Digital Asset Lending via Open Protocols 2018

This report analyzes digital asset loans and borrows routed through open decentralized lending protocols Compound, Dharma, dYdX and MakerDAO. In 2018, there was $251M worth of ETH, DAI, REP, ZRX and BAT loans and borrows routed via open protocols and settled on public blockchains. Active loans outstanding rose from $6M as of December 31, 2017, to $72M as of December 31, 2018, an increase of 1,200%.

  


Overview

Decentralized Finance (Open Finance)

Decentralized Finance, also known as Open Finance, strives to create an interoperable financial system. Among its core principles are transparency, accessibility and financial inclusion. Decentralized Finance participants are able to reduce counterparty risk via cryptographic verification on public blockchains.

The focus on trust minimization results in many benefits for the participants, foremost of which is the ability to retain custody of their digital assets. This report focuses on secured lending, the largest sector within Open Finance.

Secured Lending

Secured lending solely depends on the value of collateral and the ability to liquidate such collateral promptly and is not based on the creditworthiness of the borrower. The life cycle of secured lending involves the following processes:

What are decentralized lending protocols?

Compound, Dharma, dYdX and MakerDAO protocols address niches within the secured lending life cycle by introducing novel ways of matching borrowers with lenders, hypothecation, collateral custody and management, transaction settlement and risk management.

Who are digital asset borrowers and lenders?

Borrowers of digital assets are quantitative trading desks, cryptocurrency hedge funds and active traders with a short time horizon and a desire to capitalize on volatility in the market. They use borrowed assets to facilitate margin trading, short selling, arbitraging and hedging overall portfolio risk. Market makers also borrow for working capital purposes. Lenders include asset managers, family offices and high-net-worth individuals with a long-term view of the asset class that want to earn additional yield.

Loan Origination and Settlement on Public Blockchains in 2018

Three of the four decentralized lending protocols saw their first loan transaction occur in 2018. However, origination of loans on public blockchains began to gather momentum in December 2017 with the launch of DAI, a stablecoin by MakerDAO pegged to the U.S. dollar. Unlike MakerDAO, all other protocols were designed to facilitate the borrowing and lending of existing Ethereum-based assets. Ethereum is a public blockchain used by decentralized lending protocols to settle transactions.

Both 2017 and 2018 were busy years for top-tier venture capital firms making investments in the decentralized lending infrastructure. Andreessen Horowitz, Polychain Capital and Coinbase were the most active investors in the decentralized lending infrastructure buildout and have investment exposure to most of these protocols. Dharma and dYdX share a common connection to Coinbase, in that both were founded by former employees. Moreover, Coinbase is also an investor in Compound. Disclosure: Polychain Capital is an investor in Bloqboard, the author of this report.

In 2018, originations via the four protocols totaled $251.4M. Volume on MakerDAO accounted for approximately 81.4% of all originations. MakerDAO was the first of the four protocols to launch (December 2017) and the DAI stablecoin was the most heavily borrowed digital asset.

Originations refer to the sum of borrows and loans. Borrows and loans are not always balanced and are dependent on the protocol they are routed through.

Dharma and dYdX are both peer-to-peer protocols where borrowers and lenders are matched. As such, for both of these protocols, the volume of borrows and loans are equivalent.

In the case of MakerDAO, a borrower is not matched with a lender. The borrower collateralizes a loan with digital assets (e.g., ETH) and borrows DAI. No loans are originated on this protocol, only borrows. 

Finally, in the case of Compound, borrowers and lenders transact via liquidity pools, rather than being matched to a counterparty. Borrows and loans via the Compound protocol for 2018 were approximately $6M and $37M, respectively.

Secured Lending via Open Protocols: Industry Analysis

The volume of active loans outstanding rose dramatically in 2018, reaching $71M as of December 31, 2018. As of December 31, 2017, this figure stood at $6M, a 1,083% increase. This rise is attributable to increased public awareness of lending via decentralized protocols in 2018, something which was not present in December 2017, when the first protocol launched.

Almost 97% of active loans outstanding as of December 31, 2018, were routed via the MakerDAO protocol due to the substantial demand for the DAI stablecoin. The fact that MakerDAO was the only protocol that was operating throughout the whole year contributed to its leading position. The Compound protocol launched at the end of September and saw active loans outstanding gain traction in Q4. Compound was a distant second, with active loans outstanding accounting for a little over 3% at the end of 2018.

