The practice of lending money has been and continues to be one of the driving forces behind the modern economy. Since debt first became a facilitator for trading, it has been considered a significant component in commerce and investment.
With all this clout, it didn’t take long for the practice to make its way into the crypto market. Since around 2010, the potential establishment of “bitcoin banks” has become a popular topic among numerous forums. Not too long after, people started offering P2P lending services to extract returns on their holdings. This particular space has since evolved to include a wide variety of businesses.
Crypto lending and borrowing have numerous advantages, and these advantages could attract new users. Moreover, it can help expand the ecosystem as a whole.
Attracting banks
One notable change in the crypto sector is that traditional banks may start taking an interest in the system. Rates on fiat loans are at historically low levels, which has led to banks taking note of their lending margins being squeezed. The appealing yield extends to crypto assets, and the ever-growing demand from clients for this service may be enough to convince some institutions to put aside their apprehension and start offering crypto loans and custody.
In December of 2019, the Basel Committee stated that banks could potentially start offering crypto-asset services. Furthermore, there may be a requirement for risk management regulations.
Further DeFi development
Decentralized finance (DeFi) has a huge role in the evolution of the world of finance. For example, DeFi expands the reach of money and its functionality. All a DeFi participant needs is a smartphone, so it is clear that there is potential for global economic growth. Analysts believe that this sector is one of the most significant that is undergoing development in the crypto space.
DeFi will probably continue to be a niche segment for some time. However, this could influence centralized services thanks to a creative utilization of smart contracts. The outcome could be a hybrid of sorts. It could offer centralized assurances with decentralized functionality. To top it all of, a stamp of approval of regulatory management.
Coupled with the yield differential between crypto and traditional assets are the collateral flexibility and general security. All of these factors have the power to draw in more institutional players to the space.
This will do more than boost liquidity in the sector, which in turn could support strong infrastructure expansion, cut down on volatility, and attract more investors. It could trigger asset-specific interest rates that stretch across the sector. As a result, these could add fuel to the development of brand new derivatives (ex. interest rate swaps).
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