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Cryptocurrencies?are forcing us to rethink how we view the finance industry.
A decade ago, the idea of a loan without a credit score check would have been considered absurd. Today, the power of?smart contracts?and cryptocurrencies has revolutionized the traditional lending business. Crypto loans do not require credit checks. They are instantaneous, borderless, and open to everyone.
The crypto lending sector is evolving at a quick pace. Technology upgrades are pushing for innovative, efficient, and safer lending practices.?
This article looks at the emerging trends in crypto lending and borrowing.
Key Takeaways
- The tokenization of Real World Assets is one of the key features of blockchain, and projects aiming to capture RWAs on-chain continue to grow.
- Liquid staking token (LST) lending and borrowing is also one of the hottest trends in the crypto lending sector at the moment.
- Meanwhile, NFT lending has immense potential once real-world assets like real estate and high-value art are tokenized.
- Stablecoin lending continues to dominate as interest-bearing stables take hold.
- Flash loans continue to be a technical yet novel way to “borrow and repay” within a block.
5 Emerging Trends in Crypto Lending and Borrowing
1. Tokenized Real-World Debt
The tokenization of real-world assets (RWAs) is expected to be an important theme of the crypto industry in 2024. For those who are unaware, tokenization platforms like Centrifuge and Maple have been converting RWAs, such as US treasury bills, corporate debt, and real estate loans, into liquidity pools and crypto tokens on the blockchain for over a year now.
As of January 18, 2024, the value of total active loans across all blockchain protocols amounted to $595 million, data on rwa.xyz showed. The growing popularity of tokenized RWA debt is not surprising. The reach of the blockchain allows borrowers to access deep liquidity from across the globe at a fraction of the cost compared to traditional off-chain services. Meanwhile, crypto lenders get the chance to earn yield and gain protection from secure traditional finance debt instruments.
Decentralized autonomous organizations (DAOs) are among the biggest users of tokenized RWA debt. The majority of them have a strong preference for tokenized US Treasury bills, notes, and bonds due to their “risk-free” reputation.?
Stablecoin issuers and community treasuries are loading up on tokenized US treasuries to safeguard themselves against the volatility of crypto markets, having seen stablecoins depeg (TerraUSD) and crypto companies (FTX, Celsius) crumble in market crashes of 2022.
2. Liquid Staking Token (LST) Lending and Borrowing
Ethereum‘s move from proof-of-work (PoW) to proof-of-stake (PoS) has given birth to a new sector — liquid staking tokens (LST).
When token holders stake their ETH on staking platforms like Lido and Rocketpool, they receive a secondary token – stETH on Lido and rETH on Rocketpool – representing ETH staked on the platform. This process is also known as liquid staking.?
LSTs can be used freely, like any other cryptocurrency, for trading and lending. Top crypto lending platforms Aave, MakerDAO, Curve, and Summer.fi (formerly Oasis) allow users to deposit their LST to borrow stablecoins and other tokens.
Currently, LST lending and borrowing is arguably the most dominant trend in the crypto lending and borrowing space. To put things into perspective, the total value locked in LST stood over $25 billion (as of January 18, 2024) on the top three liquid staking services – Lido, Coinbase, and Rocketpool.
The ability to borrow crypto against stETH, rETH, and cbETH has given rise to new LST strategies to maximize returns.?
Here is an example: Adam stakes 10 ETH on a liquid staking platform (say Rocketpool) and receives 10 rETH in return. He deposits his rETH as collateral on the crypto lending platform Aave to borrow ETH. Adam then stakes the borrowed ETH and receives new rETH against it. This strategy is also known as leveraged Ethereum staking.
Adam can choose to repeat the process depending on his risk appetite. Remember that these strategies are risky and can result in devastating losses if the price of ETH and LSTs falls. The cost of gas fees is also a critical risk, as Adam will have to conduct numerous transactions to undo the cycle of borrowing and staking.
3. NFT Lending and Borrowing
Just when you thought that the “monkey jpegs” do not have any use other than Twitter profile pictures, non-fungible tokens (NFT) lending steps in. NFT enthusiasts work day and night to bring more utility to the space, and lending and borrowing using NFTs seems like a natural place to start.
Peer-to-peer NFT lending platforms allow users to list their NFTs as collateral against which one can borrow stablecoins and other cryptocurrencies. Lenders view these listed NFTs on the platform and accept loan terms that they deem safe and profitable.?
The floor price of the NFT is a critical metric that can determine if the NFT can be used as collateral and the amount of funds available to borrow. The borrower only gets their NFT back once they have repaid the loan. Since the NFT lending sector is still a nascent one, the lack of support for lesser-known NFT collections is one of the biggest challenges in the NFT lending market.?
As of January 2024, NFT marketplace Blur continues to be the most dominant player in the NFT lending space. Blur’s NFT lending feature is called Blend (Blur Lending). NFT loans on Blend have fixed rates and do not have expiry dates. Borrowers can repay their loans at any time and lenders can exit their positions by auctioning their position to find a new lender.
4. Stablecoin Lending and Borrowing
Stablecoin finance represents the most mature crypto lending and borrowing side. The Maker Protocol and its crypto-backed stablecoin DAI are synonymous with stablecoin lending. Users can borrow DAI against their ETH and LSTs using Maker’s affiliate platform, Summer.fi.
In 2023, rival platforms Curve and Aave followed suit and designed their stablecoins. Curve allows users to mint crvUSD stablecoin by locking up ETH, wBTC, and LSTs (sfrxETH and wstETH) in smart contracts.
Similarly, on Aave, users can deposit their crypto assets as collateral to borrow a stablecoin called GHO. Users who have staked AAVE tokens on the platform get discounts on their stablecoin borrowing.
A key development in the stablecoin lending sector is the emergence of interest-bearing stablecoins. Lybra Finance’s eUSD is an interest-bearing stablecoin that generates an interest of 8% APY for its holders. eUSD is minted on the Lybra protocol by depositing excess collaterals of stETH or ETH.
Leading stablecoin protocols like Maker also offer interest on stablecoins, however, their process is not as seamless as users are required to lock up their DAI tokens into a savings smart contract to earn interest.
5. Flash Loans
Flash loans are a type of crypto loan popularized by Aave – one of the most popular platforms for lending. They allow users to borrow assets without depositing any collateral. The catch is that the borrower has to repay the loan within one block transaction (the average Ethereum block time was about 12 sec at the time of writing).?
According to Aave, flash loans are designed for developers due to the technical knowledge required to execute them. A flash loan is coded to a smart contract that executes and pays back the principal, interest, and fees within the transaction. Flash loans are mainly used for collateral swaps, market arbitrage, and loan liquidation incentives.
They have a sketchy reputation in the industry because of their use in liquidating third-party loans and for their help in decentralized finance (DeFi) protocols attacks.
The Bottom Line
The innovative crypto lending sector continues to give birth to some of the most exciting developments to come out of the crypto world.
From tokenized real-world debt to LST collateralization and the nascent NFT lending space, these trends underscore the industry’s rapid evolution. Let’s see what 2024 has in store for us.
