ViaBTC | Amid the Frequent Crashes, Investors Know Little About Crypto Lending Platforms
Since 2022 kicked off, the crypto market has suffered one blow after another. As Bitcoin and Ethereum crashed into the ground, the whole market has taken a plunge. In the meantime, facing the grossly depreciated collaterals, crypto lending platforms forced users to add more margins. As a result, tons of users started to withdraw assets from lending platforms. Subsequently, some platforms went under, others laid off staff to survive, and even Celsius failed to stay intact.
Investors sigh at the fact that crypto lending platforms went bust one after another. Yet still, many are not that familiar with these institutions. Today, we will dive into their origin, the role they play in the crypto market, and reasons behind their bankruptcy.
I. The origin of crypto lending platforms
The last bull market can be seen as the result of the DeFi boom, which has had profound impacts on the whole market.
Before the advent of DeFi, we could only sell or buy cryptos on trading platforms. However, as public chains such as Ethereum keep advancing, smart contract technology has grown increasingly mature. Today, we can not only store cryptos using smart contracts but also interact with our assets in other ways via smart contracts.
The further progress of DeFi technologies has introduced many traditional derivatives into the crypto market, and crypto lending is one of them. Through lending, more idle cryptos have been put into active use, offering investors more options. This has triggered the appearance of crypto lending platforms, which act as the intermediary between lenders and borrowers. The market has also witnessed many outstanding lending institutions, such as Celsius, BlockFi, Genesis, and Clearpool. With these institutions, lenders can deposit crypto assets into their accounts registered on the lending platform to earn interest, while borrowers can get crypto loans by collateralizing their assets.
II. The necessity of lending platforms
Lending in the legacy financial system is known for its tough requirements, which include strict credit checks, bank accounts, and sufficient cash flows.
Crypto lending, on the other hand, does not require credit reviews or bank accounts, which provides convenience for unbanked individuals across the globe: you can get fiat/crypto loans simply by collateralizing your cryptos. Lending institutions play a vital role in this process.
Lending institutions function as a bridge between lenders and borrowers: crypto lenders can deposit idle assets into their accounts to earn interest, while lenders need to collateralize their cryptos to get a fiat/crypto loan. These platforms set deposit interest rates and loan interest rates and profit from the spread. In addition, they are also responsible for the security of the loans and collateral.
III. Reasons behind some lending platforms’ bankruptcy
As the market becomes increasingly bearish, more and more crypto lenders have gone bankrupt. For instance, on July 13, Celsius filed for Chapter 11 bankruptcy.
In my view, crypto lending institutions go bust mainly because of the following two reasons:
To start with, compared with conventional financial assets, cryptocurrencies are significantly more volatile, with wild price swings. When crypto prices plummet, the crypto assets collateralized by borrowers sharply depreciate, which requires more collateral. However, in a bear market where many users have suffered heavy losses, borrowers lack the funds needed to add more margins.
Furthermore, when crypto prices plunge, the market is subject to panics and a growing number of depositors will withdraw their assets from the lending institutions. Facing massive withdrawals, lending platforms are likely to limit or suspend withdrawals due to insufficient funds, which creates more panic. As such, more depositors would make withdrawals, and many such platforms would choose to file for bankruptcy because they cannot bear the pressure of the run.
Secondly, the crypto assets deposited by lenders and the crypto collateral provided by borrowers are both stored in the contract account of lending platforms, and the security of such assets relies on the account. Once a smart contract is hacked, attacked, or exploited, there would be huge losses in the assets it stores. Bankruptcy is an inevitable outcome if the contract account of a platform is emptied by hackers.
IV. The role played by lending institutions in the crypto market
After the DeFi boom, a growing number of crypto holders now choose to earn more profits via crypto finance. With lending platforms, they can not only deposit their idle cryptos to earn interest for a period but also expand their investment scale or portfolio by acquiring more cryptos through collateralized lending.
In short, crypto lending institutions have provided more liquidity for the market as they allow more idle cryptos to flow into circulation. They boost the utilization rate of cryptos, increase the trading depth of transactions, and narrow the price spread between buyers and sellers. With lending institutions, the price slippage is reduced, and trading experiences are improved.
V. The future of crypto lending
Crypto lending plays a vital role in the market. It is to the crypto market what conventional lending is to the legacy financial system. Through lending platforms, more crypto investors can have access to more cryptos so that they can optimize their portfolios and earn more passive income. Meanwhile, more traditional investment institutions will join the crypto lending market and provide greater liquidity for the crypto space and more versatile investment options for users.
That said, the crypto lending market still faces heavy regulatory pressure. Although there are no clear laws that regulate this market, crypto lending will be supported by more countries and regions as Web 3 technologies keep advancing. In the meantime, more institutions will flock to the category, and crypto lending will become one of the fundamental financial services in the crypto space as it evolves over time.