Can Decentralized Lending Spread the Wealth Without Centralizing?
If you took the collateral out of decentralized lending, you’d have something not only potentially useful, but scalable into the real economy. So said the Bank for International Settlement (BIS) in June. The problem is, that requires taking the decentralization of decentralized finance (DeFi), because it would require a trusted intermediary to vet lenders. But the whole point of crypto is to get rid of middlemen. The BIS argued in its “DeFi lending: intermediation without information?” report that for DeFi lending to become useful outside of DeFi, it would have to work more like traditional lending. “Due to the anonymity of borrowers, overcollateralization is pervasive in DeFi lending,” the report said. In crypto lending, token owners put up their crypto to be loaned out — at high rates, and for high returns — to borrowers who put up their own cryptocurrencies as collateral. Generally, you need to put up 125% to 150% of the sum you want to borrow. If the value of that collateral drops too far, it is automatically liquidated. By and large, these loans are circled back into other, even riskier DeFi schemes, notably staking and yield farming.