Lending, CDP, and Money Markets
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.
- Powered by blockchain technology and run by a smart contract
- 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.
Last modified 8mo ago