On-Chain Earning: The Decentralised Future of Lending & Borrowing

It’s been a defining couple of years for the crypto lending and borrowing sector, marked by technical developments, an influx of retail and institutional capital, and TVL growth in the billions.

Centralised lenders such as Celsius Network and BlockFi were a major focus of the 2021-2022 cycle, with the allure of double or even triple-digit yields catching the attention of many investors. However, the downfall of these platforms caused things to come to an abrupt halt, leaving the industry to face a reality check.  

Fortunately, the future is looking bright: 2023 is a new year, and investor focus has shifted back to where it should be – DeFi!

Before we look at how decentralised solutions offer a more sustainable, risk-averse way to earn yield, let’s break down what caused these collapses and the things to avoid moving forward.

The Downfall of Centralised Lending

Centralised crypto lending, a once hyped financial frontier, faced significant setbacks over the past couple of years following the collapse of major platforms. 

Celsius Network: High Yields, High Risks

Celsius Network operated as a custodial asset manager, offering regulated loans and yield opportunities of over 20% APR. Users deposited coins and tokens like $BTC and $ETH, which Celsius then used for other investments and lending activities​​.

The downfall of Celsius Network began with its use of risky on-chain leverage and over-exposure to volatile markets.

Millions of dollars of Celsius funds and customer deposits were held on the Terra Blockchain. When Terra’s token, $LUNA, collapsed and its algorithmic stablecoin, terraUST, de-pegged, this resulted in a massive devaluation of Celcius’ assets. 

In June 2022, the company froze withdrawals, swaps, and transfers, citing extreme market conditions

This situation, compounded by layoffs and a lawsuit alleging market manipulation, led to Celsius filing for Chapter 11 bankruptcy in July 2022, revealing a $1.3 billion hole in its balance sheet.​

BlockFi: Mismanagement Meets Volatility

BlockFi’s model revolved around interest-earning accounts and crypto-backed loans. It allowed users to earn interest on their crypto holdings or borrow USD against their deposited assets. 

The platform promised ~10% annual earnings on deposits and offered loans with a maximum initial Loan-To-Value (LTV) ratio of 50%.

BlockFi’s collapse was primarily driven by mismanagement and exposure to market risks. The company’s downfall was accelerated by the fall of crypto exchange FTX and its sister trading firm, Alameda Research. The company had significant exposure to these firms, totalling around $1.2 billion, and filed for bankruptcy in November 2022. 

While legal efforts to return customer assets from bankrupt firms such as FTX, Alameda, and Three Arrow Capital have been initiated, recoveries and timeframes remain uncertain.

Implications for the Crypto Lending and Borrowing Sector

These cases highlight the risks of centralised crypto lending: overreliance on market stability, counterparty risk, and a lack of transparency. 

This also underlines the importance of risk management and operational transparency in the lending and borrowing sector – transparency offered by decentralised alternatives.

The Advantages of Decentralisation

Decentralised lending and borrowing platforms offer distinct advantages that address the shortcomings of centralised counterparts, like Celsius and BlockFi.

DeFi’s core benefits lie in its inherent design and operational framework:

  1. Transparency and Trust: Decentralised protocols offer transparent, immutable transactions, enabling users to easily track their funds and understand how they’re being used.
  2. Self-Custody and User Control: Web3 wallets and their self-custodial design allow users to maintain total control over their assets, reducing counterparty risk and placing ownership and responsibility directly in the hands of the user.
  3. Programmable and Auditable: Automation through smart contracts enhances efficiency and reduces human error. When using a new protocol, ensure its smart contracts are audited and comprehensively tested by reputable firms and a trusted community of users (Minterest just completed its 7th audit by Zokyo.)
  4. Market Accessibility: DeFi lending and borrowing platforms offer a more inclusive model, opening the door to a broader range of participants from varied financial backgrounds.
  5. Built for Stability and Security: By not taking on debt or engaging in high-risk investment strategies, DeFi lending and borrowing protocols aren’t prone to bankruptcy and cannot misuse customer deposits. This approach, combined with over-collateralisation and algorithm-driven interest rates, ensures solvency even during periods of extreme market volatility.

Minterest: A Leading Solution in DeFi Lending and Borrowing

Minterest is innovating and advancing DeFi lending and borrowing by offering users a platform with high yields, unparalleled smart contract security, and advanced protocol features. Let’s take a look at how it works and the benefits it offers users.

Real Yield Model

Unlike the often misleading high-yield promises of centralised platforms, Minterest offers a sustainable yield generation strategy.

The model redistributes 100% of protocol fees to users. This incentives strategy challenges the cycle of rotating and mercenary capital and growing protocol TVL over the long term.

Buyback Mechanism

At Minterest’s core is the Buyback Mechanism, which transforms fee value into $MINTY tokens for governance participants. 

The system dynamically adjusts the distribution based on each user’s contribution, enhancing rewards through loyalty bonuses and compounding future rewards.

Solvency Engine

Minterest’s Solvency Engine offers an innovative approach to liquidations. The engine continually monitors all borrowers for solvency using real-time on-chain price data, ensuring that liquidations are neither excessive nor repetitive. 

This eliminates the need for substantial discounts to lure third-party liquidators and creates a cost-effective process that aligns with the interests of the protocol and its users.

Cross-Chain Integrations

Minterest’s integration with Swing and LayerZero brings a new era of multi-chain lending and borrowing. 

Swing’s bridge aggregator provides a unified interface for optimal cross-chain transactions, while LayerZero’s omnichain protocol connects with any blockchain, ensuring versatility and long-lasting utility. 
These integrations will be available in Phase 3 of Minterest’s Roadmap.

Comprehensive Security Audits

Minterest’s commitment to security is evident through its comprehensive and ongoing auditing process – recently passing a fourth audit with Zokyo.

The Future of Crypto Lending and Borrowing

Crypto lending and borrowing is undergoing a transformative shift. The downfall of major centralised platforms and the loss of billions of dollars have laid bare the risks and limitations of CeFi models. 

Decentralised alternatives offer transparency, user autonomy, and operational resilience. Minterest builds upon this with features like buybacks, real yield and cross-chain integrations. 

The end goal is to offer not just a quick-fix solution to centralised models, but to build DeFi’s highest-yielding, most secure, and user-centric lending and borrowing protocol.

To learn more about what Minterest is building and how you can get involved, check out the roadmap, join the $MINTY community on Twitter, and drop by the Telegram or Discord channel for a chat!

23, November 2023