Crypto lending markets are adapting to fill the gaps left by failed centralized platforms.
Key Takeaways
- Lending markets in crypto are uniquely sustainable due to their distinct value proposition that can’t be replicated outside of crypto.
- There is a significant downward trend in the total value locked in crypto lending markets.
- Capital formation in crypto is considered an evergreen business model, unlike other cyclical DeFi activities.
- The demand for turning nonproductive assets into productive ones makes lending a durable business in crypto.
- DeFi lending platforms have filled the void left by the decline of centralized platforms like Celsius and BlockFi.
- Understanding risks in on-chain lending platforms requires significant expertise, posing a barrier for users.
- The integration of Morfo with Coinbase has led to substantial growth in collateralized borrowing against Bitcoin.
- The concept of looping allows for recycling capital to increase yield through leveraged borrowing.
- The lack of traceability in leveraged systems poses significant risks in the crypto lending market.
- Cross depositing vaults is a dangerous strategy due to the concentration of risk.
- Composability in crypto leads to composable risk, where one asset’s failure can have widespread implications.
- The availability of stablecoins is the most critical metric for lending in crypto.
Guest intro
Wyatt Khosrowshahi is an Investor at Castle Island Ventures. Prior to joining in July 2023, he served as an Investment Analyst at Shima Capital, focusing on companies leveraging blockchain to improve web2 industries. He recently co-authored the “Total Value Lost” report assessing the value of DeFi markets, starting with lending protocols.
Why lending markets are sustainable in crypto
- Lending markets in crypto serve a unique value proposition that cannot be replicated outside of crypto.
-
The lending markets to me are specifically interesting in crypto because they are one of the most sustainable businesses
— Wyatt
- The current state of lending markets shows a significant downward trend in total value locked.
-
The total value locked in these lending markets has shuddered… it’s a pretty direct downward inflection
— Wyatt
- Capital formation in crypto is an evergreen business model, contrasting with the cyclical nature of other DeFi activities.
-
With capital formation this is like an evergreen business
— Wyatt
- Lending is a durable business in crypto due to the constant demand for turning nonproductive assets into productive ones.
-
That’s one of the reasons I think lending is one of the more durable businesses in crypto
— Wyatt
The impact of centralized platform failures on DeFi lending
- The decline of platforms like Celsius and BlockFi has created a void that DeFi lending platforms have filled.
-
I don’t think you can talk even about how well the DeFi lending platforms like Aave and Morpho have done without talking about the void that was left by Celsius and BlockFi
— Wyatt
- DeFi platforms have benefited from the mistrust resulting from centralized platform failures.
- Understanding risks in on-chain lending platforms requires significant expertise, which can be a barrier for users.
-
You almost need a PhD today to actually understand the risk that you’re getting paid for
— Wyatt
- The rise of DeFi lending is connected to the failures of centralized platforms, providing a clear explanation of market dynamics.
Growth in collateralized borrowing and the concept of looping
- The integration of Morfo with Coinbase has led to significant growth in collateralized borrowing against Bitcoin.
-
Morfo is integrated with Coinbase so you can borrow against your cbbtc
— Wyatt
- The concept of looping allows for recycling capital to significantly increase yield through leveraged borrowing.
-
The general idea of looping is I have some yield bearing token… you can actually recycle that capital
— Wyatt
- The lack of traceability in leveraged systems poses significant risks in the crypto lending market.
-
Although crypto is extremely traceable it’s virtually impossible to identify how levered a system is
— Wyatt
Risks and strategies in crypto lending
- The strategy of cross depositing vaults is extremely dangerous due to the concentration of risk.
-
What we discovered is essentially these vaults were just cross depositing into themselves
— Wyatt
- Current lending strategies in crypto are not durable and should not be seen as a bet on lending markets.
-
This was a strategy that I think we really rightfully identified as not extremely durable
— Wyatt
- Composability in crypto leads to composable risk, where the failure of one asset can have widespread implications.
-
As a result of that you get very composable risk
— Wyatt
Market events and their impact on crypto
- The risk profile of perpetual exchanges significantly influenced their conservative approach leading up to the 10/10 washout.
-
If you look at ten ten I think that this risk played a major role in how conservative the perpetual exchanges were
— Wyatt
- The poor liquidation of USDE on Binance was a direct cause of the 10/10 event.
-
The direct answer is probably this bad liquidation
— Wyatt
- The pain felt in the market was exacerbated by the thin order book depth of many assets.
-
I think the degree of pain felt was because of how thin a lot of the order book depth is
— Wyatt
Valuation challenges in the crypto market
- Many crypto assets may not be worth their claimed market cap due to low trading volumes.
