Lending, CDP, and Money Markets

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.

#CeFi or #CeDeFi

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.

Decentralized Money Markets

• Powered by blockchain technology and run by a smart contract

• Immutable

• Decentralised

• Permissionless

• Non-custodial

• Composability

• Overcollateralized

#DeFi

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.

Decentralized stablecoin minting

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.