What are the risks of lending with cryptosystems?

Like any loan, loans with crypto currencies involve risks. But are they enough to rule out the idea? Find out the answer from some of the founders of various crypto-lending platforms.

Decentralized financial lending allows users to lend their crypto assets in exchange for interest returns. The nature of cryptographic assets allows anyone to lend their assets on different platforms at minimal cost.

To elaborate on this, we have summarized some of the discussions during the Indonesia Blockchain Week 2020. In this session participated Justin Sun (Tron), Wei Zhou (Binance), John Izaguirre (Ontology), Stani Kulechov (Aave), Brian Condenanza (Bidao), David Truong (Aave) and Vishakh (Cryptonomic). This panel was moderated by Wei Zhou.

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The risks involved in lending with crypto-currencies
In this section of the panel, the experts discussed the risks of lending money through crypto-currency. They were also asked how they would deal with that risk.

The first to respond was Kulechov. He commented that it is very common in these crypto loan systems to be asked for a deposit that can be taken in case the loan cannot be returned.

He added that they have risk frameworks that consider each token individually, as each token has different and unique risks. In addition, they have different risks considered such as market risk, liquidity risk, among others.

Market risk applies in case the token is volatile, while Liquidex risk applies in terms of how fast you can have liquidity at a time when markets are going down.

„The funny thing is when we have events like Black Thursday. I think those events will come in the future, but the response to them depends on what risk framework you are applying,“ Kulechov said.

Condenanza said that „there are risks in terms of being the counterparty to the loan, but that’s what we use collateral for.

However, he noted that his short-term concern is the rapid growth of DeFi. More than anything, he is concerned that this growth is so rapid that it could become a DeFi bubble.

„I think it’s good that it’s going fast, but it’s also worrying and makes you think there’s something risky about it. The loan with crypto is not the safest thing, but I think it’s a good risk in terms of the returns you can get,“ he concluded.