-
The price of these assets are gonna fall really fast to the point where someone could easily argue a lot of these assets probably aren’t worth what their claimed market cap is
— Wyatt
- The lack of a fundamental floor for many crypto assets creates significant uncertainty.
-
You’re reminded that the fundamental floor is not necessarily there for a lot of assets
— Wyatt
- Funds can inflate their net asset value (NAV) to charge fees on unrealized gains, which can mislead investors.
-
It happens how those conversations go
— Wyatt
The importance of stablecoins and revenue in crypto
- The availability of stablecoins is the most critical metric for lending in crypto.
-
The most important metric in lending is really the availability of stablecoins
— Wyatt
- Most crypto platforms do not generate revenue that justifies their token valuations.
-
There’s very few if any crypto platforms that generate revenue that justifies most of the token valuations out there
— Wyatt
- Revenue is sought after in crypto for buybacks and to build trust in teams.
-
The reason people in crypto have been asking for revenue is really two things
— Wyatt
Venture capital and investment strategies in crypto
- Venture capitalists are paying high premiums for talent in the current market.
-
What you see in how these VCs are funding these things is they’re paying a huge premium for the talent
— Wyatt
- The lending markets may be underpriced, but this is not a universal truth and requires a long-term investment horizon.
-
I think the lending markets are underpriced categorically
— Wyatt
- Investors may be overpaying for assets now or in the future, depending on their investment horizon.
-
The question is do you wanna be overpaying now or you wanna be overpaying in the future
— Wyatt
The macroeconomic influence on crypto markets
- Crypto is highly sensitive to interest rates and operates as a macro trade.
-
Crypto sits so far out on the risk curve that it is one macro trade
— Wyatt
- The last real bull market in crypto occurred during a zero interest rate environment.
-
It’s no surprise that the last real bull market covid was zero interest rates
— Wyatt
- Crypto thrives under problematic monetary policies, which paradoxically leads to underperformance when policies become more responsible.
-
The irony of all this is crypto springs from the disillusionment of people
— Wyatt
Resilience and future of lending markets
- Lending markets can thrive in both high and low interest rate environments due to the dynamics of borrowing costs and market volume.
-
I really think lending markets are interesting because in the high interest rate environment they benefit from high interest rates
— Wyatt
- As interest rates decrease, the volume of borrowing in lending markets is expected to increase due to more viable strategies becoming available.
-
What you see happen when that occurs is interest rates go down the borrow cost on lending markets will go down
— Wyatt
Crypto lending markets are adapting to fill the gaps left by failed centralized platforms.
Key Takeaways
- Lending markets in crypto are uniquely sustainable due to their distinct value proposition that can’t be replicated outside of crypto.
- There is a significant downward trend in the total value locked in crypto lending markets.
- Capital formation in crypto is considered an evergreen business model, unlike other cyclical DeFi activities.
- The demand for turning nonproductive assets into productive ones makes lending a durable business in crypto.
- DeFi lending platforms have filled the void left by the decline of centralized platforms like Celsius and BlockFi.
- Understanding risks in on-chain lending platforms requires significant expertise, posing a barrier for users.
- The integration of Morfo with Coinbase has led to substantial growth in collateralized borrowing against Bitcoin.
- The concept of looping allows for recycling capital to increase yield through leveraged borrowing.
- The lack of traceability in leveraged systems poses significant risks in the crypto lending market.
- Cross depositing vaults is a dangerous strategy due to the concentration of risk.
- Composability in crypto leads to composable risk, where one asset’s failure can have widespread implications.
- The availability of stablecoins is the most critical metric for lending in crypto.
Guest intro
Wyatt Khosrowshahi is an Investor at Castle Island Ventures. Prior to joining in July 2023, he served as an Investment Analyst at Shima Capital, focusing on companies leveraging blockchain to improve web2 industries. He recently co-authored the “Total Value Lost” report assessing the value of DeFi markets, starting with lending protocols.
Why lending markets are sustainable in crypto
- Lending markets in crypto serve a unique value proposition that cannot be replicated outside of crypto.
-
The lending markets to me are specifically interesting in crypto because they are one of the most sustainable businesses
— Wyatt
- The current state of lending markets shows a significant downward trend in total value locked.
-
The total value locked in these lending markets has shuddered… it’s a pretty direct downward inflection
— Wyatt
- Capital formation in crypto is an evergreen business model, contrasting with the cyclical nature of other DeFi activities.
-
With capital formation this is like an evergreen business
— Wyatt
- Lending is a durable business in crypto due to the constant demand for turning nonproductive assets into productive ones.
-
That’s one of the reasons I think lending is one of the more durable businesses in crypto
— Wyatt
The impact of centralized platform failures on DeFi lending
- The decline of platforms like Celsius and BlockFi has created a void that DeFi lending platforms have filled.
