Understand the risks posed by crypto lending platforms

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Understanding the risks posed by crypto lending platforms – Photo: Shutterstock

The sense of chaos gripping the crypto lending industry grew over the weekend following media reports that (DeFi) platform MakerDAO (Decentralized Autonomous Organization) prevented the stablecoin DAI to be minted and deposited on the AAVE blockchain.

MakerDao’s move arose out of concern over AAVE’s exposure to an ETH derivative, known as stakedETH (stETH), but forced liquidations on crypto platforms are causing BTC prices to crater and of the altcoin.

DAI in US Dollar

MakerDAO’s setbacks follow Celcius Network’s suspension of withdrawals, again triggered by its exposure to stETH, a digital token that will only be acquired once the next hard fork of ETH, known as Merge , will take place.

The native CEL token has taken a hit and the loss of trust in seETH is in turn a function of the collapse of the algorithmic stablecoin Terra Network UST.

This crypto death spiral has sent BTC and ETH prices down to levels not seen since November 2020, and although both are staging a minor comeback at the time of writing, conditions in the crypto market remain tense.

BTC to US Dollar

The current wave of FUD in the digital asset market is largely driven by crypto lending platforms, so how do they work and how many are there and what risks do they pose?

How many crypto lending platforms are there?

It is difficult to assign an exact value to crypto lending, although data from DefiLlama in early June suggests that there are around 140 protocols providing crypto lending-based services with a higher cumulative total value locked or TVL. at $50 billion.

While these numbers suggest an abundance of choice, Ethereum is the dominant blockchain due to liquidity levels that dwarf those of other chains.

“The largest platforms such as Compound, Maker, Aave, and Iron Bank are the most popular given their large presence on the Ethereum mainnet as well as their relative longevity compared to other lending protocols,” says ‘Puff. ‘, one of the main contributors to decentralized lending. Iron Bank platform.

Tarun Gupta, founder of crypto cash management platform Coinshift, points out that Aave, Maker, and Compound alone have a combined TVL of around $26 billion and support multiple lending and borrowing markets. .

Assets exit AAVE

Gupta made his comments in early June and the speed of the crypto lending platform’s collapse can be seen by the latest data from DEFI Llama, an industry monitoring website.

In the seven days to June 21, AAVE saw a 12% drop in total assets and a staggering 47% drop in the previous 30 days.

Despite this, others say more obscure crypto lending platforms are worth checking out.

“Celo is the most efficient blockchain for the general public to leverage for crypto lending,” says David Casey, co-founder of credit platform ReSource.

Learn the CELO

“This is due to low gas costs (1/1000th of a penny) and the fact that the CELO blockchain is designed to work from a smartphone anywhere in the world.”

He does not view what he calls “overcollateralized lending” platforms such as Aave and Compound as sources of credit, but rather as leveraged or margin lending platforms for crypto traders. .

Instead, Casey claims that the only other platforms offering real crypto credit are Goldfinch, Teller Finance, Union Finance, Centrifuge, and Masa.

Unfortunately, the market disagrees and the CELO coin seems to have broken a string. According to data from CoinMarketCap, the digital token was trading at 93 cents US, down from $1.55 less than a month ago.


George Harrap, co-founder of Solana Step Finance wallet dashboard, unsurprisingly highlights the benefits of SOL-backed crypto lending platform, Solend.

The pun in the company’s title may be prescient given its current struggles around a whale (a large crypto holder) holding enough assets in the system to see the ninth-largest crypto by market capitalization fall. to zero.


Assuming that doesn’t happen, Harrap says there are a number of reasons to consider SOL for crypto lending projects.

“There are about half a dozen different lending platforms on Solana and it’s probably the most efficient and cost-effective platform for taking out loans on any token,” he says.

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Antoni Trenchev, co-founder and managing partner of Nexo – a regulated institution for digital assets – says each blockchain offers different transaction speeds, fees, privacy and security.

SOL in US Dollar

Ethereum security “unprecedented”

“Although Ethereum is the most widely used blockchain, transaction gas fees can sometimes get high,” he adds. “Polygon’s (MATIC) network, on the other hand, is newer but more cost-effective, and there are also chains like Avalanche (AVAX) that allow for great interoperability.”

According to Iron Bank’s external advisor ‘Lumberg’, Layer 2 solutions such as Optimism and Arbitrum also hold promise as they inherit the security of the Ethereum mainnet while offering faster transactions with lower fees. .

Although the Polygon validation chain or high-throughput chains such as Solana, Fantom (FTM) and AVAX are cheaper, Brian Pasfield, CTO of the DeFi Fringe Finance protocol refers to the importance of security and suggests that at In this regard, Ethereum is unparalleled.

MATIC in dollars

What are the risks of crypto lending?

Lending and borrowing through decentralized platforms requires the user to lock the tokens into a smart contract. Fringe Finance classifies the possible risks incurred by a user into the following categories:

  • Liquidation loss – a user’s loan goes below the collateral line and they lose their collateral assets

  • Smart contract exploits – where a malicious user finds a way to harm the platform by attacking their smart contracts, which can give them partial or full access to tokens locked into the platform (examples of which can go wrong involve hackers altering proxy contracts or exploiting dangerous contracts)

  • Flash loan attacks – where a user takes advantage of an error in the logic of a platform that allows them to quickly execute multiple loans, taking advantage of each subsequent one

Green Flags for Crypto Lending Platforms

Before locking their coins into a network’s contract, investors should review the TVL of different lending protocols, as it’s a good way to gauge their legitimacy, suggests Harrap. “The more money in the pools, the more people think the protocol is worth it,” he says.

Puff recommends that users review the safety and security practices of the lending protocol they use. Common security practices include software audits, bug bounty programs, insurance coverage, use of decentralized pricing oracles.

“The main risk of borrowing from a crypto lender as opposed to using a DeFi protocol is the need for trust — namely, the lender running away with your collateral,” says Trenchev.

“That’s why users should do their due diligence and make sure the platforms they interact with are audited, compliant, use third-party custodians, and have insurance.”

Understand the logic of crypto lending

Faliushin advises taking the time to understand the logic behind the crypto lending process, avoid taking out a loan with the highest loan-to-value ratio, and keep that ratio under control during the loan period.

“Potential borrowers need to know the terms and conditions of the loan and the service provider,” he says.

“They also need to understand the terms around lock-up periods when it comes to earning yield, which are different for each platform.

From these terms, you will be able to fully understand how the yield is generated and how long are the lock-in periods to unlock the yield. »

To Collateralize or Not to Collateralize?

Other factors to consider include tokenomics (whether the economics behind the protocol is strong and whether the collateral is reliable and stable or highly volatile).

Casey observes that the risks of borrowing through crypto lending platforms differ depending on whether they are leveraged/collateralized loans or uncollateralized loans.

“For the former, there are all the normal risks of leverage, including massive sell-offs like what we’ve been through for the past few weeks,” he says.

“For the latter, the risks are more on the side of the lenders, because the recovery of funds is more difficult without collateral. KYC should be implemented for crypto credit to scale.

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