DeFi Lending - Intermediation Without Information?
(14 June 2022 – Global) For Decentralised Finance (DeFi) to disseminate more broadly across the real economy, lending solutions must tokenise real assets and depend less on collateral by developing DeFi’s capacity to gather information about borrowers the Bank for International Settlements (BIS) reports.
In the latest BIS Bulletin #57, the Bank comments that the recent collapse of Anchor on the Terra blockchain and Celsius’ restrictions on withdrawals have shaken confidence and put a stop to the rapid ascent of crypto lending. Lending platforms are a key part of the decentralised finance (DeFi) ecosystem, but their institutional features mostly facilitate speculation in crypto assets rather than real economy lending. Due to the anonymity of borrowers, overcollateralization is pervasive in DeFi lending, which generates procyclicality. Reliance on collateral also limits access to credit to borrowers who are already asset-rich, negating financial inclusion benefits.
“DeFi lending must engage in large-scale tokenisation of real-world assets. To serve the unbanked or underbanked, DeFi will need to abandon anonymity and use real names, and ultimately to fall within the regulatory umbrella” the report authors
Sirio Aramonte, Sebastian Doerr, Wenqian Huang and Andreas Schrimpf state.
“While all these initiatives are in their infancy, they highlight a growing trend in DeFi to rely on forms of centralisation in one way or another. This development suggests that the similarities between DeFi and legacy intermediaries are increasing, which has two important implications. The first is that elements of DeFi, mainly smart contracts and composability, could find their way into traditional finance. The second implication is that, once more, decentralisation proves to be an illusion”
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