Lending is one of the fastest-growing segments of the cryptocurrency industry. It is growing rapidly because of the huge demand for such services from lenders to earn interest on their funds and the increasing requirement among borrowers for funds to use for crypto trading, payments, and tax purposes. 

There are three main DeFi lending channels and these are: margin lending from crypto exchanges, custodial lending platforms, and non-custodial lending platforms. The DeFi lending market was estimated to be worth around US$4.7 billion in Q2 of 2019 by Graychain. As per Smart Credit's analysis, the P2P lending market is growing at a rate of 25%-35% from quarter to quarter. 

What is DeFi Lending?

DeFi Lending or P2P Lending is a pretty straightforward concept where borrowers offer their crypto assets as collateral to borrow fiat or stablecoin loans, whereas lenders offer their crypto assets to borrowers to earn an agreed-upon interest rate. Similarly, borrowers can also collateralize stablecoins or fiat to borrow crypto assets. 

Technically, there is no groundbreaking concept behind DeFi lending / P2P Lending. However, it benefits a wide range of businesses, traders, users, among others. 

Why will the DeFi lending surge in 2020?

Credit and lending facilities lead to better utilization of money as lenders earn interest on their assets and at the same time, one who needs capital can borrow it at the time of their need. 

DeFi Lending has benefited the crypto-user community just like how the credit and lending facilities benefited the traditional finance industry by offering a win-win situation to both creditors and lenders. Now, crypto lenders can generate passive yield on their static cryptocurrency investments, and borrowers are able to receive fiat without engaging in taxable sales events. P2P lending has substantially benefited both individual cryptocurrency holders and institutional investors alike. 

DeFi Lending is far more financially attractive for the crypto-community in comparison to the traditional saving instruments. Most of the DeFi lending platforms provide an interest rate of 8% or higher to their users for lending stablecoins to them, whereas, most of the US-based banks offer a meager interest rate of 1% or less on the dollar to its savings account holders. For example, YouHodler offers a savings rate of 12% a year. Besides, we also offer crypto loans with a loan-to-value of up to 90%

The P2P lending market is growing at a fast pace with the launch of many advanced DeFi lending products in 2020. With the DeFi lending market spreadng its wings around the world, the crypto lending ecosystem is also rapidly evolving to adopt the advanced P2P lending products. It has led to an increasing number of crypto users taking out large sums of money through the DeFi lending route to engage in interesting trading opportunities.

Why should you choose DeFi lending over traditional lending?

The DeFi lending market started receiving attention and came to the forefront in the bear market of 2018 with crypto prices spiraling downwards. The digital currency owners who didn't wish to sell their crypto assets at low prices were in a quagmire. However, those crypto holders found an alternative in DeFi lending, and thus, they were able to make money on interest by lending out their crypto assets. 

There are various reasons for the sudden growth of the DeFi lending market and the chief reasons among these are the low-interest rates, convenient means of receiving immediate funds for an increasing number of investors and traders, and an alternative and simplified mechanism for borrowers that were not able to get approved for bank loans. 

The cryptocurrency lenders have earned a combined sum of US$86 million in interest till now. A total of 5400 crypto loans were issued in the first quarter of 2019, which increased to at least 18,500 in the second quarter of 2019. The lenders issued loans worth US$64.8 million in the first quarter of 2019 and US$159.3 million in the second. 

What are the risks of DeFi lending?

The DeFi lending industry is often compared to traditional savings-based accounts. However, P2P lending or DeFi lending as it is popularly known is a new and far-more-riskier option compared to the traditional banks, which are highly-scrutinized and regulated. Almost none of the DeFi lending players are federally insured and on top of that, the whole industry is based on the technologies of the new age. 

The borrowers also have to take an additional built-in risk of supplying liquidity if the value of their collateral drops below the initial lending value. Hence, borrowers have to keep checking their collateral ratio to ensure that it remains within a safe range. There have been no instances of lenders losing their investment so far but there are no guarantees that such an outcome won't happen in the future. 

What are the most common DeFi lending use cases?

#1. Lending is one of the most common use cases of DeFi. Crypto asset holders can earn money by lending their crypto assets to borrowers and earn interest on it. 

#2. A sizable portion of crypto holders' wealth is in their portfolio, and they will have to pay tax on it if they opt for selling it for cash, as it will trigger a taxable event. However, crypto holders can gain liquidity to cover their expenses by collateralizing their crypto assets for dollar-denominated loans. 

#3. A crypto user can also increase their profits through rate arbitrage as the lending and borrowing rate is different across P2P lending platforms. However, it is to be noted that there are inherent risks involved in it as the rates offered by DeFi lending platforms are influenced by market conditions.

#4. 80% of the P2P lending market will feed into the trading volume of cryptocurrency exchanges as the majority of the traders availing crypto-collateralized loans from P2P lending platforms use it for trading on crypto exchanges. 

#5 The growing DeFi lending market has also provided crypto users with easy access to leverage. It allows users to purchase additional leverage based on the loan that they availed from the DeFi lending companies and their loan amount will keep on increasing on a loop until its limit is reached. This is like a long investment for the user and they can do it with any crypto collateral they want. 

What does the future hold for DeFi lending?

Liquidations are an important part of the DeFi lending space and they play a critical role in its efficiency. The cryptocurrency assets are excellent as collateral as they are very easy to sell and have high liquidity. The DeFi lending segment is expected to play a very important role in the growth of the cryptocurrency industry as a whole. 

Blockchain technology is revolutionizing the traditional financial system and now cryptocurrencies are bringing money online. DeFi lending space is still in the nascent stage but it is expected to democratize financial services around the world. The DeFi space is here to stay and it will pave the way for the cryptocurrency industry to attain a very high level of success.

About the Author
Contributor

Michiel Mulders is a blockchain developer with a passion for the crypto space. His interests include blockchain, entrepreneurship, marketing, and carefully crafted beers. Cheers!

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