Fundraising is one of the biggest problems for fledgling projects through DeFi. As the competition for funds from investors intensifies, it becomes difficult for them to attract attention and obtain much-needed cash flow for development, which in turn hampers creating viable systems and products that can deliver unique value to people. .
Given the lack of regulation in the field of cryptocurrencies and the lack of understanding of how DeFi works by banks, it would seem rather impractical to take out a fiat loan to, for example, build a decentralized protocol facilitating peer-to-peer exchange. to-peer funds. In this scenario, using decentralized systems would be a more viable option.
Blockchain Lending Survey
By obtaining a loan from a blockchain-based system, projects are able to eliminate red tape and access funds for product development without disclosing sensitive data. The amount of funds accessible for a loan and the interest rate may vary depending on characteristics such as liquidity, volatility, trading volume, the exchanges the collateralized token is listed on, etc.
There are, however, a few points to consider.
For one thing, most blockchain-issued assets (cryptocurrencies and fungible tokens) tend to have large price swings, which could be detrimental to a budget-strapped project. Lending stablecoins to earn yield can be a solid option for these types of projects, as the price of stablecoins is immune to fluctuations in the cryptocurrency market. Through stablecoin lending, lending platforms can earn interest on their stablecoins while allowing borrowing companies to access their needed cash flow.
Second, most lending platforms only support a handful of assets as collateral, often those with the most liquidity. Therefore, only a small number of projects can use their own tokens as collateral to access a stablecoin loan. Even if a project has a certain amount of liquidity and trading volume associated with its token, it can still be difficult to use it to get a loan. Therefore, the market will need more lending opportunities for projects that have already raised funds and are looking for cash flow to further develop their products.
How to get a decentralized loan on a lending platform
To take out a stablecoin loan, you need to provide collateral on the lending platform. This guarantee will be blocked until the repayment of the loan. Each token is assigned a loan-to-value ratio (LVR), which will determine how many stablecoins you can borrow: for example, an LVR of 50% would mean that a borrower can take out a loan in stablecoins worth half of the value of its guarantee. .
Once a project takes out a loan, its collateral is locked into the lending platform. The price of the collateralized tokens will affect the LVR of the collateral and the borrowers’ loan demand will determine the interest rate. Borrowers should be wary of the price of their collateralized tokens, as a loan can be liquidated if the collateral valuation falls below its liquidation threshold, causing the borrower to lose their collateral. Lending platforms, some might be surprised to learn that they do not benefit from liquidations: it is in the interest of the platform to avoid paying network fees caused by unsecured loans, hence the Platform design should be optimal for all parties involved.
Viable financing option for businesses
Going back to the original question: “Can blockchain lending become a viable option for businesses?” I think it’s fair to say the answer is yes. However, there is largely untapped growth potential in this area.
To meet the needs of businesses requiring long-term sources of capital and engage more crypto assets in the decentralized economy, the DeFi space should introduce new mechanisms and create better infrastructure, supporting as many tokens as possible. . The second action plan is to educate end users so that projects have a better idea of the benefits of blockchain loans – as well as the conditions for obtaining one. More educated users and better product design are undoubtedly the key to attracting more businesses in need of liquidity to lending/borrowing platforms.
With the continued adoption of cryptocurrencies and DeFi, it is all the more likely that stablecoin and blockchain lending will get more traction for the foreseeable future. As the cryptocurrency market looks set to mature and wealthy investors take an interest in the investment opportunities DeFi can provide, corporate demand for longer-term stablecoin loans will increase.
Until then, it is our responsibility to ensure that the solutions found by new users are secure and feature friendly and intuitive user interfaces. DeFi’s promise is to democratize access to financial instruments, which means we must cater to both professional financial players and everyday users looking to transcend the traditional financial landscape.
Is that a hard promise to keep? Yes it is. Would I say it’s absolutely necessary? Always.
Brian Pasfield, Technical Director at Fringe.fi