I tried crypto lending/borrowing. Result? Not always sunny.

👩Recently, I had an assignment to review the process of lending and borrowing offered by major protocols. By the way, I am a complete beginner when it comes to crypto lending/borrowing. I am going to share my experiences as I completed, or at least attempted to complete, the process of lending and borrowing from each project. The following article will include my personal impression and questions I had as a complete lending/borrowing beginner.

Many of you are already aware of the recent boom in the crypto lending and borrowing business. The market size reached 1 billion USD in less than 3 years since its inception. That is more than impressive. If I were to think that the growth reflects the strong desire among many hodlers pent up since the crypto fall in late 2017, perhaps the insane growth rate is not too surprising. If there’s a more or less stable option to enhance your portfolio performance with assets that otherwise would just sit in a wallet, why wouldn’t you?

According to many Twitter updates and news outlets, crypto lending and borrowing sounds as though it gives the participants greater liquidity over their assets, and the possibility of enhancing their portfolio performance. This makes sense. However, to what degree? Is it really easy to use? Is it worth the time?

To answer this question, I decided to give them a try. The following are the list of projects I gave a go.

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5 De-Fi projects I tried

I tried MakerDAO, Compound, dYdX, NUO, bZX, and Binance.
5 Major crypto credit projects I tried.

💡 Disclaimer: what I set out to do was to find only about the process of lending and borrowing on these protocols. The intention was not to commit any serious amount of money. If that is what’s required to complete the process, I stopped the process. 

The flow broadly maps the process of lending and borrowing, except for Binance. The operation of the Binance loan program was similar to that of the traditional banking system. I will touch on this later.

Most crypto credit sites follow the flow below as the basic procedure. If the project offers users the option of taking a loan on fiat money, more steps are added to the basic step.

Basic steps to crypto lending and borrowing.
The overview of crpyo lending and borrowing
  1. Sign up to create the account. Some protocols have you skip this process and go straight to next.
  2. Connect your wallet. I chose my Metamask wallet.
  3. Put money into the account. →Protocols refer to this process by many names: Lending, depositing, and supplying.
  4. If you want, borrow money. You can simply choose to lend money and earn the interest. The APR for lending is however, not very high

Words used synonymously in the crypto credit world : #lending, #putting_deposit, #supplying 

Unlike the traditional loan service with a very thorough KYC process, crypto loans do not require an extensive KYC process, especially when you want to borrow in crypto assets. Instead, the lending is based on the concept of over-collateralization.

Key idea: over-collateralization

what is overcollateralization?
Nugget explains what over-collateralization is.

You over-collateralize when the size of your collateral is greater than the value you want to borrow. For instance, dYdX asks you to colleralize at least 1.2 times that value in crypto assets. For MakerDAO and Compound, their minimum collaralization is 1.5X.

What about the KYC process?

In terms of KYC process for many projects, all I had to do was simply connecting my Metamask account to the website.

To borrow fiat money, however, the process does require a bit more KYC procedures. Depending on the amount you want to borrow, you either have to go through google’s two step authentication or sending a copy of your government issued photo id.

Crypto loan vs. Fiat loan

From what I could tell, crypto credit projects are broadly divided into two categories: crypto loan v.s. fiat loan. According to my experience, setting the duration and loan-to-value ratio were much more flexible when borrowing crypto. When borrowing fiat, the set up was very similar to the traditional fixed loan services from banks – choosing the duration and LTV of the loan among the set options. For both categories, the APR and liquidation price as well as the minimum amount of collateralization are determined by the system according to the collateral (the type of token, the amount, the duration).

compare crypto loan and fiat loan
Crypto loan vs. Fiat loan

Now, let me point out features unique to each protocol, as well as hiccups I experienced with each project.

MakerDAO

Their Dai system in a nutshell.

  1. Once you access their homepage, you need to select “Oasis” to trade, borrow, or earn savings.
  2. All these activities are done with Dai, MakerDAO’s stable coin.
  3. To get the stable coin, you need to first make deposits. Dai is automatically generated once you make your deposit. The number of Dai you get is depending on the value you deposit.
  4. You can then lock up your Dai under “savings”, or borrow other types of coin with your Dai as the collateral. Trade is simple trading.

 🤦‍♀️My hiccup moment: You need to at least create 20 Dai to start the process, or creating your vault. Also, you need to pay gas fee every time you are agreeing to something. I understand that it is a part of the blockchain system, but the fee here at MakerDAo was higher (~$1.0) than other projects.

Compound

  1. According to an analysis I read from defirate.com, Compound operates with their own stable coin: cToken. The amount of cToken is based on your total assets deposited into the system.
  2. There is no minimum supply to start borrowing. However, I was not sure where I could check my cToken. Is it not something I get like Dai from MakerDAO? I was not sure.🤷‍♀️ 
  3. You can withdraw and repay anytime you want. There is no set date.
  4. You cannot take out the type of coin you activate as your main collateral. Meaning, you cannot put in 1 ETH to borrow more ETH.

