Diar — the digital asset institutional publication — released their weekly report detailing the increasing prominence of collateralized debt in the cryptocurrency markets — with both on-chain and off-chain services.
Their report follows last week’s report from Genesis Capital revealed that their investment lending arm had $1.1 billion in originations — doubling its loans in Q4 2018. Both Diar and Genesis Capital reference Bitcoin’s falling price as the cause for the rise in collateralized loans, with investors positioning themselves against the extended downturn in the markets.
The Growth of Crypto-Backed Loans and Dai
Genesis Capital disclosed to Forbes that their recently launched crypto-backed loan service has grown significantly — already reaching $20 million in crypto-collateralized loans. Such services have traditionally not been accessible to many retail investors and were only available to accredited investors. However, Genesis has decided to launch a fiat lending business following the positive reception to their cash lending pilot program.
Similarly, Compound.Finance — an on-chain protocol for borrowing/lending on Ethereum — has experienced roughly $85 million in volume since November 2018. In particular, the platform offered Maker Dai lending at the end of November 2018, which has surged to approximately $2.5 million in net borrowed Dai at the end of January this year.
According to Diar:
Currently, nearly 10% of all outstanding Dai is either available for supply, or borrowed against other assets on Compound.
Diar also notes that much of the volume of Dai lending indicates that borrowers are seeking more bullish trading exposure with their cryptocurrencies rather than to short assets.
The on-chain options for users seeking more conventional financial instruments are continuing to snowball. Maker’s collateralized debt positions (CDPs) already consist of nearly 1.5 percent of the total Ether in circulation locked up in CDPs, and services ranging from BlockFi to Nuo offer crypto-collateralized loans services.
Both on-chain and off-chain loan services present an intriguing development within the cryptocurrency markets. However, Diar notes that returns are slim for liquidity providers and have been steadily declining since November 2018.
Additionally, on-chain services like Compound. Finance and Maker CDPs have technical barriers to adoption, limiting their current usability to the small subset of the mainstream that is familiar with and comfortable utilizing decentralized financial tools. Dai’s surge in popularity is indicative of a growing audience of interest for on-chain debt instruments, but it remains unclear whether their popularity can rival more traditional off-chain services as more mainstream users tap into digital assets.