The world of crypto lending is changing fast. Last year’s crash of big lenders like Celsius and BlockFi scared many people away. But now, a new kind of lending without middlemen is growing quickly.
These new platforms let people borrow and lend crypto directly. They don’t need banks or big companies to make it work. According to recent data from DeFi Llama, these platforms now hold over $8 billion in digital assets.
“People lost trust in centralized services after seeing companies like Celsius freeze withdrawals,” says Marco Di Maggio, a finance professor at Harvard Business School. “Decentralized lending gives users more control over their assets.”
When traditional crypto lenders fell apart, they took billions of dollars of customer money with them. Celsius alone had about $4.7 billion in user funds when it stopped letting people withdraw. Many customers still haven’t gotten their money back.
The new wave of lending works differently. It uses smart contracts – computer code that runs automatically when certain conditions are met. This removes the need to trust a company with your money.
“Smart contracts create transparency you don’t get with centralized lenders,” explains Ryan Selkis, founder of crypto research firm Messari. “Anyone can check exactly what’s happening with the funds on the blockchain.”
On platforms like Aave and Compound, users can see exactly how much collateral backs each loan. This is very different from traditional lenders, who didn’t share enough information about how they used customer deposits.
However, these decentralized options come with their own risks. The technology is still new and can have bugs or security problems. In 2022, hackers stole about $3.8 billion from various crypto projects, according to Chainalysis.
The good news is that decentralized lending survived market turmoil better than expected. During the crypto market crash, these platforms mostly worked as designed, automatically liquidating loans when collateral values dropped too low.
“The resilience we’ve seen proves the technology works,” says Mary-Catherine Lader, COO at Uniswap Labs. “Now we need to focus on making these tools more user-friendly for average people.”
Most decentralized platforms still require users to put up more collateral than they borrow. For example, you might need to deposit $150 worth of Ethereum to borrow $100 in other cryptocurrencies. This helps protect the system but limits how useful the loans can be.
Some platforms are experimenting with ways to offer loans with less collateral. Maple Finance, for example, works with specialized companies that check borrowers’ creditworthiness off-chain, similar to traditional finance.
Regulation remains a big question mark. The SEC has increased enforcement actions against crypto companies, but hasn’t given clear guidance on decentralized lending. This uncertainty makes some traditional investors hesitant to participate.
Despite these challenges, users continue moving to decentralized options. Trading volume on these platforms increased by 38% in the first quarter of 2023 compared to the previous quarter, according to a report from DappRadar.
“We’re seeing a shift in how people think about financial services,” says Christine Moy, a former JPMorgan blockchain lead now at Apollo Global Management. “The idea of finance without intermediaries is becoming more accepted.”
The growing interest has caught Wall Street’s attention. Financial giants like BlackRock and Fidelity have been exploring ways to connect with decentralized finance, though