🤦‍♀️My hiccup moment: I couldn’t seem to zero my borrowed balance. I have $0.00000278 left. This prevents me from completely withdrawing my supply, which has the balance of $0.017. While I understand that the remaining balance is very miniscule, more of my money is held back then what is borrowed because I couldn’t completely empty it. This is rather frustrating😑.  Apparently, I have 0.01% net APR. Should I be happy that it is not a negative figure? I had a much larger negative APR when I took out a loan with 1.8x collateral to value ratio. Gas fee was not as high as MakerDAO (Compound asked me gas fee of $0.07 at the time I did mine).

dY/dX

  1. For a person who just wanted to test borrowing and lending, the procedure did not differ much from that of Compound.
  2. No need to create any sort of stable coins to lend and borrow.
  3. There is no minimum amount to deposit to borrow money.

🤦‍♀️My hiccup moment: I experienced the same hurdles with dY/dX that I did with Compound. I have such a small amount left in the borrow account that prevents me from emptying my deposit. I am not sure what to do with it. The gas price was comparable to Compound (~$0.07).

NUO

Decentralized debt market. 

This was interesting. The idea is a decentralized debt market where the lender deposits their tokens into a reservoir. When they do, lenders get to define the condition for borrowing their asset, such as premium, dates, and so on-in. When a borrow is matched, then the money is lent. While I am not sure how you would get your earning as a lender unless your fund is matched to someone who is willing to pay interest for borrowing it, I couldn’t really find more about it beyond that. If you still get a set APR for depositing your assets even without having it matched to a borrower, I really would like to know the mechanism behind it.

Free transaction: NUO supports the meta transaction. You don’t need to pay gas fees every time you are making a decision. You save $0.97 per transaction. This adds up to something. Before you know, you realize you have agreed to several transactions (and to pay several gas fees).

🤦‍♀️My hiccup moment: Unlike borrowing, lending only accepts one wallet -the Coinbase wallet. For borrowing, they do accept Metamask or other web 3.0 versions. I did try to connect my Coinbase wallet via QR code, but I just couldn’t get it to work on my old iphone 6. Yes, my iPhone 6, still working just fine.  

bZx (Fulcrum/Torque)

🧙‍♂️I am sorry, I couldn’t get Torque to work. Why is this the case?

For borrowers, you do your transaction at Torque. For lenders, you do it on Fulcrum. Someone please tell me why this is the case, but I couldn’t quite get Torque to work. In terms of borrowing, the flow was very similar to Compound and dY/dX-that is, connect your wallet, choose coin(s) to deposit, choose the amount, and press confirm. I personally find it easy. It gives me options of pressing buttons (25%, 50%, 75%, 100%) of my balance I’d like to lend, in addition to typing in the exact value I’d like to lend.

Binance*

Their operation is similar to traditional banks.

Speaking of touching base on easy UI/UX, I personally found Binance’s format similar to the traditional bank and easier to understand. Also, they appear to manage savings like traditional banks run savings accounts, while keeping crypto loans as a separate option.
This also means that your savings are not equal to the collateral you can use to borrow money. You’d also have to deposit new collateral to take out a loan. This separation was one of the main operational differences between Binance and other lending and borrowing projects.

Also, while Binance offers to make flexible savings, there is no flexible lending. This seems a more stable option to operate and manage savings programs as the idea of giving back interest for those accounts is by creating some sort of revenue, and operating loan programs with fixed schedule seems like a smart idea to generate revenue.

For your information, I created the following table from information taken from de-fi rate.

Lending APR for ETH from various de-fi projects

compare and contrast lending APR for ETH

Summary:

On the topic of easy UI/UX, I personally found Binance’s format similar to the traditional bank and easier to understand. Also, it didn’t require users much action. I had to do, or could do was to subscribe to the type of service they offer, whether that being savings (lendings) services or loans. I think this can work as a merit if you want something simple. However, if you want more control over deciding the ratio between lending and borrowing, you may prefer other platforms with greater user control.

I have to tell you, the APR for lending was much smaller than I expected from the size of the recent boom. However, the great interest may be from the possibility of doing leverage trading with the loan they take with their assets on Hodl, not so much for the size of earning they’d get from depositing money. For me personally, I didn’t find the process all that UI friendly. But hey, if you can do something possibly better with your asset sitting quietly in the wallet, perhaps the bit of UI/UX inconvenience is not a high price to pay.

I wonder, however, how much people did earn from lending and borrowing. Would love to hear success stories. What is your success story? 

Hey! Here is a fun idea to keep entertained during your quarantine lock up!

Try free crypto portfolio analysis!

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