The team at global Fintech Circle, which will go public in a $4.5 billion SPAC deal, notes that the promise of decentralized finance (DeFi) is to transform or fundamentally improve financial services by offering greater transparency, security, and community governance by leveraging blockchain or distributed ledger tech (DLT) infrastructures.
Circle writes in a blog post that lending platforms have been dominating the DeFi space, as they aim to simulate conventional borrowing and lending services while “relying on decentralized networks.” As of June 2021, more than $26 billion had been locked in various DeFi lending protocols, almost half of the total TVL figure of all DeFi initiatives at over $50 billion.
While explaining what DeFi lending may offer, Circle’s blog notes that conceptually, there’s no major difference between DeFi lending and traditional lending processes. The blockchain-focused firm points out that lenders offer funds to borrowers in exchange for an agreed-upon interest rate.
But the major differences “manifest in the way these processes work,” Circle adds while noting that in traditional finance, loans can be facilitated by banking institutions and other financial institutions. Meanwhile, in DeFi, all activity “routes through decentralized protocols and there are no intermediaries involved,” the company’s blog states.
It also notes that unlike traditional banking, DeFi platforms are “borderless and can be used by anyone.”
As mentioned in the post from Circle:
“With DeFi lending, borrowers and lenders have total control over their funds as all processes are conducted by smart contracts, which are self-executing programs running on blockchain networks.”
Lenders looking to take advantage of competitive interest rates on DeFi protocols are required to deposit their virtual currency, like USDC, into “autonomous” lending pools. This is carried out by sending their tokens to a smart contract, “making them available to other users for borrowing,” the Circle team explains.
They also noted that in return, the smart contract “issues interest tokens that are distributed automatically to the user and can be redeemed at a later date to access the deposited assets.”
“One distinct aspect of DeFi lending is that the majority of loans are overcollateralized, i.e., borrowers have to provide a guarantee that is greater than the loan value. This happens because most cryptocurrencies used as collateral are volatile, while there is no credit score or identity verification. Despite this, easy access to funds is an obvious advantage that attracts many users.”
They further noted:
“All in all, DeFi lending benefits both lenders and borrowers. The latter can secure loans conveniently, while the former can earn interest rates that are often higher than traditional rates offering a potential source of passive income.”
Stablecoins play a key role in DeFi lending protocols since they are widely used to reduce or mitigate volatility risks and make it “more convenient for both lenders and borrowers to better manage their financial operations on DeFi protocols.”
USDC has been the fastest-growing dollar-pegged stablecoins, becoming the eighth-largest crypto as of July 15, 2021, with a market capitalization of more than $25 billion.
USDC is on its way to dominate the DeFi space since it maintains a fairly stable peg to the USD, which is backed by regulated institutions – Circle and Coinbase – and is also “chain agnostic (available across multiple different blockchains and not connected to any particular DeFi protocol).”
Available data reveals that USDC was the fastest-growing and “most popular” stablecoin across DeFi apps during Q1 2021. For example, the TVL of USDC in DeFi protocols has surged frome below $50 million to more than $1.5 billion as of July 15, 2021.
Circle’s blog further noted that even though USDC is a multi-chain token, the “greatest share of its circulating supply is based on Ethereum, which makes it a convenient choice for most DeFi lending protocols, as they also rely on Ethereum smart contracts.”
Circle further revealed that USDC has managed “to remain at the top of the DeFi space thanks to its near-instant settlement speed, a high degree of security, and a major focus on transparency and regulatory compliance.”
The firm’s blog post added that Circle’s stablecoin shows “the smallest deviations from the $1 price target among the largest stablecoins according to data from Flipside Crypto, which makes it the best option for lenders looking for stability.”
The company added:
“Lenders can deposit USDC to earn interest on their capital. USDC holders can lend their tokens on DeFi lending protocols, such as Aave and Compound. On Compound, USDC is the most deposited token, accounting for more than 25% of the total value locked in the protocol.”
On Aave, USDC is “by far the most deposited and borrowed token, white a total market size of over $4.2 billion as of July 15, 2021.”
For more insights from Circle, check here.