The collateral is represented by a smart contract called cToken - which is stored and managed by Compound users themselves rather than by the Compound team or third-party custodians. Users supply collateral to borrow other crypto assets. The current leader in decentralized finance, Compound, is an example of a non-custodial lending platform.
Borrowers and lenders in DeFi lending platforms rely on smart contracts to minimize counterparty risk - they trust that said smart contracts can execute loan transactions without any technical glitches or exploitable loopholes. On the other side of the spectrum, decentralized lending platforms are non-custodial, meaning they don’t have direct access to user funds.
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In the case of BlockFi, Gemini (i.e., the custodian) obtained a trust license from the New York State Department of Financial Services - a requirement to be compliant with specific capital reserve needs and banking compliance standards under §100 of the New York Banking Law.ĭecentralized platforms are non-custodial Borrowers cannot access the collateral until they have paid off their loans.Ī regulated, centralized crypto custodian provides additional investor protections for users. When users send their collateral to BlockFi, it is then transferred to a cold storage system provided by Gemini, a regulated cryptocurrency exchange, wallet and custodian. Lenders assume that the platform can safeguard their assets and ensure the borrower repays the loan on time.īlockFi is one notable example among custodial crypto-lending platforms, as client assets are deposited with a third-party custodian. From the lender’s perspective, it is the platform’s responsibility to mitigate counterparty risk. There are four key differences between centralized and decentralized crypto-lending platforms:Ĭentralized crypto-lending platforms are custodial, which means that users’ collateral is kept by the lending platform or a third-party custodian. Compound and Maker are two examples of decentralized crypto-lending platforms. Smart contracts are used for executing loan transactions, determining interest rates for crypto assets and storing the collateral for both lenders and borrowers. The activities of centralized crypto-lending platforms include safekeeping clients’ assets and determining the interest rates of crypto assets.Ĭonversely, decentralized crypto-lending platforms make use of smart contracts to remove the need for centralized third parties to act as middlemen.
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Still, the crypto-lending market is rapidly gaining traction - and both centralized and decentralized lending platforms are the key players in the nascent industry.Ĭentralized crypto-lending platforms, such as BlockFi and Celsius Network, are similar to traditional financial service companies, in so much as they retain full control when matching and executing loan requests between borrowers and lenders. The sum, however, remains infantile when compared to the traditional lending market, which boasts an annual transaction volume of $85 billion. Loan transactions in the crypto-lending market reached $8 billion in Q4 2019, up 700% from 2018. The key differences between centralized and decentralized crypto-lending platforms With that in mind, OKX Insights examines the regulatory environment for crypto-lending platforms and decentralized exchanges. While much of the DeFi-related focus has been placed on the rise of Compound and the surging volumes on decentralized exchanges, not a lot has been said about the development of regulatory frameworks for the emerging industry niche. And since July, that value has surged to $2.83 billion. The total USD value locked in DeFi reached $1.95 billion in Q2 2020 - a quarterly growth of 311%. Daily transaction volumes hit an all-time high of $608 million on June 21. Decentralized finance, commonly referred to as DeFi, has seen significant growth in the second quarter of 2020.
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