lending

Man gets under-collateralized DeFi loan by proving income through Sablier

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A few days ago, Paul Razvan Berg, Founder of Sablier tweeted that he was one of the first people to ever receive an under-collateralized DeFi loan. Because of identity being difficult to prove within a mostly anonymous blockchain network, it has been too risky to borrow tokens without an over-collateralized position. Sablier allows users to prove their income stream, bringing DeFi one step closer to the ability to be under-collateralized.

Berg didn’t get his loan from a protocol or organization, instead, he asked people that he knew on Twitter. Essentially, Berg took a picture of his face next to his income stream on Sablier and was able to convince Peter Yuan Pan of Meta Cartel to give him a $200 loan that would be paid back by March 11th.

He enquired simply,

“@AlexMasmej @pet3rpan_ now that you can see the money being streamed to me and you know that @SablierHQ is a reputable org that doesn’t fire its founders, would you lend me 10% of the stream’s worth? I’ll pay it back when I get all of the locked up money, that is, on March 11.”

This wasn’t one of Sablier’s intended use cases, according to their introduction blog post. They mostly are aiming to allow continuous income streams in a decentralized manner. Basically, an employer creates a contract with their employee that says “pay Bob $1000 by December 31st,” then the money will continuously be deposited into the Bob’s Sablier contract.

Determining credit scores through income or bank account balance isn’t a new idea though. As countries discusses creating a centrally backed digital currency, a talking point has been to use information that new digital information to create more immersive credit rating.

With Sablier, people can prove that they are getting paid, but there is still (to my knowledge) no mass under-collateralized lending protocol linked to a zero-proof knowledge credit core system. The only incentive that Berg really has to pay his under-collateralized DeFi loan back is that it is public, and bailing would affect his reputation.

Justin Sun and Poloniex are advertising 64% interest on USDC

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Poloniex just announced USDC and USDT lending for EU users, with interest rates as high as 64% APR. This is basically an unprecedented rate of returns for lending money, especially USDC.

There is a disclaimer at the bottom of their advertisement saying “Lending on Poloniex is inherently risky and may not be suitable for all users,” but that isn’t anything outside of the norm.

Coinbase lets users earn interest on USDC, but their rates are about 1.25% because they are not actually lending the tokens. A better comparison to Poloniex would be a decentralized protocol such as Compound that is currently paying 8.4% APR for lending USDC.

The main difference between decentralized lending protocols and Poloniex is that your funds are locked for a certain amount of days on Poloniex, and it is specifically used for margin trading. In Compound, users can take out their money as they please because it is in a lending pool format. The only time they aren’t allowed to take money out is when all funds are being used.

Poloniex has users determine how many days they would like their funds to be locked up which takes part in determining their interest rates. 64% seems too good to be true, but it might actually be possible since it is the first day that the program is releasing and they need to attract users to be the first to lend. Unfortunately, as someone in the US, I am not able to see exactly what it takes to get 65% APR.

Possibly the funniest part about all of this is Justin Sun’s response. Sun is an investor in Poloniex exchange but the way he speaks on it makes it seem like he has no involvement whatsoever. Here’s a quote from him:

“APR 65.46%？I have 100 million #USDC and want to deposit? $USDC $USDT“

After Poloniex changed leadership roles with new investments, they acquired TRON’s biggest decentralized exchange, listed TRON and let TRON projects become listed with no fees. People have their opinions on the integrity of the TRON project, as they will about these extremely high interest rates.

BlockFi is now the only crypto interest provider in Washington state

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BlockFi is a wealth management platform that allows people to earn interest on and borrow crypto assets. Today, BlockFi received a Money Transmitter License from the state of Washington, making them the only regulated crypto lending service in the area.

