When we looked at the crypto-lending space as of today, we found that there are 3 primary categories of firms.
Applications (that are built over protocols or are building their own networks)
Margin Lending Platforms
Margin lending platforms are ones where you can come to the product and get leverage above 100% on your collateral. The advantage is that they let you take a position on the price volatility of Bitcoin, and you can either make or lose money on that. This essentially lets you speculate on the price, gives you leverage and lets you take a position.
The disadvantage is in regards to the funds being restricted to that particular platform. If you take Kraken for an example; they are an exchange that offers leverage up to 5x. If you have $100 worth of Bitcoin, you can take a position worth $500. If the value of Bitcoin goes up, you get to keep all the profits and you have to pay a small rate of interest. If the value goes down, you lose a significant amount of money. If you’ve taken leverage worth $500, you can’t withdraw $500 outside the platform.
BitMEX is the market leader in margin lending, and they offer up to 100x the collateral. If you have $100, they let you take a position up to $10,000. If the price of Bitcoin goes down by even 1%, you lose all your money.
Protocols are built using a sort of smart contract system, and most are built over the Ethereum logic itself. If you take the case of Dharma, Compound or Maker; they support all ERC-20 tokens, the funds are locked in a smart contract, they are decentralized and security is really good unless there’s a flaw in the smart contract.
The speed of protocols is slightly slower than, let’s say, a centralized application but that’s the price of a decentralization. Instead of getting a response in a few milliseconds, it comes in a few seconds which is good enough, especially if you’re taking a loan.
The disadvantage of protocol layers is the fact that they aren’t cross-chain by design. If a protocol is designed for ERC-20 tokens, it will only work for ERC-20 tokens — they don’t work with Bitcoin or Ripple. The disadvantage of that is; let’s say if they support Ethereum and ERC-20 tokens, that’s only 20–25% of the total market cap. Ripple is just as big as Ethereum and Bitcoin is about 4 times as big. So protocols are essentially not going after 100% of the market.
Centralized applications are custodians or they have a third-party custodian. They are built on traditional stacks and are probably hosted on a service like AWS, and they try very hard to position themselves as a decentralized product, even though they aren’t. You are at the mercy of their security or their custodian’s security.
Their advantages are that they’re cross-chain by design so they’re going after 100% of the market. They are also quick and robust applications.
The disadvantage is in regards to ‘trust’. You have to essentially trust that they’re not going to mess around with your money.
Vauld (Previously known as Bank of Hodlers)
We, at Vauld, have taken a hybrid approach. We like to be cross-chain by design because we want to go after 100% of the pie. However, we’re choosing to be decentralized in as many places as we can.
Companies like Nexo and Celsius are centralized in nature, even though they’re using the Ethereum protocol.
We don’t do that.
Our business logic will be written on the Ethereum smart contract (and will be written on other smart contract platforms), and it’s using decentralized protocols wherever possible. For every place that can’t, we have to be custodians because we’re going after the entire market.
We’re combining the good aspects of what Maker and Dharma bring to the table, and we’re bringing the functionality and features of centralized exchanges.