Re-examine the essence of the current DeFi lending business from the differences in the traditional financial industry


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When facing certain applications or businesses in DeFi, it seems that we can no longer use the traditional thinking model to understand, because many times the same two words are almost completely different things.

For example, the lightning loan mentioned earlier, using the characteristics of blockchain technology, can still achieve zero-risk borrowing under the condition that the borrower has no credit or mortgage. In addition, the mainstream excess mortgage lending in DeFi is completely impossible to understand with normal thinking. Why Should I use money to borrow money? It is obviously unreasonable to bet more and borrow less.

We can understand the nature of the DeFi lending business at the current stage from the differences in the traditional financial industry.

Lending business under the traditional commercial bank model

First, the main business modules of traditional commercial banks are divided into three categories: asset business, liability business and intermediary business.

The asset and liability business is the business on the balance sheet. Simply put, when an individual deposits with the bank, the deposit is the bank’s liabilities (the bank needs to deal with the depositor’s withdrawal needs). When a customer makes a loan to the bank, the Loans are the assets of the bank (debt, the bank recovers the loan and interest when it is due).

The asset and liability business derives the fund pool operation model, which not only puts the deposits absorbed from various channels into the fund pool, and then withdraws the funds from the fund pool to lend to loan customers, only needs to manage the surplus in the fund pool and loans Risk can keep the fund pool model working well. Then this is the most classic traditional financial lending business.

Among them, controlling loan risks is the most important part of the fund pool model. The loan guarantee methods are divided into credit, guarantee and mortgage loans. Credit loans are loans based on the creditworthiness and credit of the borrower. Thanks to the construction of the big data credit system, the credit loan procedures are simpler than before, although it is a credit loan However, most borrowers who can obtain credit lines can basically fully cover the bank’s loan lines with their income and credit capacity, and the risk is still within control. Guaranteed loans are loans made by customers through a third-party guarantor through joint guarantee obligations. Make loans based on the credit or risk preference of the person in charge. Mortgage loans are loans to banks with property you own. Common houses, cars, land, etc. are used as repayment guarantees to make loans to banks. In essence, they exchange assets that are not easy to flow into money that can be highly liquid. Because banks have low risk appetite, mortgage loans still account for the highest proportion of all types of loans.

The lending model in DeFi

At present, all kinds of lending platforms in DeFi are basically in the mode of mortgage loans, and the overall preference is for the pawnshop model, turning various digital currencies into fixed-value goods, and goods with a mortgage value of 100 get liquid currency at a price of 75 , The act of obtaining currency through currency mortgage seems very stupid, but the high mortgage interest rate and the huge early-stage yield of the DeFi market attract higher market funds.

The main market needs of DeFi lending are as follows:

1. Satisfy the funding needs of trading activities: including trading activities such as arbitrage, leverage, and market making, this is the most important rigid demand. For example, over-the-counter service providers or market makers need to borrow funds to satisfy a large number of transactions. Traders increase leverage by borrowing or borrowing assets to sell short for arbitrage.

2. Obtain passive income: that is, investors who want to hold encrypted assets for a long time and hope to generate additional income.

3. Satisfy the funding needs of the token economic activity of liquid mining.

4. Obtaining a certain amount of liquidity: This is mainly for the short-term liquidity needs of miners or start-ups in some industries. This is more in line with the logic of traditional lending business.

But unlike traditional lending, which lends money to people who need it more, we see that DeFi lending is currently more of an arbitrage game where a user provides loan funds to the market and then borrows it by himself. It may seem silly to use the borrowed money for mortgage lending, so that it goes back and forth, but users can get multiple benefits with a single fund.

Compared with traditional RV type mortgage loans, manpower is required to verify the owner of the asset, and repayment default also requires manpower and time to conduct asset auctions. The pawnshop model in DeFi only needs to stop the mortgage when the mortgage rate is too low, and the asset liquidation can end the loan contract. Compared with the operation cost of traditional mortgage loans, the total amount of Pawnshop Maker loans in DeFi has exceeded 900 million US dollars.

Several core issues that need attention:

1. Is DeFi lending following the old path of private financial innovation?

Peer-to-peer Internet finance was once regarded as a cross-age product of financial innovation a few years ago. At first, the meaning of peer to peer lending lies in the individual to individual, institution to institution, it is the gathering of small amounts of funds to lend to those who need funds. However, centralized institutions are attracted by the high rate of return of the fund pool and have started various shadow banking models, using illegal fund-raising, CX and other models to turn the innovative inclusive finance concept into a high-yield escape game. Peer-to-peer distributed finance is inherently error-free, and the centralization and lack of transparency allow institutions that use peer-to-peer Internet finance as a gimmick to do a lot of evil.

In DeFi lending, the platform itself is replaced by smart contracts. The platform cannot use any user’s digital assets. All intermediate matching processes are replaced by smart contracts. At the same time, the clearing model of over-collateralization provides adequate protection for depositors’ funds. So that the platform does not have to worry about the risk of bad debts, if one day in the future, real assets or credit chains can be uploaded, it will usher in a major explosion of the point-to-point model in DeFi.

