DeFi Loans: 7 protocols and what you need to know about them
As the decentralized finance (DeFi) market matures, there are new fields opening up. In an effort to match some of the most common trading options, such as quick credit and shorting positions, non-custodial lending and trading platforms have emerged.
The DeFi market is dynamic; the sector is constantly looking at new ways to use blockchain technology to improve financing processes. Crypto lending platforms are filling a gap in the market. Getting easy access to credit, denominated in the right asset, has been a recognised challenge in the cryptocurrency sphere.
With many lending platforms in the market, it’s useful to understand where the key differentiators lie. We’re going to look at:
- – The common threads in a range of different platforms
- – Details of how each platform is structured
- – How each platform is unique in the pool of platforms
- – The standing issues with crypto lending
What unites DeFi protocols?
As with any emerging market, there are plenty of organizations vying for their space in the crypto lending space. We’re analyzing seven of them, namely:
- – Compound
- – dYdX
- – bZx
- – Nuo
- – DDEX
- – Aave
- – Oasis
The commonality between all of them is that they use Ethereum-based smart contracts to manage lending. Each of the ask crypto holders to lock in and tokenize their assets to earn interest and from that pool, create smart contracts to offer collateralized lending. It means that lenders lock in their assets in return for other cryptos that can then be used to make trades.
The important factor for all of these systems is their non-custodial nature. As long as you have your coins already in a suitable wallet, all you do is lock them in – you don’t transfer any of your assets to the platforms. This adds a layer of security to a fairly untested system.
How does each platform work?
There are key differences between the seven platforms we’re looking at, centered around things such as leverage rates, the tokens and coins accepted, and the type of activity you can work on. Here’s a breakdown of each one.
1.Compound DeFi Protocol
Compound is a market leader in DeFi lending. It’s got one of the largest pools of capital, making it a
good choice if you’re looking to fund large trades with borrowing. When you borrow on the
platform, you use other coins and token as collateral and get ETH in return.
From an investor’s perspective, Compound offers a way to invest your assets that’s highly liquid and
there’s no need to manage your investment. Interest is earned fast. Every fifteen seconds investors
earn; the same timeframe that the Ethereum blockchain updates.
As one of the most established trading and lending platforms, there’s a detailed whitepaper that can
offer users confidence in what they’re working with. On the flip side, for users there aren’t any KYC
checks for users so it’s quick and easy to get signed up and still maintain your privacy.
2. dYdX DeFi Protocol
dYdX has been around since 2017 and is powered by a vastly experienced team. You can use four different assets – BTC, ETH, USDC, and DAI – with a leverage ratio on your collateral of up to five times your value. You get access to a lot of funds based on what you own if you want to do big deals fast, and you get on-platform options for margin trading.
When you’ve decided to diversify your holdings and have multiple assets stored across wallets, you can still use dYdX. You have the option to aggregate your collateral across wallets to be able to leverage borrowing. Whether you borrow this way or through one wallet, you can take advantage of perpetual, or ever-lasting, contracts that just keep working, as opposed to the one-off trades you get with smart contracts.
There are plans afoot for derivatives trading on the platform, and in 2020 they’ve added the option to trade Bitcoin on the Ethereum blockchain. Trading is through a BTC-USDC pairing and you can leverage up to 10x your collateral. The platform is innovative and is always looking to add new features.
3. bZx DeFi Protocol
bZx is a platform that’s used to facilitate lending and trading across a whole host of other platforms. It’s accessible and works like an API. Two platforms have been created by bZx:
- – Fulcrum facilitates margin lending and is primarily a trading platform
- – Torque is geared specifically towards lending and borrowing
The options for what you can do through bZx are dizzying, and lots of areas of crypto take advantage of their native technology. Some of the uses for the protocol include wallets, exchanges, asset management, derivatives, and of course, lending and borrowing.
4. Nuo DeFi Protocol
With a lower leverage option than other systems, Nuo offers margins of up to 3x your collateral. There are no fees once you’ve opened your Nuo account, which could save significant amounts of coin for heavy users.
Along with facilitating lending through its platform, Nuo launched a DEX in 2020 to allow trading through any ERC20 coin. Unlike other systems, the person locking in assets in return for interest only start to earn two days after their deposit, and earnings are daily thereafter. The returns look higher than on other platforms, and therein lies the trade-off.
There are 12 coins and tokens that can be traded on Nuo, but margin trading is only enabled on ETH and DAI.
A note of caution with Nuo, there’s no whitepaper published at the moment. Users can’t really dive into the mechanics of the system, which could feel a little disconcerting.
5. Aave DeFi Protocol
The word means “ghost” in Finnish, a nod toward the platform’s values of openness and transparency. A major difference between this and other crypto loan platforms is that loans can be taken at both fixed and floating interest rates.
