Lending is one of the oldest economic activities in human society. Ancient loans took the form of pawnshops where loans were granted against collateral deemed valuable. Early forms of credit arose when resource owners lent production materials to laborers with an expectation of repayment in goods. If the borrower failed to repay, their family could be enslaved.
Today, credit is essential to businesses and the entire economy as it allows economic units to raise operational capital without diluting equity. This leverage effect leads to increased investment, capital expenditure, and consumption, and eventually rapid economic growth.
In TradFi, credit is typically divided into secured and unsecured credit. A mortgage is a secured loan since the loan is secured by property. Credit cards are an unsecured loan, or can be thought of as collateralized by the creditworthiness of the borrower. Credit creation results in balance sheet expansion.
In DeFi, most existing lending protocols are based on over-collateralization. They are similar to pawnshop lending, and do not involve credit creation. Over-collateralized loans offer many trading and hedging strategies for the financial sector. However, their use cases are limited in other businesses because only asset owners can borrow, and the poor cannot increase their leverage. Even for asset owners, there are more efficient ways to leverage than participating in DeFi lending. For example, a person with $10 million in crypto assets may be able to borrow $20 million from a CeFi institution that undergoes KYC and credit checks (although with the collapse of FTX, the world’s top three CeFi lending platforms are all struggling). Essentially, the “core DeFi principle” of permissionless blocks the growth of the DeFi lending market.
The logic of DeFi lending
DeFi over-collateralized lending is essentially a way to increase capital utilization. For example, if user holds an ETH (worth $2000), he/she is bullish on its subsequent market and don’t want to sell it, and want to gain from the potential market, then DeFi over-collateralized lending is a good option, the user can stake this ETH to a lending protocol and get 1400 USDT (based on the staking ratio of 0.7) for other investments for further profit. At some point in the future (supposing without triggering liquidation), user can redeem it. Of course, many lending protocols also support staking stablecoins, lending crypto assets such as ETH at the staking rate.
Over-collateralization prevents borrowers from defaulting while the excess also provides insurance space for the platform to resist market fluctuations. In the current DeFi lending system, howevers, investors do not hold the initiative.
For example, when user stakes ETH to a lending protocol, it usually does not generate considerable profits (although many lending protocols provide small incentives). Alternatively, the lending protocol may use these user-pledged assets for other “farming” activities, and the profits are usually not distributed to the pledger.
Smart players usually prefer to use lending platforms to engage in circular lending with leverage to gain higher profits.
Suppose the user currently holds an ETH worth $2000 and stake it to borrow 1400 USDT based on a 0.7 loan-to-value ratio. The investor then uses the 1400 USDT to purchase 0.7 ETH from another DEX and continues to borrow on the same platform.
At this point, the investor will have a total of 1.7 ETH (two ETHs staked on the platform), and the debt owed to the platform is 2380 USDT. When ETH rises from $2000 to $4000, the investor will have a total of $6800 worth of ETH.
Then, the investor can redeem the second staked 0.7 ETH and trade it into USDT (get 2800 USDT), and take out 1400 USDT to redeem the first staked 1 ETH. The investor will then have a total of 1 ETH + 1400 USDT, and the extra USDT is the profit earned through revolving lending.
This means that the investor only uses $2000 of capital to leverage $3400, and when the investor engages in multiple lending transactions, their cumulative staked assets and debt increase simultaneously, as shown below:
Users see that when an investor borrows and repays for the third time, their cumulative staking assets increase from 1 ETH to 2.19 ETH while its debt increases from 1400 USDT to 3,066 USDT accordingly. Following this trend, the investor can continuously increase their leverage through repeated cycles.
Therefore, the main factor determining the profitability of this investor at this point is the price of ETH (since their debt is calculated based on the value of USDT and remains constant). The higher the value of ETH, the higher their profit will be.
Of course, there is a risk of liquidation in borrowing and lending itself. When the health of the borrowing user falls below a certain threshold, it will trigger a liquidation
Health = Collateral Value / Loaned Asset Value
Assuming the platform’s health threshold is 1.2
When 1 ETH = 2000u, health = 2000/1400 = 1.42
When 1 ETH = 1900u, health = 1900/1400 = 1.357
When 1 ETH = 1680u, health = 1680/1400 = 1.2, triggering liquidation.
That is, the platform will forcibly sell the ETH staked by the investor to pay off their debt to avoid losses when liquidation occurs. Therefore, when the ETH price is 1680 USD, the platform will be liquidated. The investor will only hold 1400 USDT borrowed from the platform, which is equivalent to the price of ETH at 1680 USDT. However, due to liquidation, they only receive 1400 USDT and lose 280 USDT.
When users borrow and lend repeatedly and trigger liquidation, their losses will accumulate. Many investment institutions leverage up wildly in the bull market, but are liquidated in the market downturn and go bankrupt, which has a huge impact on the crypto industry.
The loan protocol cannot provide investors with a better or more substantial way of earning profits other than leverage. Its limited application scenario makes it difficult to bring incremental benefits to the cryptocurrency industry from external markets.
USDToch: a new lending form for DeFi 2.0
USDToch is a leading investment ecosystem in the industry. As an AI strategy investment platform based on Web3 assets, USDToch offers a variety of assets and lending products such as cryptocurrencies and US stocks. The platform uses verified liquidity strategies executed by an AI system to achieve stable and low-risk returns, and ensure the safety of investors’ assets.
USDToch product makes big improvements on DeFi 1.0. Lending is one of its main forms of investment available to investors by allowing them to achieve collateralized loans through a non-permissioned approach.
Users can stake and borrow digital assets, and the platform will issue loans USDT or other digital currencies based on the assets users stake. The platform also offers a number of loan products, including short-term loans and long-term loans, so that users can choose different lending products according to their needs. This allows users to obtain funds quickly while ensuring the safety of their assets and improving the utilization of their funds at the same time. The difference, however, is that when users stake assets to USDToch, they can receive a substantial staking interest from USDToch.
In terms of business logic, USDToch has built a stable business revenue model. By generating a large fund pool through lending and partnering with top market makers worldwide, USDToch will use the funds in the pool to participate in the liquidity market of Web3 assets.
This efficient value circulation of funds is a unique feature of the platform. The platform brings together leading quant funds and institutional investors worldwide who possess advanced investment strategies and technologies (including AI) to effectively control risks and increase returns. Users can also enjoy quality asset allocation and investment management services through these strategies.
USDToch, through a decentralized approach, helps more long-tail investors regain competitiveness in the financial market competition by aggregating user assets, gaining access to a large number of income opportunities by technological means, institutional partners, etc., and distributing these income to users through smart contracts (far higher than the current returns in the DeFi market).
Therefore, USDToch’s advantage in lending products is that it can generate stable and super high returns without taking the high risks featured revolving and leveraging loans.
USDToch’s investment targets are not limited to crypto assets. Currently, USDToch is also tokenizing traditional investment targets such as stocks, bonds, and commodities based on blockchain technology in the form of RWA (Real-World Assets). This makes it more widely available to users in a decentralized way and compensates for the development bottleneck of the DeFi sector’s overall investment returns. This means that in the near future, USDToch may enable users to lend traditional assets on the chain, driving the cryptocurrency industry towards a new direction of value discovery.
As the hotspot of the crypto world continues to evolve, the form of DeFi products is also undergoing iterations. USDToch is innovatively and extensively laying out the lending sector, promoting deep changes in DeFi 2.0, and driving the DeFi world from 1.0 to 2.0.
The issuer is solely responsible for the content of this announcement.