There are tons of ways to lock up your crypto to earn interest in the decentralized finance space, but BlockFi is going about doing this in a centralized manner. Right now, BlockFi is offering up to 8.6% interst annually for locking up assets like Bitcoin, Ethereum and Gemini’s stablecoin, GUSD. These rates are competitive compared to DeFi options and users might feel comfortable that their operation is regulated and not experimental technology.

A Money Transmitter License is administered by FinCen and allows companies to be in the business of handling money. BlockFi has been capable of offering Washington citizens crypto backed loans since 2018, but they weren’t allowed to deposit crypto and earn interest.

Wherever there is demand for borrowing, there is opportunity for people to earn interest by lending cash or crypto and tons of projects are working hard to make passive interest accessible to everyone.

Comparing risk on DAI lending platforms

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Earning interest on crypto is in a sweet spot between profitability and ease of use. In a previous piece, I touched on some platforms that make the process of investing very simple, but exactly how risky can lending crypto assets get?

Coinbase holding risk

Coinbase is the most regulated of the options. CENTRE (Coinbase & Circle), who manages USDC, lists reserve bank partners and compliance organizations that ensure “checks and balances.” There, you can also find attestations from an accounting services firm, updated every month. 

The biggest risk of earning through Coinbase is if suddenly, everyone sold their USDC and Coinbase had backed money in contracts that they couldn’t get out of. This scenario seems very unlikely. Still, there is not much information on how the interest is calculated on Coinbase, and it would be a good idea to follow them closely incase something changes. 

DyDx lending Risk

DyDx puts borrowers in over-collateralized positions ranging from 125% to 150%. Margin traders collateral only needs to be 25% because they can’t withdraw their loan. Each borrower has a liquidation point to ensure the lender will be paid back.

If a borrower’s collateral becomes worth only 115% of their loan, it is liquidated. The other 15% goes to DyDx’s insurance fund. Everything is collateralized through Ethereum, so liquidation can occur if Eth becomes less valuable. DyDx says the insurance funds are there for times of “extreme volatility.”

So far there are no reports of the insurance fund running out of money. 

Dharma lending Risk

Lending on Dharma means that you’re adding value to the Compound protocol. Like DyDx, Compound requires 125% collateralization for both USDC and DAI. Instead of building an insurance fund through a liquidation buffer, 1/10th or 1/20th of interest paid by borrowers is set aside for “reserves.” 

Like DyDx, nobody has reported the protocol running out of reserves. 

Still, there have been times of high lending pool usage. If someone puts millions of dollars into compound, which right now contains around 150 million, they could risk not being able to pull. out. If 96% of compounds funds were being lent out, only 6 million would be able to be removed.

Multiple people being afraid that they won’t be able to pull their friends could cause a “run on the bank” scenario where everyone pulls out and causes panic. Still, the higher the usage, the more interest lenders get paid. Users have to put trust in that system of incentives.

Risk between tokens

USDC risk has been summarized in the Coinbase platform section because of how closely the two operate. DAI on the other hand has a very complex system that is tied to the volatility of Ethereum. 

To make it short, DAI has a system of checks and balances that hasn’t fallen apart yet. Still, it’s peg to the dollar is choppy. Throughout history, DAI has stayed within 5% of the dollar mark. This means that earning 5% APR could either put you at a total of 0% earnings or 10% earnings depending on the price of DAI when it is purchased and sold. 

If passed, on November 18th, “Multi-Collateral Dai” will allow users to use more than Eth for collateral. Theoretically, the feature will give DAI a wider safety net for when extreme volatility strikes the market.

Remember, it’s new technology 

Compound offers a “bug bounty” to encourage people to report issues rather than taking advantage of them. On the Dharma “risk” faq, they warn you that you are using new technology that is prone to bugs. Not all the kinks have been worked out of these systems and developers are aware. 

With that being said, all protocols have been audited to an extent by third parties. There are no records of either 0x or Compound being hacked. Keeping up with news about the protocols should help mitigate risk as it is less likely for a whole insurance fund to be taken out in one day than it is over time.