The Crypto Borrowing Landscape

Over the past 18 months, there has been a proliferation of appealing options for lenders to earn interest on passive crypto-assets; however, the same cannot be said for those on the other side of the market: the borrowers of crypto-assets.

In this post, we will outline the current borrowing landscape, both centralized and decentralized. Then, we will outline our new product, CoinList Lend, which we believe provides a superior alternative to synthetic borrowing for both professional and institutional traders.

This post assumes a sophisticated understanding of market dynamics, derivatives, and risk/reward frameworks. It is written from the perspective of a professional institutional trader; and although we encourage everyone to follow along, we understand that it may not be suitable for all readers. If you are interested in learning about lending crypto-assets and the basic mechanics of the crypto lending market, please follow this link. If you are interested in learning more about synthetic borrowing in depth, follow this link.

Rewind the clock to 2016–2017. The price of Bitcoin was skyrocketing, but most professional traders were still sitting on the sidelines. Huge arbitrages persisted between various exchanges and geographies; however, unless they had gone long Bitcoin (or Ether) prior to the run-up, most traders didn’t have inventory or the infrastructure to capture these arbitrages. In order to capture the upside, market participants naturally had to absorb some amount of long exposure and all of the associated volatility and risk. Given the potential profits, many professional traders still took the plunge. However, it was clear there was a need for a crypto borrowing market.

Today we have a much richer ecosystem for lending crypto that encompasses both decentralized and centralized systems; however, the market is still far from perfect. Decentralized options such as Compound, MakerDAO, Dharma, ETHLend, and their peers provide open access but layer on additional regulatory and technology risks and lack anonymity or a diversity of assets. Existing centralized options such as Genesis Capital, BlockFi, and Celsius limit some concerns of regulatory risk and anonymity but may not have flexible terms or transparent pricing that professional traders are accustomed to.

Let’s look take a look at the existing marketplace.

General Mechanics: Our imaginary borrower, Alice, onboards with a lender by completing any KYC/AML verification requirements, and she signs any borrowing documentation provided by the lender. When she is ready to borrow, she calls or messages the lender, who will provide an interest rate on her desired asset, along with a collateral level and tenor. If she agrees to those terms, she deposits collateral in order to receive the asset directly from the lender.

Who: Key players include OTC (Genesis Capital, BlockFi, Celcius) or exchange-traded (Bitfinex, Poloniex) lenders

General Mechanics: Alice sends collateral, typically ETH or ERC-20 tokens, to a smart contract, and she receives the asset in a wallet of her choice. She can typically receive 66.67% of her collateral as a loan in another asset. Interest rates may be fixed or variable depending on the service. Key players include Compound, dYdX, ETHLend, MakerDAO, Dharma, etc.

Centralized and decentralized lending platforms both suffer from a liquidity shortage due to many of the issues mentioned above. Larger institutional borrowers have functionally stayed away from decentralized platforms due to perceived risks and cannot source enough working capital on reasonable economic terms from the limited network of centralized lenders. As a result, borrowers have generally turned to a more liquid but riskier alternative: synthetic borrowing.

For those unfamiliar with the mechanics of synthetic borrow trade, we will summarize its mechanics using an example before detailing the core advantages and disadvantages.

Today is May 6th. Alice has $500,000 in working capital that she wants to swap for Bitcoin to be able to arbitrage a few exchanges. Alice does not want to buy Bitcoin though. She thinks the price is too high and is concerned that a fall in the price of Bitcoin will eat into her arbitrage revenue. Alice knows she does not meet the minimum threshold to be on-boarded as an OTC client, and liquidity on exchange lending/borrowing order books is not sufficient for her needs. She decides to borrow Bitcoin synthetically.

To do so, Alice buys $500,000 worth of Bitcoin on Coinbase @ ~$6,000 per Bitcoin. $500,000 / $6,000 = 83 BTC. She then sends 8.3 BTC to BitMEX, and uses the 8.3 BTC on her BitMEX account as collateral to short 10x leverage June futures: 8.3 BTC x 10 = 83 BTC. Now Alice is hedged, she is long 83 BTC Bitcoin on Coinbase and short 83 BTC on BitMEX.

Voila! She now has 83–8.3 = 74.7 BTC in excess Bitcoin on Coinbase available for working capital to make markets, arbitrage, etc.

This all seems fair and easy at this point, but we will peel back the onion to examine the risk/reward of that synthetic loan relative to a standard Bitcoin loan.

There are three primary advantages of synthetic borrowing relative to centralized or decentralized alternatives.

We have prepared a deep dive on the risks of synthetic borrowing that is available here. However, we have summarized the major concerns below.

Here, we have examined the different alternatives available to crypto borrowers. Realizing that the market is still underserved for efficiently sourcing working capital, CoinList has launched a lending/borrowing platform: CoinList Lend.

Over the past two years, CoinList has grown to become the leading platform for compliant token sales and ecosystem growth, where the highest quality projects such as Filecoin and Blockstack work with institutional and accredited investors around the world. Through this work, CoinList has developed deep relationships across the industry with long-term holders of crypto-assets. CoinList Lend is a marketplace where long, passive holders and active professional traders meet to lend and borrow tokens.

CoinList Lend was developed in response to a common question from our core customers: how can I earn additional income from my long-term holdings of crypto-assets? In order to answer that question, we needed to understand the other side of the market: the crypto borrowers. Over the past months, we dove deep into the institutional borrowing market, speaking with market-makers, hedge funds, and OTC desks. CoinList Lend is the product of that outreach and research. We believe it is a superior solution for both lenders and borrowers. Its main characteristics are:

Matthieu Jobbé-Duval is the Head of Financial Products at CoinList. Previously Matthieu was the co-lead on developing the Bitcoin trading desk for Barclays in London. Matthieu has spent the last 10 years trading derivatives at global investment banks.

Scott Keto is Director of Strategy and Business Development at CoinList. Previously, Scott was a portfolio manager at Athena Capital Advisors and has held a variety of investment roles at venture firms across the globe.

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