DeFi
DeFi borrower behavior in spotlight after BIS study
A recent study from the Bank for International Settlements (BIS) sought to examine borrower behavior in the DeFi space, half of the equation that powers tens of billions of TVL dollars in lending protocols.
THE studywhich claims to be the first to examine the intricacies of user behavior as well as the dynamics of DeFi lending, highlights the importance of understanding these behaviors given commercial institutions’ increased interest in tokenizing assets such as bonds and securities.
Interestingly, one of the findings of the report is that many borrowers prefer to avoid over-indebtedness due to the obvious and present risk of forced closure and self-liquidation, after which their underlying collateral is sold by the protocol in question. Of course, a minority of borrowers still engage in risky leverage that can wipe them out at any time due to the volatility inherent in the crypto market.
Growing DeFi conservatism
It should be noted that the study only looked at data through March 2023, a month before the Ethereum Shanghai upgrade that allowed ETH withdrawals. Since then, LSDFi – DeFi protocols built on liquid staking derivatives – have risen to prominence, boosting the lending market by allowing users to unlock liquidity from their staked assets.
Still, the study’s findings that users are, for the most part, wary of the risks associated with liquidation are encouraging given the depiction of DeFi as a lawless Wild West awash with greedy speculators and risky propositions.
This reality has actually led to the emergence of protocols and dApps that specifically play to the conservatism of today’s DeFi users. A good example of Nolusthe cross-chain “leasing” protocol that works quite differently from typical lending platforms like Aave and Compound.
With a Nolus DeFi Lease, borrowers can get up to 150% financing on their initial investments and access the underlying leveraged assets through whitelisted strategies. To get 150% funding, borrowers simply need to lock in their down payment (in any fiat, stablecoin, or digital asset), after which they receive 150% above the down payment provided as a stable loan – the two being used to purchase the desired digital. active.
Since this deposit along with the loan is locked in a DeFi Lease position and functions as collateral, the margin call risk is reduced by 40% compared to other blockchain lenders. This reduced risk, combined with 3x the exposure of other lenders, a fixed interest rate and ownership of the underlying asset, makes Nolus an increasingly popular choice.
Launched in June 2023, the protocol has so far processed over $50 million in transactions and boasts a total TVL of $4.9 million from around 10,000 users. In addition to having a unique approach to issuing loans, Nolus also handles liquidations differently: rather than liquidating positions in full, it offers partial liquidations to give users more time to recover their position.
Risky business
Of course, DeFi hasn’t completely abandoned its risky image – it’s still the space where things like flash loans and unsecured loans can flourish. The latter allows institutional investors to borrow cryptos without providing collateral. In effect, users deposit their capital into unique borrower pools created by institutional borrowers, in exchange for generous interest rates.
DeFi risk goes beyond liquidation dangers and encompasses things like smart contract vulnerabilities, which can be exploited by malicious actors to steal user funds. Another risk concerns carpet pulls, in which protocol creators close up shop and abscond with their ill-gotten gains. This is another reason to do your due diligence before interacting with any DeFi dApp, regardless of the attractiveness of the returns.
With decentralized loans, TVL having exceeded $30 billion for the first time since mid-2022, and with DeFi borrower behavior seemingly becoming more conservative over time, some will wonder if the industry’s reputational baggage is lightening. Perhaps permissionless and intermediary-free protocols will soon be seen in a unanimously positive light, rather than denounced by the usual skeptics.