Experts told how borrowing in cryptocurrency differs from traditional loan products, and what risks landing platforms and their clients may face
The crypto lending market has grown significantly in recent years, but the lack of regulations and regulators in the digital asset industry has led to many problems, including the liquidity crisis of decentralized lending platforms (lenders) and the bankruptcy of large companies such as Celsius Network and Three Arrows Capital.
DeFi lenders are services that offer secured loans without intermediaries. Instead of banks and brokers, DeFi lending uses smart contracts — automated and self-executing algorithms that specify all the terms of the transaction, including amounts, terms, and interest rates.
Since blockchain lending eliminates intermediaries, the transaction process becomes simpler, and the loan is cheaper. At the same time, the absence of a third party carries significant risks for both the lender and the borrower.
The features of crypto credit products and the dangers faced by borrowers and the landing platforms themselves
Borrower risks
The main risks of DeFi lending lie in their specifics: since crypto loans are not centrally regulated and there are no guarantees for the return of funds, the collateral amount usually significantly exceeds the loan amount.
Crypto assets are volatile, and the cost of a loan or collateral can change significantly over the time the funds are used. Accordingly, it will be necessary to increase the collateral or return more funds than was originally taken by the borrower.
Users need to be aware of these risks and understand that such a loan has a lot of advantages, but also carries risks if you do not understand the product properly. Some resources that provide loans in cryptocurrencies may turn out to be fraudulent, that you can protect yourself from deception by contacting only large trusted sites.
Features of DeFi loans
A distinctive feature of crypto lending platforms is their general availability, said Chen Limin, CFO and head of trading operations at ICB Fund. He explained that the ease and simplicity is due to blockchain technology, which eliminates intermediaries.
At the same time, there is no requirement to provide identity documents and there is no time spent on consideration of the application, the expert specified. According to him, this is possible due to collateral, which, as a rule, is 125% of the loan amount, but may vary depending on the volatility of an asset. To mitigate risk, a borrower can raise funds in stablecoins, Limin says.
The expert added that crypto lending platforms today offer so-called instant loans: they assume the absence of collateral and the receipt and repayment of a loan within a single block (in Ethereum it is 13 seconds). The specialist noted that the amounts of such loans are significant. Instant loans can be used by large traders in arbitrage transactions (the larger the amount, the higher the potential earnings), he said. Limin also drew attention to the fact that such a tool is often used by attackers to carry out attacks on DeFi protocols.
“Instant loan attack” – this is the name given to a type of fraud, which is a hacking of crypto platforms with the help of a quick infusion and dumping of assets received from instant and unsecured lending services.
8) The hacker swapped the stolen fund into 69422.9SOL and 6,497,738 USDCet via Jupiter. The USDCet was then bridged to Ethereum network via Wormhole and swapped to 6064ETH via Uniswap after that.
— CremaFinance (@Crema_Finance) July 3, 2022
The most recent of these attacks were the $8.7 million Crema Finance protocol hacks and the $3.5 million attack on the Nirvana Finance protocol .
Looks like @nirvana_fi got hacked. Someone drained the protocol via what looks like a flash loan attack for ~3mil USDT. They've sent it to ETH mainnet via wormhole, and converted it to DAI. #opsec #crypto #hack #cryptohack
This is the eth address:https://t.co/KYmTqcxYZb
— Andy D (@AndyBTC_) July 28, 2022
Domino Principle
As the practice of recent months has shown, crypto lending platforms may lose control over assets, Roman Nekrasov, co-founder of the ENCRY Foundation, warned. He explained this by the fact that users pledged their coins, receiving crypto lending platform tokens in exchange, which they then re-mortgaged again.
“Sometimes, due to such schemes with multi-stage remortgaging of tokens, users made a tenfold profit in a month. But in fact it was money out of thin air, out of a bubble,” the expert says.
He added that crypto lending platforms re-mortgaged the funds received from users in other lending protocols, thereby inflating the bubble even more. The collapse of Luna\UST became a trigger, breaking the chain of re-mortgaging funds from one protocol to another, the expert believes.
According to him, at some point, like dominoes, crypto lending platforms fell down, and users, in fear for the safety of their assets, rushed to withdraw coins from DeFi lending protocols. This caused liquidity problems for such protocols and provoked an avalanche of bankruptcies , Nekrasov is sure.
According to Nekrasov, these events will lead to a rethinking of crypto lending itself and clear the market of overly speculative decisions.
