- According to DeFi education platform DeFi Rate, the total USD value of crypto assets locked in decentralized finance platforms increased by almost 140% in 2019.
- Much of this growth can be attributed to the rapidly growing interest in MakerDAO.
The cryptocurrency lending industry exploded to prominence in 2017, when MakerDAO first went online—allowing DAI cryptocurrency holders to stake their tokens and earn interest, while crypto-asset holders could lock their assets in a smart contract to receive a DAI loan.
This innovation lit the flame of what would eventually become the Decentralized Finance (DeFi) industry, a rapidly growing sector that encompasses blockchain-based financial protocols, smart contracts, money-management tools and the decentralized applications (Dapps) used to interact with these.
Decentralized Finance (DeFi) is Already Exploding
According to DeFi education platform DeFi Rate, the total USD value of crypto assets locked in decentralized finance platforms increased by almost 140% in 2019, climbing to over $651 million by the turn of the new year. Now, this number already sits at more than $1.1 billion, indicating this growth is far from over.
Much of this growth can be attributed to the rapidly growing interest in MakerDAO, a decentralized autonomous organization that allows anybody to borrow DAI by putting up collateral. This DAI must be repaid later, in addition to a stability fee, paid in Maker (MKR) tokens.
As it stands, more than 2% of the total ether (ETH) supply is currently locked in Maker, with a combined value of over $500 million—equivalent to around 61% of total value locked in DeFi platforms.
It isn’t just Maker that has exploded in use in the last year either. According to DeFi Pulse, a variety of other DeFi platforms also skyrocketed last year, with Synthetix and Compound both achieving well over $100 million locked value in 2019—gradually eroding Maker’s dominance, which stood at 90% at the beginning of the year.
This rapid growth in Maker alternatives highlights the intense market demand for newer, more feature-complete DeFI platforms that provide a more tailored approach to lenders and borrowers.
The Current State of DeFi Lending
Part of the reason DeFi lending platforms have taken off recently can be attributed to the relatively robust way risk is handled on such platforms. For the most part, in order to receive a loan, borrowers must put up sufficient collateral in a crypto asset supported by the platform.
This, combined with an automatic liquidation feature usually means lenders are protected against losses, while borrowers can quickly receive loans if they have collateral.
This system allows crypto asset holders to quickly extract value from their portfolio, without needing to liquidate their long-term speculative positions, while lenders receive a fair return for relatively low risk.
This use case has seen the number of DeFi lending users climb considerably in the last year, with the number of Ethereum-based DeFi users growing by more than 500% in 2019 alone, according to a recent DappRadar review. Among these users, the vast majority interacted with DeFi services in the lending category—which currently captures more than two-thirds of DeFi activity.
This growth was partly enabled by the advent of Uniswap, a decentralized exchange that exploded in popularity in 2019 as people began to leverage Uniswap as a liquidity protocol for DeFi apps. Now, Uniswap is the fifth largest DeFi app by locked value, after achieving more than 5,000% growth in 2019.
However, although popular, current DeFi offerings have been described as inflexible and “dangerously centralized”, while many solutions simply lack the transparency and simplicity necessary to appeal to a wide audience. Likewise, the potential for another black swan event, similar to the 2016 DAO attack has left some worried that it’s only a matter of time until something similar happens again.
Fortunately, in order to address these concerns, a slew of new projects are currently in development, including one particularly promising platform that completely reworks the lending economy from the bottom up.
Along Comes Lendroid
Although the industry can still be considered relatively new, the next generation of lending platforms is already in development, and could be poised to bring DeFi to a whole new audience. One of these projects is Lendroid, a lending engine that looks to make lending and borrowing a low maintenance task, while empowering a new generation of builders to take advantage of its open-source protocol.
Lendroid compartmentalizes the lending space, allowing individuals and businesses of all sizes to easily participate in different parts of the decentralized lending economy. Within this new economy, users can create their own lending packages, defining their own interest rates and accepted collateral by hosting a lending pool.
Through this system, the Lendroid protocol allows people to make money in a variety of ways. Beyond simply providing loans in return for an interest rate, protocol users can also opt to be an underwriter to take on the collateral risk of loans, or simply help to crunch the numbers—providing insights to pool operators and investors for a cut of the fees.
These lending pools come in two basic types: low risk ‘Harbour pools’ and clean risk ‘High Water Pools’. Depending on the risk appetite of the investor, Lendroid users can add liquidity to either type of pool and earn a return on their investment.
The network of underwriters also helps to make Lendroid much more resistant to a black swan incident. Since underwriters assume loan risks, both lenders and borrowers can be secure in the knowledge that they will get out at least what they put in, minimizing the hassle and risk associated with older solutions.
Besides offering increased flexibility, reduced risk and improved simplicity for the end-users, Lendroid also introduces a number of technical innovations that could be poised for further shake-up the industry. With that in mind, we recommend reading through the Lendroid developer documentation for a deeper look at the capabilities of the protocol.