Author: Ledn co-founder Mauricio Di Bartolomeo, Blockworks; Compiler: Songxue, Golden Finance
In 2022, the collapse of both centralized and decentralized crypto lending projects will have a negative impact on the market had a profound impact. Terra alone wiped out more than $60 billion in wealth from the DeFi space. Centralized bankruptcy cases, such as FTX, BlockFi, Celsius, Genesis, etc., have lost similar or higher total amounts. But the sudden collapse of these companies is not just due to a specific market event, but is a symptom of larger structural problems in the lending industry.
The crisis has revealed some horrifying realities about the shaky foundations on which the digital asset lending industry is built: an industry-wide lack of transparency, a lack of internal risk management controls, and poor lending standards .
But people still need Bitcoin, stablecoins, and digital asset lending services, especially in the developing world where I was born and raised.
As the hard-tested established players continue to rebuild the industry, we will also see new faces drawn to “fill” the void left by bankrupt players. We’ve already seen Coinbase, Kraken, and Bitstamp launch their own crypto lending solutions, adding legitimacy to the market and highlighting the sheer scale of the opportunity.
As new players enter the lending space, they must operate with great transparency, prudence and caution. If user collateral is going to be used as collateral again and lent out, it is very important to be transparent and candid about their revenue generation strategy. Users need to have a clear understanding of how and where their funds are being used.
My perspective on this lending crisis, like everything else in my life, is profoundly influenced by the economic collapse I observed in Venezuela.
The chaos brought upon us by hyperinflation forces us to look for an unexpected way out: Bitcoin. My family and friends and I, along with millions of Venezuelans, found this necessary — when there were no dollars available and nothing else to replace them. However, once Venezuelans realize what Bitcoin is and what it can do, they don’t want to sell it.
This is a practical, survival-driven way to use cryptocurrency. When I saw what Bitcoin did for people back home, and what it meant to others, I realized that the way we interact with these assets needed to evolve.
Just holding digital assets is not enough for everyone. People need solutions that allow them to use digital assets as collateral or earn interest – and to do that, they need to be able to trust a platform.
How do we design our systems to be as transparent as the cryptocurrencies they handle? The shocks of the past year have shown that we need a new approach, one that builds real trust and stability without losing the innovative core of Bitcoin and digital assets.
Clearness in terms of service and risk exposure is not only valuable, but non-negotiable
Some well-known cryptocurrency lending platforms have already started Implementing a Proof of Reserve (PoR) protocol, following in the footsteps of some of the pioneering large global exchanges, is a significant step towards increasing transparency and integrity in the industry. Trust and accountability are much needed, and Proof of Reserves (PoR) is a procedure that enables a business to prove that it has sufficient assets to cover liabilities (i.e. customer deposits).
With proof of reserves, a company can publicly confirm important aspects of its integrity and financial health. What’s more, this is done through third-party attestation and the use of cryptographic proofs, with the results shared with stakeholders to build trust. Customers need to ensure that the lending platform is truly on solid financial footing.
Using Bitcoin and other cryptocurrencies as collateral is more than just a utility, it is a vital service that can open the door to financial opportunity for millions of people. But the stability of this lending model is not inherent; it depends on the underlying concepts of risk management and transparency.
The key concept is this: Cryptocurrency lending platforms that do not clearly disclose risks and fully disclose their lending and risk management policies, including proof of reserve standards, may jeopardize the financial security of their customers.
A clear example is the consequences that can occur when risk management fails, as happened with Celsius. After filing for bankruptcy protection, Celsius proposed a bankruptcy plan to return some crypto deposits to retail customers — most of whom are expected to receive about 67% recovery through various means — including equity holdings in the new entity.
This is what happens when you don’t follow strict risk management protocols.
In an unstable economy, risks are more significant. For individuals leveraging digital asset lending services to weather the economic storm, clarity on terms of service and risk exposure is not only valuable, it’s non-negotiable. They deserve clear processes that allow them to access their digital asset wealth without having to navigate a minefield of hidden terms and undisclosed risks.
We are creating a space that everyone can trust
Transparency is critical. It cannot be an afterthought but must become part of the platform’s daily business operations. Companies must be honest and show everything to users, including the risks involved. This kind of complete transparency is crucial in everything, especially when offering Bitcoin or digital asset loans. This is to ensure that users’ assets remain safe during market fluctuations.
But transparency is not a one-and-done solution; people need to understand what is happening. This means educating users and giving them the information they need to make informed decisions, rather than just throwing financial jargon and numbers at them.
Robust risk management cannot be just a practice of some platforms; it must become a universal standard. Rather than just reacting when things go wrong, we need to focus on preventing problems before they start. This means keeping an eye on your money, stress testing different scenarios, and knowing how to contain bad situations when they occur.
We are at a critical moment, and creating a path to success requires work that rebuilds trust with our users.
By focusing on clear communication, education, and robust risk management, we are laying the foundation for not just a quick fix, but a space where everyone can trust.
Brian
YouQuan
Joy
Hui Xin