The lending industry has evolved over the past years with the introduction of crypto assets, and new players offering digital asset liquidity and innovative solutions. Even still, the lending and banking space is still highly regulated and complex to change. How have crypto lenders changed the industry, and will banks become irrelevant in the future? At PBWS 2020: Online Edition, a panel of experts discussed the progression of the crypto lending business and what this means for banks.
According to Daniel Leon, in the DeFi space, community is at the center of everything, instead of shareholders. Crypto is changing the focus and putting the customer at the center. This will likely not kill banks but can force them to change. Crypto lenders are also permissionless and offer transparency from the start.
Democratizing lending and crypto lending have recently become accessible and popular, and all counterparties are generally more knowledgeable about the industry and are looking for a return. However, more complex operations such as structuring are not yet there and that could be interesting for bigger deals and more complex structures. There is also an opportunity for those who are getting yield to hedge the volatility risk.
There are also some risks and scams to watch out for since it is a feature of permissionless blockchains that anyone can design anything, but it is necessary to allow anyone to create projects on the blockchain to encourage innovation. Due diligence is necessary before using the newer, more innovative platforms because the barrier to entry is low. There may be identity checks when entering blockchains.
For DeFi projects there is also the question of who is responsible for the code of the software, as well as the use of it, for example if there is a new version after a fork. There are many interactions between the DeFi and CeFi space, so intermediaries like market makers take on the risk for those kinds of institutions, and this could become more of a trend in the future with other intermediaries as well. For hyper-regulated sectors it is being debated whether or not the regulations will happen on-chain or off-chain, but regulations will definitely always be important.
With smart contracts, it is hard to have a default on a loan because of the liquidation process. With new innovations like flash loans, there are more efficient liquidations. If the risk is lower, there may be less of a need to have stricter regulations. This has created a tradeoff between competitiveness and risk management since so many players have entered the market, however risk management remains a priority. The players have evolved and now there are more advanced players monitoring the risk, although currently credit risk is being priced more on the conservative side.