It's Getting Easier to Borrow in DeFi

But at +20% rates, is that a good thing?

Good morning defiers! Here’s what’s going on in DeFi today:

  • Users of smart contracts-based digital wallet Argent can now open collateralized debt positions (CDPs) in a few taps

  • Debate on why people are willing to pay +20% to borrow on MakerDAO


It’s Getting Easier to Take Out Collateralized Crypto Loans

It’s getting increasingly easy to access MakerDAO’s Collateralized Debt Positions, or CDPs, which allow users to take out DAI loans against 1.5 times collateral in ETH. That will help decentralized finance grow, bringing in more users and liquidity.

Digital wallet Argent yesterday said it’s allowing users to open CDPs directly within the iOS app “in just a few taps.” This comes shortly after Coinbase started offering DAI in exchange for users learning about how to open CDPs. Coinbase users created roughly 14,700 CDPs since the campaign started, The Block reported.

Argent has done a good job of improving user experience. It’s one of the few non-custodial wallets (if not only one) with bank-like features like approvals for large transfers, wallet locking, and account recovery without the need of a seed phrase. Also, users don't need to worry about gas (because the wallet uses meta-transactions). The same is true in the creation of CDPs; no need to think about gas, and the number of steps have been cut down.

It’s worth taking a breath and thinking about whether unexperienced users having such easy access to crypto loans at 20.5 percent rates (that’s the current borrowing rate on MakerDAO), is a good thing. Argent helps borrowers minimize the risk of liquidation by making it easier to close the loan and to assess whether the collateral ratio is too low.

Why Are People Willing to Pay 20% on Crypto Loans?

That’s the very valid question Ethereum developer Alex Van de Sande raised. Why pay an annual rate of over 20 percent to borrow DAI on MakerDAO, when you can get better rates elsewhere, from other DeFi platforms to loan sharks? See the entire Twitter thread here.

Conclusions:

MakerDAO CDPs versus other DeFi platforms:

- Users are willing to pay a premium for a more battle-tested system. They’d rather pay a few percentage points more than risk a black-swan event and lose all their money. –It pays to be the grandfather of DeFi.

MakerDAO CDPs versus USD bank loans:

- Everyone can use it: Available to anyone, anywhere as long as they have the required collateral, unlike dollar loans.

- Faster and cheaper for crypto traders: DAI is immediately usable without having to go through additional steps to get into the ecosystem. No need to pay fees on the on-ramps and off-ramps.

- No KYC required: Provides liquidity without having to go through know your customer procedures. Banks aren’t going to take crypto as collateral from projects with token holdings from ICOs etc.

High crypto loan rates make more sense for borrowers who are using leverage to trade, and don’t care about getting U.S. dollars or other fiat money in their bank accounts. The big step forward in DeFi will be when it also wins on non-speculative loans.