Borrows Overview

Over $212M of borrows across 22,360 draws were routed through decentralized lending protocols in 2018. MakerDAO had 96% share of all borrows with over $204M flowing through the protocol; Compound had $6.4M, approximately 3% of all borrows.

Borrows origination accelerated in Q3 and Q4 of 2018 due to the fact that Compound and dYdX protocols emerged around this time to provide new borrowing possibilities. In addition to this, the overall decline in prices of digital assets in Q3 and Q4 prompted traders to borrow to open short or leveraged long positions.

DAI was the most borrowed asset in 2018 accounting for almost 98% or $207M of all borrowed assets. The second most borrowed asset was WETH (Wrapped ETH) with nearly 2% or $4M of all borrowed assets in 2018.

Some insights into the borrows composition by protocol are presented below.

The lowest APR to borrow DAI, the most demanded asset, was available through the MakerDAO protocol. APR throughout the year was set at 0.5% and 2.5%. Interest rates to borrow via MakerDAO are determined by a vote from MKR token holders rather than directly by lenders. WETH, the second most borrowed asset, could be borrowed at a little over 6% APR via the Compound protocol in 2018.

Loans Overview

Lenders lent out almost $39M worth of digital assets across 6,164 loans via decentralized lending protocols in 2018. The majority of volume was routed through the Compound protocol. The protocol had a 96% share of all loans or over $37M flowing through it; $1.3M or a little over 3.4% of all loans were routed through the dYdX protocol.    

Loans origination took off at the end of Q3 and the beginning of Q4 in 2018 because Compound and dYdX protocols emerged to provide new lending opportunities.

WETH (Wrapped ETH) was the most lent out asset in 2018, accounting for over 36% or $14M of all loaned assets. The second most lent out asset was DAI, with a little over 29% or $11M of all loaned assets in 2018. The majority of DAI and WETH loans were routed through the Compound protocol.  

Some insights into the loans composition by protocol are presented below. Surprising here is the share of REP loans (26% or $9.7M) relative to the borrowed share of REP (0.8% or $49K) on the Compound protocol. Since interest rates to loan REP have been close to 0%, this suggests that lenders had supplied significant amount of REP to borrow other assets on Compound.  

The highest APR to lend out the most in-demand asset, DAI, occurred via Dharma and dYdX protocols. Median APRs to lend DAI throughout the year were 30% and 8.5% to the respective protocols. The second most lent out asset, WETH, was lent at 13% and 11% APR via Dharma and dYdX, respectively.

Collateral Ratio

Collateral ratio is the most important metric to gauge the safety of lenders in secured lending, and in some cases, that of the underlying protocol. The Compound protocol had the highest collateral ratio at year-end. The reason for this is that lenders can lend to the Compound protocol without waiting for the borrower to match. This was appealing to lenders and, as a result, created disproportional demand to lend out digital assets. MakerDAO had the second highest collateral ratio at 380% on December 31, 2018. Dharma and dYdX had collateral ratios of 123% and 167%, respectively.

Open Lending Protocols: Snapshot

Compound Protocol

Leadership team: Robert Leshner (CEO and co-founder), Geoffrey Hayes (CTO and co-founder).

The first borrowed asset on the Compound protocol was WETH (Wrapped ETH), which occurred on September 26, 2018. On Compound, interest rates adjust algorithmically, based on supply and demand for borrows and loans. Borrows and loans have no fixed maturity and remain outstanding so long as a borrower’s collateral ratio remains at or above 150%. At the end of December 2018, Compound was the only protocol which allowed borrowers to collateralize a loan with multiple assets. Disclosure: some Bloqboard originations are routed via Compound liquidity pools.

Compound
Originations$43,852,521
Loans$37,414,829
Borrows$6,437,692
Top Originating Platforms Compound

Bloqboard
Collateral Supplied (same as Loans)$37,414,829
Active Loans Outstanding (as of December 31, 2018)$2,264,942
Number of Borrows739
Average Borrow Amount$8,711
Protocol Collateral Ratio (as of December 31, 2018)738%
Interest Rate TypeVariable
Most Borrowed Asset (Volume)WETH ($3,169,555)
Largest Borrow5,000 WETH ($616,850)
Largest Loan339,308 REP ($2,741,610)
Volume of Borrows Liquidated $42,295
Borrows Liquidation Ratio0.66%
Liquidation Penalty5%

Data source: Ethereum blockchain.
Note:
1) All loans with a value of less than $1 have been excluded.
2) Digital asset prices are historical unless otherwise specified.
3) Borrows liquidation ratio = volume of borrows liquidated divided by borrows.

