GTON Academy. Lending: one of DeFi's main pillars

In this post, we will have a look at DeFi lending, one of the most rapidly developing and promising segments of the crypto space.

Over the last couple of years, crypto lending – releasing crypto-backed loans using other crypto as collateral - has emerged as one of the main areas in decentralized finance (DeFi). Numerous lending protocols have been launched whose combined total value locked (TVL) reached $46.8 bln in 2021, showing more than 500% growth, year on year.


To hedge against market volatility, loans issued by lending protocols have to be over-collateralized. It means that for each loan, a borrower needs to put up collateral whose value will be higher than that of the loan. If, for instance, a user needs to borrow an equivalent of $100 in crypto, they have to put up at least $120 as collateral.

Normally, collateralization rates on major lending platforms range between 120% and 150%, depending on the expected price appreciation and volatility.

If a debt position is considered at risk - which normally happens when the position falls below the minimum collateralization ratio - collaterals can be forcefully liquidated to cover the outstanding debt. This liquidation mechanism makes it possible for loans to be taken out anonymously and trustlessly.

Overcollateralization serves to mitigate the risks of a protocol's insolvency in case many borrowers default on their loans simultaneously.**

Main players

Since the lending segment gained prominence around 2020, several projects have emerged as its undisputed leaders, maintaining this status to the present time.

Based on 2021's TVL data, the top three lending protocols were Maker, Compound, and Aave with TVL at $18.3 bln, $12.8 bln and $10.8 bln and total outstanding debt at $9.1 bln, $7.7 bln and $6.5 bln, respectively.

Maker is primarily known for the biggest decentralized stablecoin, DAI. Meanwhile, Compound and Aave are money markets that offer algorithmically adjusted rates based on the utilization rates of lending pools. These protocols represent different approaches to lending and borrowing: while the first is used to create a CDP (Collateral Debt Position) on a smart contract and generate a stablecoin, the latter create money markets for lenders and borrowers aka pools through which they do pool-to-peer trades.

GTON Capital money protocol is used to create an overcollateralized GCD stablecoin through a multi-collateral CDP algorithm so can be referred to the first category.

Issues and tradeoffs

Despite the heavy dominance of long-established lending protocols, the lending landscape is becoming more diverse as new lending platforms implement additional features and target various niche audiences. But most attempts to tweak the existing lending models come with a tradeoff.

C.R.E.A.M., which is part of the yearn ecosystem, attempted to onboard long-tail assets to its money market, which, however, presented some risks to the protocol's integrity.

The protocols Alchemix and Abracadabra took on yield-generating positions as collateral to mitigate capital inefficiency to a certain extent while bringing in composability risks.

Meanwhile, Kashi and Fuse from the SushiSwap and Rari ecosystems, respectively, introduced isolated lending pairs that insulate protocol integrity risks but saw lesser capital efficiency as a result.

At the same time, TrueFi was the first on-chain uncollateralized lending platform that claimed to maximize capital efficiency for creditworthy borrowers.

Prospects moving forward

One direction that lending protocols are likely to actively explore is peer-to-peer lending.

Currently, institutions seem to have a firm grip on the lending segment. But facilitating access to individual lenders through DeFi could allow protocols to offer higher yields, doing what blockchain is generally expected to do - eliminating the middle men. In fact, by 2025, the peer-to-peer lending market is expected to reach $1 trillion in value, according to Venture Beat.

Another potentially promising area in which DeFi lending could make a difference is tokenization of real-world assets. As opposed to remaining a self-referential system powered by speculative activity, lending protocols could embrace real-world assets, such as buildings represented on the blockchain and used as collateral for loans. One major issue that would need to be solved though is the creation of reliable oracles – tools enabling data exchange between blockchain and the real world.

In addition, DeFi lending could potentially play a major role in serving the unbanked and underbanked. However, in that case, lending protocols will have to abandon anonymity and adopt the use of real names. That would make lending protocols compliant with regulators' requirements. But the issue of preserving privacy of users who are no longer anonymous will have to be dealt with.

About GTON Capital

GTON Capital builds infrastructure to advance digital capital markets including GTON Network — L2 Ethereum rollup with $GCD stablecoin as a native currency, Pathway — algorithms for the pricing of governance tokens, set of mutually reinforcing DeFi protocols, DONs, and more.

By combining cutting-edge achievements of Web 3.0 technology, GTON Capital creates a more advanced and stable foundation for DeFi development.

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