The cryptocurrency lending industry has been booming lately, with the options to borrow against holdings or earn interest by making loans becoming easier to find.
Leading wallet service Blockchain.com jumped into the market on March 10. Building on a loan desk opened to institutional investors in August, Blockchain.com will now allow customers to borrow dollar-denominated Paxos stablecoins (PAX) against their bitcoin (BTC) holdings.
One major reason for these loans is that they allow investors to increase liquidity—often to fund other speculation such as buying derivatives on margin—without selling off cryptocurrency holdings they view as long term investments.
While Blockchain.com’s Borrow currently only lends against bitcoin, support for Ethereum’s ether (ETH), bitcoin cash (BCH), and Stellar lumens (XLM) is coming soon, the company said on its blog. It is available directly from Bitcoin.com wallets.
After a soft launch in August, Blockchain.com launched its Blockchain Markets lending desk for institutional investors like hedge funds and wealthy individuals in November.
Aave adds tether
Meanwhile, Aave, a decentralized and non-custodial lending platform, added support for tether (USDT) stablecoins today.
The announcement, by Tether, focused on the high interest rate it said was available by loaning USDT—12%—and on the flash loan market in which uncollateralized loans are borrowed and repaid within a single transaction.
Ethereum-based Aave lets users either lend or borrow stablecoins against collateral, or borrow without it for flash loans. These are used primarily for trading cryptocurrencies, although Tether also cited exchange arbitrage and moving holdings between DeFi platforms .
“USDT is the largest stablecoin in the market and it brings a vast amount of liquidity within the DeFi space,” said Stani Kulechov, CEO of Aave. “Together with Aave, this will help bootstrap DeFi composability via flash loans, lending and borrowing.”
In addition to tether, Aave supports stablecoin loans in Maker’s Dai (DAI), Circle’s USD Coin (USDC), TrueUSD (TUSD), and Synthetix USD (SUSD).
While tether is far and away the most popular stablecoin with the highest market cap—$4.65 billion, according to Messari’s Real Volume—the company is embroiled in a variety of controversies, including a fraud suit by New York’s Attorney General, a $1.4 trillion class action lawsuit accusing it of causing the crypto winter, and serious questions about its unwillingness to provide an audit of the dollar cache it says backs USDT one-to-one.
DeFi lending’s siren song
Lending via DeFi platforms and lending pools is popular, in large part, because it commands fabulously high interest rates. This starts at 5% and can run well into double digits. Tether is promising 12% on Aave.
That is many times the 1% to 2% or less available in the mainstream financial industry. Of course, high rewards generally come with high risk, and more than a few cryptocurrency lending skeptics says that when an offer sounds too good to be true, it usually is.
Among those risks are flash crashes, like the one that cost Poloniex lenders $14.4 million on May 26, 2019. When the CLAM alt coin dropped from $20.02 to $6.70 in the space of two hours, many of the exchange’s CLAM margin borrowers defaulted on their margin calls. Controversially, Poloniex spread the loss across all participants in its BTC lending pool.
Two weeks later Stuart Madnick, an information technologies professor at MIT’s Sloan School of Business, published an article in the Wall Street Journal citing flash crashes as a major flaw in the broader blockchain technology.
When a centralized stock market system, such as the NYSE, “runs into a problem, such as a flash crash, one solution is to shut the market off,” said Madnick. Exactly that happened four minutes after the NYSE opened on March 9, with Corona virus-inspired fears causing stock prices drop so far and fast that stop-loss circuit breakers halted trading for 15 minutes.
“But, in the case of an attack discovered on a blockchain system,” Madnick pointed out, “it is essentially impossible to turn it off.”