2. Is the issuance of stablecoins by lending institutions a core transaction kidnapping?

In the real world, the division of labor of financial institutions is usually quite clear, and the central bank is responsible for formulating monetary policy, maintaining financial stability, and defusing financial risks. Commercial banks are responsible for credit intermediaries, deposit loans and other businesses, and pawn shops are responsible for collateralizing physical assets in exchange for highly liquid assets. Although centralized institutions are programmed in the blockchain market, operators in the commercial bank model or pawnshop model issue stablecoins by occupying the market, and produce their own stablecoin tokens through borrowing with high returns. Are they in the market? This has caused useless transaction friction, so that if traders in the market want to conduct a second transaction on the assets obtained by mortgage, and the traded product does not support the stable currency loaned by the lender, they need to transfer the borrowed currency Trading the mainstream currencies in the exchange market will add a layer of trading friction in vain and will not benefit the market.

3. Why has the lending business become one of the three cores of DeFi?

The nature of lending in DeFi is still to provide liquidity for the market, by collateralizing low-liquid assets in exchange for high-liquidity assets, but the high LTV (pledge rate) in the market, but because the currency collateral model is actually through high Liquid assets mortgages have obtained highly liquid assets, and at the same time, the over-collateralization model has reduced the liquid assets in the market. Therefore, it is of no value to the market to talk about borrowing in the over-collateralized mode alone, but the combination of liquidity mining and over-collateralization breaks the problem of insufficient market liquidity, that is, the liquidity of mortgage funds is provided, and the mortgage is obtained. Assets are invested at the same time, and leverage is used to provide multiple liquidity for the market, and the overall liquidity demander DEX (decentralized exchange) in the DeFi system is revitalized.

Looking at the mainstream business direction of the current DeFi lending market from the head project

Compound (point-to-point mode)

The decentralized peer-to-peer model is a good inclusive financial model for the market. Compound’s fund pool application model enables the funds in the pool to reach a very high utilization value. At the same time, peer-to-peer plus over-collateralization allows borrowers to make endless funds in the market Circulation (the pool of funds never exhausts).

Compound perfectly describes the idea of ​​finance that finance itself is not productive, and each participant is a liquidity porter in the market.

Maker (pawn shop mode)

MakerDAO is one of the earliest DeFi agreements on the market. Loans are issued through an over-guaranteed model. Users get deposits and benefits from price fluctuations by collateralizing ETH or cryptocurrencies accepted by other platforms, and then reinvest in DAI through loans. The excess guarantee model solves the problem that long-term investor funds in the market are always in a frozen state, and improves the utilization rate of funds to provide liquidity for the market.

The mortgage lending model is originally to mortgage low-liquidity assets to obtain high-liquidity currency. In the DeFi market without a credit system, the method of obtaining credit in exchange for currency by currency mortgage seems simple and efficient, but it is produced under a high pledge rate. Is it easier for the market to shrink liquidity than to increase leverage?

Aave (Flash Loan)

As the first unsecured lending model in the blockchain world, Aave’s lightning loan has a pioneering spirit and uses the unique characteristics of the blockchain to make itself risk-free. The lightning loan design uses Ethereum to produce more The 13-second feature is to temporarily transfer loan funds to the smart contract and execute the transaction operation designed by the developer. If the funds and fees are confirmed to be returned to the fund pool, the operation is successful. If the return is less than the loaned funds, the transaction will be restored and the transaction will be restored. Makers and depositors can achieve unsecured loans without risk.

Because the unique feature of lightning loans is to use price deviations in the market to carry out arbitrage operations, which makes large arbitrage in the market continuous, but in essence, arbitrage transactions in financial products are one of the normal operating methods, but lightning loans are large The simplicity of capital and high-frequency arbitrage has magnified the risk of arbitrage in the market. As long as the arbitrage space is sufficient to cover transaction costs in the digital currency market, news of flash loan arbitrage will appear. However, flash loans flattening market spreads and promoting reasonable market pricing are still benign for the digital currency market in the long run.

Flash loans have also attracted enough traffic for Aave. Compared with other platforms, it is unique in that it can freely choose stable interest rates and floating interest rates for loans, which can minimize the borrowing cost generated by borrowing and at the same time high deposit interest rates. It also attracted a lot of users for Aave.

What is missing in DeFi lending now?

We can see that there is no credit lending in the current DeFi lending market. Credit lending is obviously a more efficient model than mortgage lending, but it is a great way to build a basic system of credit lending in the anonymous environment of the blockchain. problem. First of all, we need an extremely recognized and reliable credit system to judge the solvency of borrowers, so as to control the risk of bad debts. Whether we use an oracle to introduce a large database of credit in the real world, or build a credit mechanism within DeFi, these are not the key. The key point is how to make a binding individual and corresponding credit, that is to say, a person has multiple accounts, with very good credit accounts and very bad credit accounts, then accounts with poor credit will lay great ground for the lending market. Big risk of bad debts. In addition, if credit is obtained through reality, the original intention of anonymity in the blockchain system is meaningless.

Under the strong anonymity system of the blockchain, looking for credit support itself is seeking a breakthrough on the shortcomings. Instead of challenging the search for anonymous credit in the anonymous market, it is even better to improve the utilization rate of funds and reduce the LTV (staking rate) through user operating habits. , To reduce the liquidity reduction problem caused by the shrinking market.