Impermax and the DeFi Lending Landscape

The DeFi lending landscape has exploded in the last year. Loans and lending services now make up a sizable portion of the DeFi industry and community. But what is driving demand for crypto loans, and where is the industry heading? Let’s examine the current state of decentralized crypto lending and how Impermax fits in.

How is DeFi lending different from traditional lending?

DeFi lending tools have been gaining traction for a while. This is because of their unmatched accessibility. Users don’t need to hand over sensitive data, experience background checks, or build trust with an institution to take part. This is essentially the first time in financial history when people can get loans without being subject to scrutiny from the loan provider. They are therefore open to everybody.

The permissionless nature of crypto

Additionally, DeFi loans are favored by crypto fans because they support the ethos within the blockchain industry of being independent of centralized bodies, and allowing for permissionless self-custody of assets. With DeFi loans, you are not trusting somebody else with your assets, they are still yours, and they are still in your control.

Keeping your gains going strong

Demand for these loans may also be increasing because cryptocurrency is currently experiencing a bull market, and so people are apprehensive about selling their assets in exchange for fiat for fear that they will miss out on future gains. In this circumstance it makes more sense to lend your crypto for a stablecoin, convert that stablecoin into fiat, spend that money, and then buy your loan back in crypto later on. This way, you never actually leave the crypto market and you do not need to fear missing out.

Optimizing taxes

Another reason is that DeFi lending can help delay capital gains tax. For some people, it may be preferable to pay capital gains tax at some point in the future, depending on what their finances are currently looking like. Additionally, depending on which DeFi lending platform you are using, your income from lending will either be counted as income tax, or capital gains tax. In the US, short-term capital gains are treated as regular income tax, however, longer-term capital gains will be treated separately. Depending on your tax bracket, it can be favorable to have your finances assessed under capital gains tax, rather than income tax, as they are both calculated differently.

Maximizing arbitrage with short term loans

A third use-case for DeFi crypto loans is to take part in arbitrage opportunities– this is where there is volatility between the values and rates of assets on different platforms that people can use to their advantage to make gains. With the sheer number of DeFi trading platforms in existence, there are oftentimes a lot of arbitrage opportunities. Taking part in such an opportunity means that you buy an asset on one platform, and then are able to sell it on another platform at a higher rate, as all platforms fluctuate differently. Even DeFi stablecoins such as Dai will fluctuate in price and allow for these opportunities as they are soft-pegged to fiat.

Flash loans are borrowed and repaid in a single transaction

You can technically engage in arbitrage without needing a loan, however, there are crypto loan options available which allow you to make greater gains. Many people are drawn to flash loans for this reason. The user borrows money and pays it back all within one action on the blockchain, meaning this all happens within a brief period of time (sometimes just a few seconds). That same smart contract can be used to buy and sell assets on different exchanges at different rates. These loans are uncollateralized, as the lender gets their money back instantaneously. Considering how arbitrage opportunities don’t usually last long, this makes flash loans the perfect tool for arbitrage.

Impermax reduces collateral needed

Impermax offers several advantages to the DeFi lending landscape, the largest of which is that it offers much more reasonable collateralization. With the exception of flash loans, DeFi lending platforms almost always require you to overcollateralize your loan, by 300% of the value on average. Impermax not only lets you borrow 100% of your collateral value, it actually allows you to borrow up to 10x or more of your collateral’s value by using leverage.

Using LP tokens as collateral means collateral on Impermax always matches the loan value

The fact that LP tokens are backed by two separate entities helps with the risk of liquidation. Plus, LP tokens have their own worth outside of the tokens they are backed by; LP token holders can earn money by getting a cut of Uniswap’s trading fees, which is heavy incentive for borrowers to pay their money back and reclaim their tokens. For these reasons, Impermax can offer 100% collateralization on their loans, rather than other DeFi lenders who need to overcollateralize. In reality, this means that you can borrow double or sometimes triple the amount that you can at other more traditional DeFi lenders.

What areas of traditional lending may come to DeFi next?

There is huge room for growth in the DeFi lending space, and it’s hard to predict what the next big innovation will be, but it would not be surprising to see the creation of a DeFi stock loan provider. A stock loan is where one party uses the shares they own from a company as collateral in exchange for borrowing money. At first glance, it might seem impossible to do this as shares do not run on the blockchain, meaning that value cannot be cryptographically exchanged. However, it could theoretically be possible to “wrap” shares, or in other words, tokenize them as an ERC-20 asset (or any other asset compatible with a blockchain). If that were possible, then it could also theoretically be possible to create a decentralized platform that takes and holds these shares as collateral, and in exchange provides cryptocurrency.

Adding stocks and equities to DeFi platforms

For this to be viable, it would have to be possible for ownership of the shares to pass to the platform, and one way to achieve that is to create a smart contract that is also legally binding. Within the smart contract, there would be an agreement that both electronically executes and holds legal significance, allowing the shares to leave the hands of the original owner should they have to default. Legally binding smart contracts are something that has been discussed by legal experts in the past, with Sean Murphy, Global Head of Blockchain and Distributed Ledgers at legal firm Norton Rose Fulbright arguing that they are possible. In a paper, he wrote that “legal compliance can be built into the program logic, providing a way of transacting that maximises operational efficiencies with the potential to reduce legal and regulatory cost and risk”. Considering how a DeFi stock trading platform already exists, it is not insane to think that DeFi stock loan providers will eventually happen, too.

Industry growth ahead

The DeFi lending landscape is still in its early stages. There is huge room for development and it will be fascinating to see where it goes in the next few years. DeFi lending and borrowing is one of the most significant and robust use-cases for decentralized projects, and at the moment it is at the cutting-edge of the blockchain (and FinTech) industry. Impermax plans to lead the way as the number one LP token-based lending marketplace and a leader in industry innovation.



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Impermax Finance

We're developing a DeFi ecosystem that will enable investors to leverage their LP Tokens