‘Decentralization Proves To Be an Illusion,’ BIS Says
The recent Terra LUNA collapse and Celsius’ restrictions on withdrawals have sparked fears of a crisis in crypto lending. Economists at the Bank of International Settlements (BIS) said while on-chain collateral in DeFi lending overcomes asymmetric information, it doesn’t make the space immune from boom-bust episodes, compounded by liquidation spirals. Cryptocurrency lending platforms — where borrowers can deposit cryptoassets as collateral to secure a loan from the lenders — are critical to the DeFi (decentralized finance) ecosystem, according to the institution’s bulletin released this week. However, BIS economists found these platforms’ institutional features mostly “facilitate speculation in cryptoassets” rather than “real-economy lending.” “Smart contracts assign each collateral type a haircut, or margin, that determines the minimum collateral borrowers must pledge to receive a loan of a given amount. The high price volatility of cryptoassets means that there is overcollateralization: the collateral required tends to be much higher than the loan size,” the bulletin read.
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