“Stepping into DeFi Lending”

Paul Holland

October 7, 2019

DeFi, and specifically DeFi lending, has been called the “killer app” of crypto because of its value proposition: to earn high returns on stable value.  

Balaji S. Srinivasan, former CTO of Coinbase and GP of a16z tweeted recently,  “Interest is shaping up to be the killer app for #defi. Easy to understand, lower volatility risk due to use of stablecoins, and significantly higher than normal bank rates.”

Money markets, index funds, and other slow-growth investment vehicles are popular with low risk investors due to their apparent safety and consistent returns. $3.3 trillion dollars are invested in money market funds in the US alone.  DeFi lending while still unfamiliar to most, offers a similar system but with much higher returns, ranging from 8-18%, compared to returns of 2-3% in money market funds.

This means that the cryptocurrency space can now offer something to investors that looks and feels very similar to what they are familiar with. Park your funds in a lending platform and they will earn interest just like a more traditional investment. 

Other crypto assets, such as Bitcoin, require a steep learning curve as well as a risk profile that does not fit many participants in traditional markets.  DeFi, on the other hand, is similar to what they know and therefore has a better chance of encouraging new users to step in. DeFi also requires far less bandwidth to understand the value proposition.

Barriers are still quite high

Going from dollars in the bank to dollars on a DeFi lending platform still involves a number of steps and a mental shift.  The DeFi curious have reported that they are interested in using it but just have not devoted bandwidth to it, potentially due to the fear of the unknown. Yet when users have been guided step-by-step by someone they trust, they report it being a lot easier than they expected. 

I just set it and forget it.  I put my DAI across three lending platforms and just let it sit there earning interest.

I attended a webinar by the DeFi Nation Facebook group that walked us through how to earn the yearly returns.  It was super interesting and a lot easier than I expected. To see it visually, step by step, was massively enlightening!

I kept hearing about ‘DeFi’ and had intended to check it out.  It was not until I had coffee with a friend who was into it that I got in because he showed me how.  It was really easy to do but only because someone answered my questions.

It is this latter point–answering people’s questions–that signals a key issue with the adoption of Defi and cryptocurrency in general: there are so many decision points and few trusted sources to rely on, so reassurance is important.  These quotes show just how easy it is to actually do, but how difficult it is perceived to be.

This “trust gap” must be bridged either by a friend or by doing significant research, which requires a lot of mental bandwidth.  The irony is that the 2008 financial crisis actually did see money market funds trading at under $1, meaning that there is a risk associated with them, but the status quo seems to reassure enough people.  

DeFi Lending is the Gateway

Taking those first steps into the DeFi world, via a lending platform, is really just the beginning. Once people are over the hurdle and using DeFi lending to earn returns, they will have access to a growing suite of financial tools powered by the true hero of DeFi, DAI, the stable coin that is leading the way to truly decentralized money. 

While the industry still has a lot of work to do with the user experience, DeFi lending will continue to draw attention and bring new users to the space.

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About the author
Paul Holland

Contributing Author

Paul Holland is the CMO of Mosendo, where they’re making peer-to-peer electronic cash a reality. Paul’s experience includes traditional banking along with multi-million dollar marketing campaigns for clients ranging from high profile influencers to multi-national corporations.

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