Crypto lending has been a part of the industry for a while. There are both decentralized and centralized lending services available for users. While the lending services anchored on Bitcoin have exploded over the years, the lending market was affected in 2022 after the crash of Three Arrows, Celsius, and Genesis.
Speaking about this industry, a group of panelists at the Bitcoin 2023, Miami event, made up of Mauricio Di Bartolomeo, Co-Founder & CSO at Ledn Inc.; Jason New, Managing Partner at NovaWulf Digital Management; and Alex Thorn, Head of Firmwide Research at Galaxy Digital, unanimously agreed that the crash of lending platforms such as Three Arrows Capital (3AC), Celsius, and Genesis, were out of mismanagement.
Mauricio explained that lending, which is a historic habit of man from the Mesopotamians until date, will not go away although the asset classes may change such as the introduction of crypto. “The Bitcoin lending markets have of course exploded over the last few years” because lending and borrowing are part of what humans do.
Illegal token mechanism
He added that the common feature that influenced the collapse of BlockFi, Three Arrows Capital, and Genesis is that they were heavily concentrated. For example, 3AC owned huge equity in BlockFi. Alex added that the deep connection and lack of separation between the three companies – 3AC, Genesis, and BlockFi – was a faulty system. “These guys, all three of these firms in particular were heavily intertwined and concentrated and just didn’t actually run a normal lending book like it’s not that hard. It’s not rocket science.”
The Ledn official also noted that Voyager and Celsius played tricks on their tokens. He warned that the collapsed lending firms initiated fake and unsustainable token mechanisms which added to their downfall.
Some of the lending platforms mentioned have token formulas that were mostly manipulated from the inside until the result showed up outside and they filed for bankruptcy.
The CSO of Ledn Inc. also noted that one of the strong foundations of the best crypto lending platforms in existence today is that “very few of them have a token.” Jason also added that “it should have been a bit of a red flag when you were using your own created token to enhance yield.”
Illicit use of customers’ funds
Jason in support of the others revealed that most of the dead lending firms gambled with their customer’s funds which is wrong. It made them not just lending platforms but they started operating like hedge funds, “investing the [customers’] deposits” and carrying out transactions on-chain.
He cited an example with Celsius that gave customers’ funds to DeFi traders. ”That isn’t lending right, and that’s not managing a lending book. It is running a hedge fund” without the consent of its clients. Jason also noted that there was no disclosure by these first which made them lack transparency on the sources of their revenue.
Steps towards transparency
When explaining how to drive transparency, Ledn CEO said that lending first should let their clients know what their funds are used for. “People are actually very intelligent, they can understand if you explain what it is the activity that you’re doing to generate the yield. They would like to know what it is that you’re doing with the money that gets them the yield.
He added that Ledn, they are focused on transparency, accountability, and education. He also revealed that this led them to start proof of reserve before it became popular in the industry. “We were the first lending company to do it.” Although we were recognized by some of our investors as “that do their diligence and understand the business.”
Alex also explained that his firm, “Galaxy is a publicly traded company so that comes with a lot of transparency.” He revealed that they publish their quarterly financials to the public, “because that’s what public companies do.”