Core knowledge:

• Unsecured lending is the sub-category with the biggest decrease in the group of Lending & borrowing projects.
• Maker DAO, Aave, and Compound are the 3 leading projects in the group of lending and borrowing projects in the Crypto market.

AAVE & COMPOUND TAKE MARKET SHARE IN THE LENDING CATEGORY

The top three lending protocols based on TVL include Aave, JustLend & Compound. If we add two criteria including total outstanding balance and total revenue, to filter out protocols with real users, we will be left with two protocols, Aave & Compound, these two protocols account for more than 70% of the total outstanding balance. of lending protocols.

In particular, Compound (COMP) is also an “inspirational” project for both the lending & borrowing category with the Peer to Pool lending and liquidity farming models, contributing to the development of the lending & borrowing category. However, with the mistakes in implementing the development strategy, most of Compound’s market share was acquired by Aave (AAVE).

JustLend has a very high TVL but a very low loan balance, almost like a user depositing assets to earn interest and incentive from the protocol, not borrowing.

MakerDAO & DAI “Alone And One Horse” On The “Battlefield” CDP Protocol

MakerDAO started in 2014, it is considered one of the first projects to create a credit system in the crypto market. MakerDAO allows users to collateralize crypto assets, create collateralized debt positions, and mint DAI, the protocol’s stablecoin, pegged for $1.

After 3 years of development, in December 2017, MakerDAO officially mainnet and allows users to mint DAI. On the product front, MakerDAO has two important phases;

• Single Collateral Dai (mainnet – 11/2019): Ethereum is the only asset used as collateral to borrow money.
• Multi Collateral Dai (11/2019 – present): Accept other ERC20 tokens as collateral to mint DAI.

However, the move from single collateral to multi collateral is not the direct reason for MakerDAO and DAI to thrive. Their growth was driven by the DeFi wave on Ethereum.

During the period from mainnet – Q4/2019, DAI supply did not increase significantly, the total supply of DAI was less than 1 million DAI. However, only in the last 2 months of 2019, the total supply of DAI has increased to over 40 million DAI. In the first 2 quarters of 2020, DAI supply increased from 41 million to 130 million. In the 2 quarters after 2020, DAI supply increased from 130 million to 1.15 billion.

During the DeFi boom, no other CDP protocol was active on the Ethereum mainnet. In the “one person, one horse” context, MakerDAO and DAI are the beneficiaries.

MakerDAO only has the main market on Ethereum, they focus their resources to develop and capture market share on Ethereum, then gradually becoming the “standard” when it comes to crypto-backed stablecoins, positive network effects have come to DAI.

DAI is extended to sidechains & Ethereum L2 without much effort from MakerDAO. The positive network effect with DAI is something we have seen with the Metamask case, where the EVM chains are the ones actively integrating Metamask.

Overall, MakerDAO is the leading protocol in the CDP protocol family. All important metrics of the protocol such as TVL, total debt, and total revenue outperformed protocols in the same segment.

Unsecured Lending Plummeted

Unsecured lending can be understood as loans that are not secured by collateral or are only partially mortgaged. This is a sizable market segment in the traditional lending and borrowing market.

However, in the crypto market, the implementation of the unsecured lending market is very limited due to shortcomings in various aspects. Currently, Unsecured lending holds a relatively small market share in the group of lending protocol projects.

In the crypto market, when it comes to unsecured lending, we have 3 prominent projects operating in this segment, including:

• TrueFi
• Goldfinch
• Maple Finance

In essence, the operating model of the three projects is similar, retail investors lend to institutional investors. While, institutions do not need to collateralize assets or only partially mortgage the loan. In return, institutional pays very high-interest rates to retail lenders (ranging from 10x – 30x when compared to lending rates on Aave & Compound).

Therefore, although the total TVL & total outstanding loans of unsecured lending protocols are quite low when compared to mortgage projects like Aave & Compound, their total revenue generated is quite large. The figure below compares the total revenue accumulated in the last 3 months of Aave and Maple finance.

Despite its advantages, unsecured lending also has its own limitations and potential risks:

• Payment risk.
• Poor synthesis.

As can be seen, the operating model of TrueFi, Goldfinch, Maple Finance is similar to CeFi organizations like Nexo. Users deposit money into the platform, and the platform lends to other institutions for high-interest rates.

However, the fact that the loan is not fully collateralized carries a liquidity risk when the borrower institutions go bankrupt and fail to repay the loan.

The event that Luna and crypto institutions pulled together at the end of Q2/2022 made the lender aware of this risk and tended to withdraw capital from unsecured lending protocols. As a result, the TVL of TrueFi and Goldfinch decreased by more than 90%, and TVL of Maple also decreased by more than 85% compared to 3 months ago.

VERDICT

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DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.

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