Dharma Protocol

Leadership team: Nadav Hollander (CEO and co-founder), Brendan Forster (COO and co-founder).

The first borrowed asset on the Dharma protocol was DAI, which occurred on May 22, 2018. Dharma is a peer-to-peer lending protocol where borrowers and lenders can request and offer loans. Borrowers can share loan requests and lenders — offers to lend privately or discover them on relayers (bulletin boards). Disclosure: Bloqboard is a relayer for the Dharma protocol.

Dharma
Originations$315,832
Loans$157,916
Borrows$157,916
Top Originating Platforms Bloqboard
Collateral Supplied$227,647
Active Loans Outstanding (as of December 31, 2018)$4,306
Number of Borrows379
Average Borrow Amount$417
Protocol Collateral Ratio (as of December 31, 2018)123%
Interest Rate TypeFixed
Most Borrowed Asset (Volume)WETH ($84,433)
Largest Borrow104 WETH ($46,649)
Largest Loan (same as Borrow)104 WETH ($46,649)
Volume of Borrows Liquidated $11,115
Borrows Liquidation Ratio7.04%
Liquidation Penalty

Data source: Loanscan.io, Ethereum blockchain.
Note:
1) All loans with a value of less than $1 have been excluded.
2) Digital asset prices are historical unless otherwise specified.
3) Borrows liquidation ratio = volume of borrows liquidated divided by borrows.

dYdX Protocol

Leadership team: Antonio Juliano (Founder), Zhuoxun Yin (Head of Operations).

The first borrowed asset on the dYdX protocol was WETH (Wrapped ETH), which occurred on September 28, 2018. The dYdX protocol is designed to facilitate decentralized margin trading and derivatives. The team also launched Expo, a portal that facilitates margin trading and short selling of ETH while abstracting away the underlying protocol.

dYdX
Originations$2,627,709
Loans$1,313,854
Borrows$1,313,854
Top Originating Platforms Expo
Collateral Supplied$2,348,389
Active Loans Outstanding (as of December 31, 2018)$101,786
Number of Borrows1,530
Average Borrow Amount$859
Protocol Collateral Ratio (as of December 31, 2018)167%
Interest Rate TypeFixed
Most Borrowed Asset (Volume)WETH ($793,932)
Largest Borrow264 WETH ($29,002)
Largest Loan (same as Borrow)264 WETH ($29,002)
Volume of Borrows Liquidated $310
Borrows Liquidation Ratio0.02%
Liquidation Penalty

Data source: Ethereum blockchain. 
Note:
1) All loans with a value of less than $1 have been excluded.
2) Digital asset prices are historical, unless otherwise specified.
3) Borrows liquidation ratio = volume of borrows liquidated divided by borrows.

MakerDAO Protocol

Leadership team: Rune Christensen (CEO and founder), Andy Milenius (CTO), Steven Becker (President and COO).

The MakerDAO protocol launched on December 18, 2017. This current iteration of MakerDAO is based around SCD (Single Collateral DAI). In the current version of the protocol, borrowers supply ETH as collateral to a CDP (Collateralized Debt Position) and borrow DAI, a digital asset attempting to retain a 1:1 peg to the U.S. dollar. Disclosure: some Bloqboard originations are routed via the MakerDAO protocol.

MakerDAO
Originations$204,620,178
Loans
Borrows$204,620,178
Top Originating Platforms CDP Portal
Collateral Supplied$661,893,841
Active Loans Outstanding (as of December 31, 2018)$69,432,332
Number of Borrows19,712
Average Borrow Amount$10,380
Protocol Collateral Ratio (as of December 31, 2018)380%
Interest Rate TypeVariable
Most Borrowed Asset (Volume)DAI ($204,620,178)
Largest Borrow2,499,750 DAI ($2,499,750)
Largest Loan
Volume of Borrows Liquidated $52,082,062
Borrows Liquidation Ratio25.45%
Liquidation Penalty13%

Data source: Loanscan.io, Ethereum blockchain.
Note:
1) All loans with a value of less than $1 have been excluded.
2) Digital asset prices are historical unless otherwise specified.
3) Borrows liquidation ratio = volume of borrows liquidated divided by borrows.
4) MakerDAO has a high liquidation ratio because the whole borrow gets liquidated if collateral drops below 150%. On Compound, only the necessary portion of the borrow gets liquidated to bring the borrow back up to 150%.

