In the last year, we have seen the exponential growth of the cryptocurrency economy as tons of money flowed into various cryptocurrencies, decentralized finance (DeFi), non-decryptable tokens (NFT), crypto indices, insurance products and decentralized options markets.

The total value locked (TVL) in the DeFi sector across all networks has grown from $ 18 billion at the beginning of 2021 to $ 240 billion in January 2022. With a lot of liquidity in the ecosystem, the space for crypto lending has also grown exponentially, from $ 60 million early in 2021 to over $ 400 million by January 2022.

Despite the exponential growth and innovation of DeFi products, the cryptocurrency market is still limited to token-backed loans, ie providing a cryptocurrency as collateral for borrowing another cryptocurrency.

There are several platforms such as Nexo and Genesis that provide NFT-secured loans, but this service is mainly for institutional customers with first-class NFT. For retail, it is nothing more than token-backed loans.

If the cryptocurrency economy is to grow to the size of any real economy, it must reach the masses of retail consumers and be able to provide them with financing opportunities.

Here are the key components that must be developed before the crypto banking infrastructure can compete with banks.

Selection of goods and services
One of the most frequently asked questions from those who are new and want to enter the crypto-economy: what can I buy? The current infrastructure has nothing but NFTs, DeFi products, storage and liquidity supply.

In a traditional economy, currencies exist because the exchange of goods for services, or vice versa, usually does not have a 1: 1 ratio, so currencies serve to facilitate transactions of goods and services. In cryptoeconomics, currencies existed before goods and services were widely available to buyers. This makes cryptocurrencies difficult to value and volatile.

An economy needs enough goods and services to create enough supply and demand for consumers to use the currency to exchange these goods and services. With only NFT and DeFi financial products in the current cryptocurrency ecosystem, it is very difficult to attract ordinary Joes or Janes into the economy, because there are simply not many of them to consume.

A sound and functional banking system is also dependent on ensuring sufficient liquidity through customer deposits and sufficient customer demand for borrowed funds. With the rise of digital goods and services, especially non-financial ones such as art, music, real estate or gaming equipment in the metaverse, the banking system will be able to use them as collateral for various secured loans. Like car loans or mortgages, consumers in the cryptocurrency world will be able to own these products by paying for them on a regular basis in the future.

Reliable credit scoring system
In the current market for cryptocurrency lending, customers do not require a credit check or credit scoring system to borrow cryptocurrency. This is because credit is over-mortgaged and the credit-to-value ratio is strictly controlled. When the maximum life value exceeds the liquidation limit, the collateral will be sold at a discount to repay the loan. The full value of the security is never used, and there is always a large reserve in case of a sudden decrease in the value of the security.

In conventional banking, customers receive a credit score based on their past transaction behavior and financial status, ie annual income, savings, loan repayments and investments. In the cryptocurrency lending market, this is almost impossible because wallets are created anonymously and anyone can create as many wallets as they want. This makes it very difficult to track the behavior of transactions and create a credit score.

In order for the current structure to change, users must be motivated to build a good overview of all wallet activity and wallet loyalty. There are scores like Terra’s LUNAtic Rankings for ranking order correlations within a particular series, but there does not appear to be any specific credit rating for ranking the financial health of portfolio owners.

As more jobs are created in the crypto area and more people are paid in crypto, wallets that show a healthy long history of activity, such as a stable cash flow of income, an ongoing stable balance or regular loan payments in crypto, should. rewarded. . The reward can be in the form of larger loans at lower interest rates; or take a long time.

Source: CoinTelegraph