How will mainstream adoption of crypto come about through defi lending



  • Decentralized finance (Defi) lending is where long term holders of cryptocurrencies can use their crypto as collateral to take on loans or earn interest, rather than letting their crypto holdings sit in their wallet and do nothing. The ability to lend on defi platforms has dramatically increased the utility of crypto and I believe will be the primary driver in taking crypto to the masses because people will be able to see the tangible benefits of crypto.

    1. Fed interest rates are 0-0.25% till 2022. The Fed funds rate is usually the benchmark for many retail bank rates, and if you are a saver, you need to find other alternatives to grow your wealth or have it eroded by inflation. Many people have chosen to take their money into stocks, and that is probably the main reasons why the stock market has recovered so quickly from the COVID-19 crisis despite the real economy screeching to a halt. Bitcoin has been one of the popular alternatives as well to preserve and grow wealth for many people, however with the current price of bitcoin stagnating and unable to break through the $10k mark, many people have turned to the defi space to seek higher returns. Lending on defi platforms can be as high as 10% APR or higher.

    2. Collateralization of crypto assets. There is an increasing number of defi platforms that are willing to give you a loan backed solely by crypto assets. In its latest token utility article, Switcheo has also pushed out this feature. You can now take on a mortgage loan and buy a home with crypto assets. The process of getting a loan is also much quicker as you don't have to declare your credit rating, income, and various other personal details and be evaluated by a bank. Instead, the loan can be disbursed in minutes solely based on the value of your crypto assets. This way of getting a loan is much more time-efficient and also cost-efficient than traditional mortgage loans.

    However, the growth of defi lending has not been welcomed by everyone, and there are a few reasons for this as well. Firstly the increased usage of defi lending threatens the existence of retail banks themselves, humans that evaluate each loan applicant are being replaced by code and smart contracts. While it will be a difficult transition for most people, trusting code rather than a human, isn't this how the human race has always made use of technological advancements to grow and achieve more? For example, in the past, knowledge was passed primarily through word of mouth. Books came along where ideas could be recorded and distributed long after the original writers were gone. Today we have the internet where almost any information is in the palm of our hands. Technology has made knowledge and information more transparent, and defi is revolutionizing the financial industry the same way the internet did for books. Things may not be the same as we are used to, but if it's better now than before we should embrace this change, not try to fight it.

    Secondly, defi lending is still very much in the beta stages where smart contracts still get hacked, and things occasionally do go wrong. The Black Thursday crash and the subsequent liquidation of holders on Maker is probably the most significant failing that comes to mind. However, the Maker foundation has reacted well to correct the mistakes, and the governance community has shown that they can respond quickly and decisively as well.

    The defi lending space continues to grow, having almost tripled its value locked on defi platforms from $620 million to $1.6 billion in 1 year from July 2019 till July 2020 according to Defipulse. This financial revolution will continue to empower consumers to regain control from large corporations and banks and is a step forward for us.


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