By
Benjamin Njiri
April 23rd, 2024
The increasing competition among borrowing/lending platforms, stablecoins, derivatives, and cross-chain CDPs indicates a new era in fintech innovation.
Decentralized finance’s (DeFi) meteoric rise has been accompanied by a slew of advances in financial technology, sparking a wave of P2P lending protocols and liquidity pools. The increasing competition of borrowing/lending, stablecoins, derivatives, and even cross-chain CDPs mark a new era in fintech innovation and have bred some intriguing externalities.
Many DeFi lending protocols offer interest rates that are significantly more appealing than rates offered by banks and low-risk fixed products in conventional credit markets. Combined with drastically reduced barriers to accessing financial instruments, DeFi has become a full-blown movement beyond the scope of strictly crypto.
Competition among liquidity pools and derivatives has already initiated more than $650 million locked into DeFi protocols, and the momentum appears only to be gaining steam.
And one DeFi platform, Constant, a secured P2P lending startup that leverages smart contracts on Ethereum, has garnered significant traction over the last several months — capitalizing on a unique offering and the technology underscoring the ascendance of open financial protocols.
Coalescing a Fragmented Market
DeFi emerged with the onset of MakerDAO’s prominence towards the end of 2018, when its native crypto-collateralized stablecoin, Dai, became one of the most liquid assets on Ethereum, and the second most liquid stablecoin behind of fiat-backed Tether. The popularity of Dai was so intense that its 1:1 peg to the USD actually lost parity several times, leading to an increased stability fee for Maker CDP users.
As the competing lending protocols, liquidity pools, and stablecoins arose, it soon became clear that the early stages of DeFi would consist of a highly fragmented market. In many aspects, this is what led to the advent of appealing interest rates for lenders, specifically exchange-issued stablecoins like USDC (Coinbase) and BUSD (Binance).
For reference, users on Constant can earn 10 percent ROI with BUSD on its platform.
However, the fragmentation of the DeFi market has also led to inefficiencies and immature microstructure. In the process, this has attracted traders and arbitragers seeking alpha, which has created various opportunities for yield arbitraging across lending protocols. Arbitragers play a vital role in maintaining stablecoin parity too, along with smoothing many other market inefficiencies, even though Dai’s arbitrage challenges breed scalability woes.
If the DeFi market is fragmented, then arb’ers are the glue pulling the platforms together into a more cohesive, efficient ecosystem.
As a result, technologies like atomic batch-based transaction processing have met the demand for more complex fund trading strategies triggered by arb’ers and trading funds — shedding light on the vast potential of a more mature DeFi ecosystem.
With marked advantages over legacy credit systems, even P2P lending pools like SoFi that offload risk to lenders, it is not surprising that liquidity pools are ballooning in locked assets and aggregators like Argent are attracting mainstream adoption.
Accessibility to liquidity pools plays the cardinal role here.
“Liquidity layer smart contracts are permissionless and open source for any 3rd party (entity or individual) to use — you can think of using the liquidity layer as an API, without having the API owner’s consent,” detailed Ash Egan, VC at AccomplicVC in a recent Medium post. “As the liquidity layer gains traction, network effects increase, leading to more competitive spreads and rates. In the context of lending, more liquidity at scale allows better rates or essentially more access to cheaper credit as lenders receive lower interest if supply outpaces demand.”
In particular, Constant has found an impressive niche between aggregators and liquidity pools, matching over $3 million loans in under 4 months — making it one of the fastest-growing startups in the space.
Constant’s Ascendant Demand
Constant’s fiat flex accounts are directly integrated with Compound, the most liquid credit pool in DeFi. Investors earn 5 percent APY on their deposits, which are converted to Compound’s liquidity pool of digital assets for collateral.
Users can withdraw their deposits at any point, and minimums are only $10, vastly increasing access to a fixed income product with 50X better interest than a typical savings account.
However, such offerings are not uncommon in the DeFi space as the competitiveness of protocols ramps up. Where Constant’s advantage reveals itself is with its customizable interest rates and terms feature that is adjustable by users. Lenders can independently set their terms, and be matched instantly with borrowers that agree to them — with APR up to 10 percent.
In a market where competition is fierce, some of Constant’s rivals like Dharma have already pivoted their model entirely — becoming strictly aggregators of DeFi rates.
Constant has continually evolved its product offerings to gain an edge, and it is paying dividends so far. Besides fiat flex accounts, Constant offers staking on TomoChain (6 percent APR), and low-cost loans with BEAM — a Mimblewimble privacy protocol.
For investors, the transparency, rates, and accessibility of DeFi platforms like Constant should not be overlooked. They represent a marked departure from trust issues plaguing conventional finance, and innovation by project’s like Constant breathe fresh air into an outdated credit market.
“Traditional P2P lending platforms often adopt the role of banker — assessing borrowers, maintaining protection funds, or insuring against losses,” detailed Constant in a recent blog post. “The cost of such mechanisms are passed to you, the customer, through higher fees or smaller returns. However, a P2P lending firm that adopts the above criteria can ditch these mechanisms and pass the savings to you.”
An appealing vision, indeed, and one is underscoring the rise of DeFi as more than a crypto-specific innovation.