Crypto Credit & Lending Platforms — Are your funds safe? (Part 2)
For those who missed Part 1: covering decentralized credit and lending platforms.
The idea of a centralized counterparty in crypto may sound counter-intuitive considering blockchain/DLTs originated for the purpose of removing the need for middle-men and entrusting them with our most-valuable assets. Nevertheless, to this day they remain prevalent and essential to the basic functioning of the ecosystem. Centralized exchanges are crucial fiat on-ramps and still the bridge between the “traditional” finance world and the crypto market. As is the case with any financial intermediary, it takes years of solid management practices to build trust and establish a reputation as a secure and reliable business partner, this equally applies to cryptocurrency exchanges. History has shown that trusting negligent entities can lead to disastrous losses and that even the most reputable are not immune to security breaches (e.g. Binance hack in May). It’s the way which they deal with the ramifications that makes the difference. Binance showed exemplary conduct following the hack by covering all the losses, being fully transparent with how it unfolded and taking the necessary steps to ensure that it never happens again. Unfortunately, other cases didn’t end with the same desirable outcome.
On the topic of lending, exchanges were some of the first to offer lending services, primarily to contribute to the margin lending pool. On certain exchanges, for example: Bitfinex, Poloniex and BitMEX users have the option to lend their cryptoassets to margin traders in return for interest income. This can be an attractive proposition especially during periods of high volatility where the rates become exorbitant and very profitable for lenders. It goes without saying that all funds are subject to counterparty risk in the form of custody security breaches, auto-liquidation systems malfunctioning, borrowers defaulting etc. Last month, Poloniex’s BTC margin lending pool suffered a significant loss due to a severe price crash in the CLAM market. With a total loss of around 1800 BTC, the principal of all lenders was reduced by 16%. Since this incident occurred they’ve slowly started refunding the losses to affected users, but it begs the question why an illiquid cryptoasset like CLAM was still available for margin trading and able to cause such a cascade of losses. Even more puzzling, rather than covering the loss themselves, Poloniex socialized the losses on their customers. This whole debacle serves as a strong reminder to the risk involved with margin lending. The topic of counterparty risk and crypto exchanges is a continuous tale of controversy and one that has been discussed heavily by a variety of good sources, which is why the objective of Part 2 is to focus solely on a new type of centralized crypto intermediary emerging from the lending space.
As mentioned in Part 1, the surge in popularity of crypto lending has led to the creation of many platforms, purposely addressing this demand. Presently there are two type of platforms, those who serve the institutional market for ex: Genesis Capital and those who serve the retail market, which this Medium will cover. Contrary to exchanges who the crypto community are very familiar with, these newly formed entities have established themselves in full force and are now in custody of millions worth of cryptoassets. In every industry competition is healthy and it’s great to see new players position themselves in the market reducing the dominance held by exchanges, nevertheless treading into unfamiliar water comes with risks and it’s important to evaluate who these projects are and the measures they take to keep your funds safe. To this day, there still hasn’t been major incident involving a centralized crypto credit and lending platform, but in this market it’s prudent to take past incidents as a valuable lesson for the future.
Due to their popularity the platforms covered below will be BlockFi, Nexo and Celsius Network.
Published at Fri, 26 Jul 2019 12:39:09 +0000
{flickr|100|campaign}