Lending, CDP, and Money Markets
Last updated
Last updated
Conventionally, money markets were centralized structures facilitating the deals between lenders and borrowers.
Borrowers approach money markets to get a short-term loan.
If the borrowers can’t pay back their loans, the lenders can sell the collateral to recover the loaned funds (liquidate).
When the loan is repaid, the collateral is returned.
Borrowers are required to pay interest to the lenders and a fee to the money market.
Below is an example of how centralized finance (CeFi) lending works. The same model is used for so-called Centralized DeFi, where cryptocurrency is introduced into the picture but is used in a centralized manner.
A borrower borrows a $100 USDT using BTC as collateral. Since BTC is a volatile asset, there needs to be a certain overcollateralization to have an ability to liquidate and secure the lender. After a certain period, the borrower can use the borrowed asset for leverage trading, farming etc. In the end, the borrower has to return a larger amount of Tether to receive the collateral back.
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Immutable
Decentralised
Permissionless
Non-custodial
Composability
Overcollateralized
In DeFi, a similar principle is used. Most often the currencies are different, instead of BTC, ETH is used as collateral. Examples of such projects are Compound and Aave.
A similar protocol can be used not only to lend and borrow a stablecoin, but also to mint it. MakerDAO and DAI is an example of such protocol. A CDP (a collateral debt position) is being entered by a borrower to mint and use the stablecoin.
GCD works similarly: ETH & GTON can be used by borrowers to mint it and later use it on the rollup as the native token.