Another unique feature that’s garnered a lot of interest in Aave is the option of Flash Loans. A user borrows token for a trade with zero collateral, and as long as the trade is completed fully within that particular block, everything is processed successfully, with a fee of 0.03% percent going to Aave.
It’s also possible to use Aave balances to buy things in fiat, in Europe at least. Another perk for those trading in Euros is being able to take a loan and withdraw it into fiat.
There’s plenty of innovation in Aave, making it a platform to watch to see where the market should be heading in the future.
6. DDEX DeFi Protocol
Based on the Hydro protocol, DDEX gives leverage of up to 5x against collateral. The system focuses on three key activities:
- – Margin trading
- – Spot trading
- – Lending to accrue interest
All money borrowed stays on the platform to allow you to make your trades, but it’s still non-custodial – your assets remain in your wallet.
Processes like leveraged limit orders and stop-loss orders can be built into contracts, mirroring traditional stock market trades. Since DDEX began its life as a DEX that has since moved into offering crypto loans, the focus is very much on the trading side and there’s little detail available for those looking to add their money to the capital pool.
7. Oasis DeFi Protocol
Oasis is the lending platform from Maker. It runs on open-source code, allowing for in-depth checks of its processes by anyone who’s interested. The three primary functions of the platform are:
- – Trading
- – Borrowing
- – Saving
An interesting differentiator of the system is that all borrowing is made in the form of DAI, a USD pegged stable coin, with ETH supported as collateral and for trading. One drawback is that all ERC20 coins aren’t tradeable on the system; along with the limited coins that are accepted on the platform, you can’t have a diversified portfolio with Oasis.
The lack of trading pairs also means that there isn’t a lot of liquidity in the pool – not many people are choosing to save so there’s not a lot to lend out. Oasis might have an easy-to-verify system but it’s not all that open to being used.
What are the risks with crypto loans?
Like with anything to do with money and fast profits, there is an inherent risk with crypto loans. Both the lender and the saver expose themselves to risks. With crypto loans, these extend beyond the standard financial risks and delve into the technical side too.
As an investor, that is one of the people who pool their assets to allow loans to be made, you have to trust that your funds will be returned to the pool. The way the smart contracts are structured, it may seem like the risk is nearly completely mitigated. In theory, when a lender’s loan value drops below the value of their collateral, the contract will kick in and sell off their assets. Larger pools like at Compound should offer more safety, in theory.
Markets, as we know, are volatile, and sudden spikes and dips in coins and tokens on either side of the trade could become junk under extreme circumstances. Smart contracts can’t completely protect you against losses.
Another feature of fiat lending is governance and oversight from outside bodies. As with DEXs in general, you don’t get any protection when you borrow crypto – your trust is all in a well-written smart contract. It’s similar for investors; when you let your assets be used by the platforms, you’re trusting them with no fallback.
All of the platforms we’ve looked at place emphasis on their security. Theoretically, their systems could get hacked just like other exchanges before them. The non-custodial nature of the loan systems – you’re not transferring your assets to the companies to hold – should offer some comfort that this wouldn’t be an issue.
Smart contracts are another downfall to be aware of. All of these seven platforms work off smart contracts facilitated by the Ethereum blockchain. Contracts are based on coded logic, and this can sometimes misfire and cause lenders or borrowers to lose money.
It all depends on what you’re looking for in your DeFi lending protocol as to which one you should avail yourself of. It’s important that you understand the inherent risk as a borrower and a lender before then choosing a platform work with.
The basic premise of all of these services that offer crypto loans is the same. Some users agree to store their money to earn some interest, whilst others borrow that money against collateral and pay interest on what they borrow.
To summarize, the similarities across all of these protocols are:
- – Based on the Ethereum blockchain
- – Facilitated by smart contracts
- – Your assets stay in your existing wallet, locked away
- – When your loan value dips below your collateral value, assets are liquidated
- – Assets are tokenized to facilitate lending and earning of interest
But there are plenty of areas that make the platforms different. These are important to understand and will require plenty of research. Things that you should be looking out for in these platforms are:
- – The amount of leverage you get with your capital
- – Which wallets they are compatible with
- – Which coins, stable coins, and tokens they work with
- – The different trading pairs that you can work in
- – How quickly interest starts accruing
- – Fees structures – some only have gas fees, others have transaction fees
- – How accessible and open are the ledgers and coding
- – Whether the company is innovating in a direction useful to you
Of course, what’s important to one person may be entirely insignificant to another. We’ve given you a background in each of these platforms so that you can understand what you’re looking at and make a more informed decision.
No information contained in this article is to be construed as financial advice.