Collateral is so five months ago
There's a growing number of leveraged trading and lending platforms in DeFi
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There's a new leveraged lending and trading platform in DeFi land, getting traders closer to the "features" (a.k.a shenanigans) of traditional finance, but also adding risk to an already risky space.
Fulcrum recently launched with $750,000 of liquidity, adding to platforms offering margin trading like dydx, Nuo and Synthetix. These platforms are breaking the norm in the DeFi space, which has been to demand users lock up more assets as collateral than what's being lent out. MakerDAO, the most popular platform, requires 150% collateral (so you have to lock up 150 ETH to get 50 DAI).
Being able to borrow on margin is bound to make DeFi more attractive. BitMEX, which lets you take on leverage of as much as 100x, is one of the centralized trading platforms with the most volume. Leverage maximizes gains and losses, and enables shorting, or betting against an asset. But you have to trust BitMEX with your money and trust that it won't get hacked and that the owners won’t run off with your funds or use them for other stuff (like trading against you or lending it out) without telling you –not saying this happens on BitMEX, just that that's the risk with any centralized exchange.
In a decentralized exchange users are in control of their own funds. So margin trading on DEXs gets DeFi closer to traditional trading without having to trust sketchy exchanges.
Now the bad part. For a while, collateral and DeFi were two sides of the same coin, and that was for good reason. Demanding that users lock up more assets than what they were borrowing ensured the system would always have enough funds to repay loans, even if the price of the collateral dropped sharply and suddenly. Prices dropping suddenly in crypto?? Where have we ever seen that? Right.
So the big risk you're taking with decentralized margin trading is that if the market crashes, borrowers' positions will get automatically liquidated and lenders will be lucky to get the scraps. It's not that much different from margin trading crypto in a centralized exchange, except in the case of a DEX a smart contract (computer program) will be in charge of the whole operation. We've seen cases where automated orders spiral out of control in flash crashes, and even then, someone can step in and halt trading and reverse orders. In the case of a decentralized market running on immutable code that’s spiralling out of control, we won't have those backstops or they’ll be a lot harder to implement.
Another DeFi Leveraged Loans Platform Launches
Fulcrum, a platform for margin lending and trading, launched with $750,000 in liquidity (link to their blog post here). It's built on the bZx protocol, which claims to be the first Ethereum-based decentralized margin lending protocol. Dydx, Nuo and Synthetix also lend on margin.
So What? Lending in the DeFi space started with platforms demanding steep over-collaterization to make up for the lack of information on borrowers, for example, MakerDAO issues loans backed by 150% collateral. But an increasing number of platforms that lend on margin (requiring less collateral than what's being borrowed) are springing up. This will likely increase volume in the DeFi space, but also risk. See my Views for more.
Devs Are Building Bridges Between DeFi Lending Platforms
The InstaDApp team is connecting MakerDao and Compound lending platforms with a smart contract which cycles between Maker contracts and Compound contracts until the user gets the best rate (more in their blog post here).
So What? There's a wide spread between lending and borrowing rates offered across the DeFi platforms (see here), and that's because they operate pretty independently and the process of switching platforms can take many steps. We'll likely see more projects like InstaDApps aimed at making the market more efficient. In the meantime, there's still plenty of room for arbitrage.
Synthetix Shoots to Top Three DeFi Platform in Four Months
Synthetix, an Ethereum-based protocol that enables derivatives issuance, climbed to the third platform this week with the most Ether locked up in the widely-tracked Defi Pulse website. It's only been live since February.
So What? Synthetix is in its very early days and some are already criticising its inner workings and incentive mechanisms, but its clean user interface is making up for those concerns and driving fast growth. It shows just how important UX/UI is in a space where many of the devs are building for other devs. For another example, see how use of lending platform dydx shot up after they upgraded their UI, here.
My idea is to provide the top news of the day in the DeFi space and why they matter, and my take on what’s happening. Aiming to do it 4 to 5 times a week and make it short and sweet. Like it? Hate it? Let me know!