Open Lending Protocols: Review 2018

Compound Dharma dYdX MakerDAOTotal
Originations$43,852,521$315,832$2,627,709$204,620,178$251,416,239
Loans$37,414,829$157,916$1,313,854$38,886,599
Borrows$6,437,692$157,916$1,313,854$204,620,178$212,529,640
Top Originating Platforms Compound

Bloqboard
Bloqboard Expo CDP Portal
Collateral Supplied$37,414,829$227,647$2,348,389$661,893,841$701,884,706
Active Loans Outstanding
(as of December 31, 2018)
$2,264,942$4,306$101,786$69,432,332$71,803,366
Number of Borrows7393791,53019,71222,360
Average Borrow Amount$8,711$417$859$10,380
Protocol Collateral Ratio
(as of December 31, 2018)
738%123%167%398%
Interest Rate TypeVariableFixedFixedVariable
Most Borrowed Asset (Volume)WETH
($3,169,555)
WETH
($84,433)
WETH
($793,932)
DAI
($204,620,178)
Second Most
Borrowed Asset (Volume)
DAI
($2,466,014)
DAI
($37,642)
DAI
($519,922)
Third Most
Borrowed Asset (Volume)
ZRX
($607,493)
ZRX
($22,461)
Largest Borrow5,000 WETH
($616,850)
104 WETH
($46,649)
264 WETH
($29,002)
2,499,75 DAI
($2,499,750)
Second Largest Borrow3,000 WETH
($444,660)
12,500 DAI
($12,500)
236 WETH
($26,602)
1,875,000 DAI
($1,875,000)
Third Largest Borrow3,000 WETH
($392,220)
12,000 DAI
($12,000)
237 WETH
($26,092)
1,700,000 DAI
($1,700,000)
Largest Loan339,308 REP
($2,741,610)
104 WETH
($46,649)
264 WETH
($29,002)
Number of
Borrows Liquidated
3565721,6172,032
Volume of
Borrows Liquidated
$42,295$11,115$310$52,082,062$52,135,781
Borrows Liquidation Ratio0.66%7.04%0.02%25.45%
Liquidation Penalty5%13%

Data source: Loanscan.io, Ethereum blockchain.
Note:
1) All loans with a value of less than $1 have been excluded.
2) Digital asset prices are historical unless otherwise specified.
3) Borrows liquidation ratio = volume of borrows liquidated divided by borrows.
4) MakerDAO has a high liquidation ratio because the whole borrow gets liquidated if the collateral drops below 150%. On Compound, only the necessary portion of the borrow gets liquidated to bring the borrow back up to 150%.

Conclusion

Over the course of 2018, lending and borrowing on open protocols grew to become the central theme within Decentralized Finance, with the four major lending protocols cumulatively processing over $251M in originations. While the rise of loans and borrows that were routed via open protocols and settled on public blockchains may seem rapid, the protocol developers and platform operators are still in the midst of building out the infrastructure and integrations with the broader ecosystem.

We anticipate that these areas will be addressed over the coming year. We also expect to see new assets such as WBTC (Wrapped BTC), other top Ethereum-based assets and a greater variety of stablecoins to be routed via these protocols. A variety of loan originators should emerge in 2019 to address different segments and jurisdictions of borrowers and lenders, including the anticipated release of Dharma Lever in Q1. We believe that Decentralized Finance will become a core value proposition for public blockchains in 2019.


Bloqboard | Research
research@bloqboard.com

Disclosures

This report has been prepared solely for informative purposes and should not be the basis for making investment decisions or be construed as a recommendation to engage in investment transactions or be taken to suggest an investment strategy in respect of any financial instruments or the issuers thereof. The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of the date of publication, and are subject to change without notice. Borrowing and lending of digital assets on open protocols involves significant risks including technical risks of public blockchains, technical risks of open protocols, price volatility and illiquidity and may not be suitable for the majority of market participants. Bloqboard does not hold any positions in digital asset loans and borrows, but in the future may hold positions in assets and loans that are the subject of this report. In addition, employees and other associated persons may trade and hold positions now or in the future in the assets that are the subject of this report. As a result, Bloqboard, its affiliates, and its employees or other associated persons may be subject to certain conflicts of interest in connection with the provision of this report. Bloqboard will not be liable whatsoever for any direct or consequential loss arising from the use of this information.