From banks to DeFi: the evolution of the lending market

TL;DR

This paper explores the evolution of lending markets from traditional banks to DeFi protocols, highlighting their mechanisms, advantages, challenges, and future outlook within the Internet of Value ecosystem.

Contribution

It provides a detailed analysis of DeFi lending protocols like Maker, Compound, and Aave, and discusses their potential to address issues in traditional lending.

Findings

DeFi lending protocols hold over $40 billion in liquidity.

They offer advantages such as decentralization and transparency.

Dependence on traditional finance persists in DeFi systems.

Abstract

The Internet of Value (IOV) with its distributed ledger technology (DLT) underpinning has created new forms of lending markets. As an integral part of the decentralised finance (DeFi) ecosystem, lending protocols are gaining tremendous traction, holding an aggregate liquidity supply of over $40 billion at the time of writing. In this paper, we enumerate the challenges of traditional money markets led by banks and lending platforms, and present advantageous characteristics of DeFi lending protocols that might help resolve deep-rooted issues in the conventional lending environment. With the examples of Maker, Compound and Aave, we describe in detail the mechanism of DeFi lending protocols. We discuss the persisting reliance of DeFi lending on the traditional financial system, and conclude with the outlook of the lending market in the IOV era.