From the barter system to currencies, from fixed deposits to cryptocurrencies, the evolution of the economy and its associated avenues has been rapid. Unlike them, the lending market has been quiet with pretty limited developments and changes. However, one change that has the potential to revolutionize the lending and borrowing space is crypto lending.
Speaking of it, we, at Coinfomania, connected with Anshul Dhir, the Cofounder & COO of EasyFi — a layer-2 lending platform built on the Polygon (MATIC) blockchain. He spoke of the importance of automated market makers in the current DeFi landscape. We have received valuable insights into how DeFi might be shaping up in the coming years.
Q1. Decentralized lending has been growing in the past few years. With relevant lending protocols also coming to life, what are the facets that make DeFi-based lending stand apart from traditional systems?
Convenience. Trust. Transparency.
If you ask me to pinpoint three reasons why decentralized lending will be the future, there you go. First off, DeFi brings a whole new level of convenience and accessibility to the table which is not totally absent in traditional banking, but that’s the starting point. Anyone with a computer or smartphone, and internet access can effectively make use of DeFi products. On the other end, with traditional systems, there is a lot of unnecessary commutes, paperwork, and time wasted for essentially the same service.
Similarly, there is an air of mistrust prevailing around the traditional banking system. Your money in the bank is only as safe as the bank or the government wants it to be. And this is why the younger population is turning towards technology (FinTech firms). They are willing to place their trust in algorithms and tech that offers self custody of money & related assets.
Adding to the trust factor is the presence of transparency in DeFi lending. The on-chain data is immutable, so there exists no chance for the records to be tampered with. However, after you deposit your money in a bank, you have no clue as to how it is being utilized. Championing transparency is turning into a priority for most financial products. And that is good news for all of us.
Q2. The growth of automated market makers (AMMs) in DeFi is pretty evident. However, since the concept is fairly new, please explain how they work. Also, how can users at the grassroots level leverage it?
The growth of automated market makers is a testament to the growth of trading volume, tokens, and utility in the crypto market. While growth is great for DeFi, sustainability and ease of transaction pose a challenge. This is where AMMs come into play.
Decentralized exchanges (DEXs), before AMMs, were limited to a great extent by lack of liquidity. Why? Because both the buyer and the seller had to turn up together, quote the same price, and only then would the transaction take place. This is a slow, tedious process as finding people to trade regularly is difficult.
Currently, AMM platforms provide a liquidity pool i.e. a pool of tokens against which users can trade. This setup allows users to trade without needing to wait for a seller or a buyer, enabling quicker transactions. The pricing of tokens available in the pool is determined by a mathematical ratio. If there is a discrepancy between the asking price and the market (pool) price, arbitrageurs fill the price gap.
Using AMMs, users can profit in two ways. One is by providing liquidity, and the other is by arbitrage trading.
Providing liquidity to the liquidity pool does not have any major prerequisites. Any user can add their funds to the pool and earn incentives for doing so. It is now popularly known as yield farming.
Meanwhile, arbitrageurs make money by maintaining the price equilibrium in the liquidity pools. In networks like Ethereum, congestion and gas fees are high, so a huge initial capital is a must to conduct arbitrage. Since EasyFi is a layer-2 platform with nearly a fraction of the gas fees, profitability is high for arbitrageurs. Likewise, there is no need for big capital, making it a viable opportunity for retail traders.
Q3. Solving problems is at the crux of any new initiative or project. Likewise, what problems is EasyFi looking to solve?
I truly believe crypto lending needs a potion of efficiency. Apart from that, it is pretty straightforward, any hassle or bottleneck in decentralized lending, we consider them a potential challenge for us.
However, at the moment, we have clearly defined four concrete issues. To start with, there are concerns of slow transactions and high gas fees of the Ethereum blockchain. The frequently congested network is compromising its feasibility for users. We feel it is imperative to build alternatives and deload the Ethereum network. This very thought drove us to use layer-2 integration with Polygon (MATIC).
Furthermore, decentralized lending was plagued with a high collateralization ratio where borrowers had to stake nearly 200% of their assets to avail of loans. Again, this had an adverse impact on the market. We observed the supply of funds being strong, but there was negligible demand. To be fair, there were minimal incentives for users to borrow in a decentralized system. This is why we wanted to provide both under-collateralized loans and micro-lending to spur demand in the market. With this, even retail users can leverage crypto lending.
An often overlooked aspect of the crypto lending space was the lack of credibility benchmarks. Equipping ourselves with TrustScore, we have a system to assess the creditworthiness of a user which makes it easy to understand a borrower’s reputation before lending.
Q4. Several crypto lending platforms have lately been a favorite hunting ground for hackers. EasyFi has also had its fair share of security issues. Can you please illustrate the measures your team has taken to enhance the security of EasyFi?
First of all, it was devastating for us to see our hard work being turned into a joke by a perpetrator. After the postmortem, we compensated our users to the full extent of the losses.
But for us, it was about gaining back the trust and belief amongst our users.
So, right after the attack, we went back to the drawing board and chalked out a comprehensive plan of action regarding security enhancements. From securing our smart contracts to establishing company-wide security practices, we ensured all the bases were covered.
Also, to further secure our protocol, we have partnered with Halborn Security, a market leader in cybersecurity that specializes in full-stack security for blockchain firms. Alongside a complete audit, we are also engaging with them in continuity to help secure our platform to the T.
Q5. How does 2021-22 and beyond look for the DeFi space? And how is EasyFi working towards embracing the potential changes?
Obviously, more users, digital assets, and products shall arrive in the market. What shall define the growth of DeFi is how the market decouples speculation and the price of the assets. For this to happen, user education is important. If the value of an asset is truly driven by its fundamentals, I believe there will be more stability in the DeFi space.
Rightly why we are also focusing on diversifying our products and services to upkeep the fundamental values of the platform. To make crypto lending as seamless as possible, we are building chains to integrate different blockchain networks. Currently, we have integrated our platforms with three other major ones i.e. Binance Smart Chain (BSC), Polygon, and Ethereum.
By championing interoperability, we will be enabling 24/7 liquidity across the ecosystem. This, I hope, furthers into an inclusive network for all assets to be traded with low transaction time and fees.
The DeFi engine is now gaining steam and with proper infrastructure, and is bound to disrupt several traditional systems. With more institutions recognizing the potential of blockchain and DeFi and adopting them, the ripple effect has been initiated. I believe EasyFi will be a catalyst for this ripple effect.