As the challenge continues to expand, it risks embracing the very ideology it initially sought to reject, as the primary beneficiaries of this new funding paradigm are those who already own digital assets.
Replacing intermediaries does not directly improve finances
When it comes to financial products and solutions, almost everything has a problem, whether it’s exceptional returns on investments or low financing rates. Decentralized finance (challenge) is no exception.
Defi gained immense popularity because it sought to eliminate the problems and drawbacks inherent in traditional finance (tradfi). While it is undeniable that the emergence of the challenge has effectively lowered the barriers to accessing financial solutions, we cannot ignore the uncomfortable reality that the challenge is becoming, at least to some extent, the same as tradfi, with a label “Decentralized”.
The blurred line between the Defi and Tradfi loans
In the traditional system, anyone who wants to borrow funds from banks or private lenders must provide their credit score. If the score meets the criteria, the loan is approved at a fair rate. If the credit score is low, the borrower might have to compromise for higher rates. In some cases, the lender may also ask the borrower to provide collateral for the loan.
While the challenge exchanges central authorities with a peer-to-peer system, access to products such as the loan challenge requires borrowers to post a substantial collateral, often in excess of the total amount they wish to borrow, called oversizing. Additionally, entering the challenge market and using its financial products requires an understanding of blockchain technology and cryptocurrencies – knowledge held by a fraction of the world’s population.
The loan challenge was initially aimed at facilitating “true decentralized lending” whereby anyone in need of capital could obtain a loan without any middleman. Unfortunately, this is not what today’s challenge loan looks like. It has effectively become another mechanism for existing digital asset owners to generate returns by putting what they already own to work. Today’s challenge does not empower the unbanked world.
As such, it appears the challenge is more lender-driven and not as inclusive as advertised. Take, for example, the parabolic growth of the challenge credit ecosystem in recent months. The major challenge lending platforms and protocols have accumulated a Total Locked-In Value (TVL) of over $ 60 billion.
AAVE, an open source, non-custodial lending and borrowing protocol, has nearly 20.96 billion TVL spread across staking and liquidity pools on Avalanche, Ethereum and Polygon. Likewise, at the time of writing, Maker DAO claims a TVL of $ 17.06 billion and rising, Compound has a TVL of $ 11.33 billion and Instadapp orders around 12.17 billion TVL, highlighting the growth. dazzling challenge in general.
The boundaries between tradfi and challenge are blurring at an alarming rate. Here is an example.
A small business owner in a developing country needs financing. Unfortunately, they do not have access to traditional financial services. Somehow, they happen during challenging loans and create an account on one of the existing platforms. When they apply for financing, they realize that the collateral requested will be greater than what they wish to borrow, which they obviously do not have.
We also need to look at the other side, the prospect of the challenge loan platform. Naturally, challenge lending platforms need collateral to protect lender investments. But does it justify the need for oversized loans? For now, challenge does not bring unbanked people into the system, but rather rewards privileged crypto holders with a return for their existing assets.
Unsecured challenge loan: excellent in theory, but drawbacks exist
Honestly, there are no unsecured challenge loan platforms (none that I could find) except Gluwa, an alternative financial system for the unbanked. Gluwa has partnered with various international companies like Aella, Multis, Creditcoin, Jenfi, Wyre, Gopax and Consensys in emerging markets. Its integration with Aella’s consumer credit app has reached over two million customers across Africa. To date, Gluwa and Aella have facilitated over one million transactions, creating over 28 million blocks.
Gluwa does not require users to post any guarantees. But there is a catch. The interest rate on these unsecured loans is much higher than the usual secured challenge loans available from AAVE, Compound and similar platforms.
As such, Gluwa, although a challenging solution, shares many similar traits with the traditional loan-to-loan paradigm, such as unsecured private loans where the lender takes on high-risk borrowers and forwards this risk in the form of higher interest rates.
The path to follow
Between oversized defiant loans and high interest unsecured loans, there is a lot to consider. While platforms ask for guarantees, they indeed allow anyone to easily access capital at the click of a button. But again, only for people who already own digital assets. He denies the idea of inclusiveness and equal opportunities for all – essentially the foundations of the challenge. The other side of the challenge coin is that unsecured loans charge higher interest rates to balance risk, which again runs counter to the challenging view of a fair and justified income. for everyone.
A truly decentralized lending and borrowing process must balance risk and return equally for lenders and borrowers, which is difficult to achieve. So in the future, we might see a better version of decentralized lending, or we might end up with ‘really’ decentralized loans, which look exactly like the traditional financial market, thus coming full circle and becoming the very thing that we are. he once wanted to change. .
What do you think of the challenge loan today – right or wrong? Let us know in the comments section below.
Image credits: Shutterstock, Pixabay, Wiki Commons, DataDrivenInvestor.com
Disclaimer: This article is for informational purposes only. This is not a direct offer or the solicitation of an offer to buy or sell, nor a recommendation or endorsement of any product, service or business. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or allegedly caused by or in connection with the use of or reliance on any content, good or service mentioned in this article.