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What are the risks of making loans with cryptocurrencies?


Like any loan, cryptocurrency loans involve risks. But are they enough to dismiss the idea? Discover the response of some founders of various cryptocurrency lending platforms.

Decentralized financial loans allow users to lend their crypto assets in exchange for interest-bearing returns. The nature of crypto assets allows anyone to lend their assets on different platforms at minimal cost.

To deepen this, we have summarized part of what was discussed during the Indonesia Blockchain Week 2020. In this session, Justin Sun (Tron), Wei Zhou (Binance), John Izaguirre (Ontology), Stani Kulechov (Aave), Brian Condenanza (Bidao) participated. , David Truong (Aave) and Vishakh (Cryptonomic). This panel was moderated by Wei Zhou.

The risks involved with cryptocurrency loans

In this section of the panel, the experts talked about the risks of lending money through cryptocurrencies. Likewise, they were asked how they would face this risk.

The first to respond was Kulechov. He commented that it is very common that in these crypto loan systems you are asked for a deposit that can be taken in case the loan cannot be repaid.

He also added that they have risk frameworks that consider each token individually, since each of them has different and own risks. In addition, they have different risks considered as market risk, liquidity risk, among others.

Market risk applies in case the token is volatile, while liquididex applies in terms of how quickly liquidity can be achieved at a time when markets are going down.

The funny thing is when we have events like Black Thursday. I think those events will come in the future, but the answer to them depends on what risk framework you are applyingKulechov commented.

For his part, Condenanza said that “there are risks in terms of being the counterpart of the loan, but for that we use collateral.”

However, he noted that his short-term concern is the rapid growth of DeFi. More than anything, what worries him is that this growth is so fast that it could turn into a DeFi bubble.

“I think it is good that it goes fast, but it is also worrying and makes you think that there is something risky about it. The loan with cryptocurrencies is not the safest thing, but I think it is a good risk in terms of the returns that you can obtain, “he concluded.

This time we bring you the most relevant information on the risks involved in peer-to-peer cryptocurrency loans, according to the experts present at Indonesia Blockchain Week.
This time we bring you the most relevant information on the risks involved in peer-to-peer cryptocurrency loans, according to the experts present at Indonesia Blockchain Week.

What can be improved?

In this part of the panel a word that came up repeatedly was education or, rather, the lack of it. For Condenanza there is a significant risk considering that many people do not know how to use cryptocurrencies or how to protect them properly.

However, he assured that it is one of the first steps within this space. In his opinion, lending cryptocurrencies to earn interest is one of the most basic ways to participate in the crypto space, although he acknowledged that it is still risky. Thus his final advice was “balance your risks, what you want to get and what you could use”.

Finally, he highlighted that everything is focused on the user experience. “A good interface that people can use is always necessary.” In his opinion, people in the crypto world sometimes make things very complicated even for very simple concepts.

On unfinished business, Sun highlighted the issue of scalability. “I think that if some competitive protocols offer more scalability in blockchain we can consume no matter how much liquidity you have”.

Regulation in the cryptocurrency lending space

Vishakh considers that “there is going to be a lot of centralization, because that’s how things tend to be. There will be all kinds of rules and legislation”. However, he added that in the end blockchain innovation is permissionless, and that governments can’t just cover it all. “It is up to the companies that launch protocols, to remove secure protocols”.

Blockchains already use tools to reduce technical risk, such as formal verifications and functional programming. However, this does not prevent important regulations from emerging.

Vishakh considers that “after this period everyone will be more educated and lean more towards instruments and platforms that prove to be technically sufficient”.

Next, Izaguirre summarized the problems in two things that he not only sees in Blockchain or crypto-asset loans, but in new technologies in general. These are lack of education and lack of smart regulation.

According to him, these “they interconnect very well because the political parties, the people, that regulate the national or supranational economy don’t really know how to buy a BTC”. Still, these people have the right to say how exchanges or protocols have to develop the new industry. All this without the correct knowledge.

Lack of education translates into a lack of smart regulation.

John Izaguirre, Ontology

Our responsibility as professionals working in this area is to really educate people. But give them the right tools. I would also say that it is up to us to create a platform that is quite accessible for people in general to learn and educate themselves, ”stated Izaguirre.

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