The sudden rise of digital asset lending

 “It is not good to be curious about all the reasons behind price movements.”

- Jesse Livermore; Reminiscences of a Stock Operator


The crypto market is a place of themes.

In 2017 we had the rise of dApps. In 2018 it was fight for the best and most scalable protocol. This year in 2019, the focus has been on buy/burn utility tokens via exchanges.

Looking around the market today, one can’t help but notice a new theme gaining significant traction and awareness - Lending.

Most of us have heard lending platforms like Nexo have processed over $700m, MakerDAO having $250m+ total value locked, and as recently as days ago, Binance announcing their first wave of lending products to their users. Having said that, we shall skew towards an informational series in this issue of Dark Pools, taking a dive deeper into the topic of ‘crypto lending’.

Digital Asset Lending – Defining the concept

Here at Astronaut Capital, we prefer splitting “crypto lending” into 2 segments, where both concepts are relatively similar; when a borrower takes a loan from the lender in return for an interest income.

1.     Traditional lending (Stable coins)

2.     Securities lending (Non-Stable coins)

There is not much explanation needed for the first point, as the lending of stable coins operates similar to fiat lending. Think of bank loans, student loans, and mortgages. Instead of earning a meagre interest of 1% from traditional banks, one can lend via stable coins to earn a higher interest rate, 8% (Nexo) and 10% (Binance). Hence, it isn’t surprising to see a ~4x growth in locked collaterals for lending, according to DefiPulse.

Now, for the second segment, things are slightly different. As Investopedia defines:

Securities lending is the act of loaning a stock, derivative or other security to an investor or firm... generally conducted between brokers and/or dealers and not individual investors.”

Traditionally only open to institutional investors, retail investors are now able to participate and get a share of the pie. However, one great difference lies in the fact that “governance rights” are not being transferred to the borrower in crypto lending, which does not concur with the traditional space. This leaves several caveats, and whether this will surface sooner or later remains to be seen.

So, who are the lenders/ brokers?

Many avid crypto enthusiasts will know there exist a whole myriad of lending platforms from centralised to decentralised in nature. Our desk took the liberty to present the more popular below.

Browsing through the table, opportunistic traders with an eye for detail would immediately point out an investment opportunity, termed carry trade. It is a strategy that borrows at a low-interest rate and re-investing at a higher interest rate to earn on the difference.

Then what about the borrowers?

Many of these borrowed tokens are also utilized to exploit market opportunities such as shorting an overvalued security/token. Yes, this does improve market efficiency; however, it does not apply for most of the circulating tokens out there. Try borrowing and shorting a token that is rank #250 on CMC, it will not be easy. And this boils down to the significant risk surrounding this industry, credit / counter party risk.

What does this mean for “lending” tokens?

BlockFi’s recent $18.3m Series A funding announcement is one of the few pieces of evidence that investors are taking notice of this sector. The desk at Astronaut Capital, in general, has been bullish on the finance sector of the crypto markets, as we believe this is one of the first steps in building a successful crypto ecosystem and a more efficient market. As the saying goes, the financial system forms the backbone of any economy.

A ‘fad’ or the beginning of something big?

Market sentiments are nowhere near perceived bullish sentiments as price discovery of “lending” tokens have remained relatively subtle. Several pieces of the puzzle are yet to be resolved, such as governance rights (imagine a user borrowing tokens to influence the bureaucratic decisions of a platform, during the lending period), market accessibility, and regulatory headwinds just to name a few.

Having said that, it's not that we are pessimistic about the lending space. Volume and demand in recent months is extremely impressive. Our issue relates more to the track-record (or there lack-of) of companies/projects facilitating such activities on behalf of market participants.

Put simply, there are too many ‘unknown unknowns’ and it takes just one bad apple to ruin the bunch.

We will continue to monitor this segment of the market, and expect the lending marketplace to look extremely different in the coming months, particularly with the recent announcement of Binance Lending and the upcoming launch of institutional lending by LendingBlock.

Until next time,

Lennard Neo & Matt Dibb


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About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

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