-
I don’t think you can talk even about how well the DeFi lending platforms like Aave and Morpho have done without talking about the void that was left by Celsius and BlockFi
— Wyatt
- DeFi platforms have benefited from the mistrust resulting from centralized platform failures.
- Understanding risks in on-chain lending platforms requires significant expertise, which can be a barrier for users.
-
You almost need a PhD today to actually understand the risk that you’re getting paid for
— Wyatt
- The rise of DeFi lending is connected to the failures of centralized platforms, providing a clear explanation of market dynamics.
Growth in collateralized borrowing and the concept of looping
- The integration of Morfo with Coinbase has led to significant growth in collateralized borrowing against Bitcoin.
-
Morfo is integrated with Coinbase so you can borrow against your cbbtc
— Wyatt
- The concept of looping allows for recycling capital to significantly increase yield through leveraged borrowing.
-
The general idea of looping is I have some yield bearing token… you can actually recycle that capital
— Wyatt
- The lack of traceability in leveraged systems poses significant risks in the crypto lending market.
-
Although crypto is extremely traceable it’s virtually impossible to identify how levered a system is
— Wyatt
Risks and strategies in crypto lending
- The strategy of cross depositing vaults is extremely dangerous due to the concentration of risk.
-
What we discovered is essentially these vaults were just cross depositing into themselves
— Wyatt
- Current lending strategies in crypto are not durable and should not be seen as a bet on lending markets.
-
This was a strategy that I think we really rightfully identified as not extremely durable
— Wyatt
- Composability in crypto leads to composable risk, where the failure of one asset can have widespread implications.
-
As a result of that you get very composable risk
— Wyatt
Market events and their impact on crypto
- The risk profile of perpetual exchanges significantly influenced their conservative approach leading up to the 10/10 washout.
-
If you look at ten ten I think that this risk played a major role in how conservative the perpetual exchanges were
— Wyatt
- The poor liquidation of USDE on Binance was a direct cause of the 10/10 event.
-
The direct answer is probably this bad liquidation
— Wyatt
- The pain felt in the market was exacerbated by the thin order book depth of many assets.
-
I think the degree of pain felt was because of how thin a lot of the order book depth is
— Wyatt
Valuation challenges in the crypto market
- Many crypto assets may not be worth their claimed market cap due to low trading volumes.
-
The price of these assets are gonna fall really fast to the point where someone could easily argue a lot of these assets probably aren’t worth what their claimed market cap is
— Wyatt
- The lack of a fundamental floor for many crypto assets creates significant uncertainty.
-
You’re reminded that the fundamental floor is not necessarily there for a lot of assets
— Wyatt
- Funds can inflate their net asset value (NAV) to charge fees on unrealized gains, which can mislead investors.
-
It happens how those conversations go
— Wyatt
The importance of stablecoins and revenue in crypto
- The availability of stablecoins is the most critical metric for lending in crypto.
-
The most important metric in lending is really the availability of stablecoins
— Wyatt
- Most crypto platforms do not generate revenue that justifies their token valuations.
-
There’s very few if any crypto platforms that generate revenue that justifies most of the token valuations out there
— Wyatt
- Revenue is sought after in crypto for buybacks and to build trust in teams.
-
The reason people in crypto have been asking for revenue is really two things
— Wyatt
Venture capital and investment strategies in crypto
- Venture capitalists are paying high premiums for talent in the current market.
-
What you see in how these VCs are funding these things is they’re paying a huge premium for the talent
— Wyatt
- The lending markets may be underpriced, but this is not a universal truth and requires a long-term investment horizon.
-
I think the lending markets are underpriced categorically
— Wyatt
- Investors may be overpaying for assets now or in the future, depending on their investment horizon.
-
The question is do you wanna be overpaying now or you wanna be overpaying in the future
— Wyatt
The macroeconomic influence on crypto markets
- Crypto is highly sensitive to interest rates and operates as a macro trade.
-
Crypto sits so far out on the risk curve that it is one macro trade
— Wyatt
- The last real bull market in crypto occurred during a zero interest rate environment.
-
It’s no surprise that the last real bull market covid was zero interest rates
— Wyatt
- Crypto thrives under problematic monetary policies, which paradoxically leads to underperformance when policies become more responsible.
-
The irony of all this is crypto springs from the disillusionment of people
— Wyatt
Resilience and future of lending markets
- Lending markets can thrive in both high and low interest rate environments due to the dynamics of borrowing costs and market volume.
-
I really think lending markets are interesting because in the high interest rate environment they benefit from high interest rates
— Wyatt
- As interest rates decrease, the volume of borrowing in lending markets is expected to increase due to more viable strategies becoming available.
-
What you see happen when that occurs is interest rates go down the borrow cost on lending markets will go down
— Wyatt
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