In a recent article "Number Three" Arthur Hayes eloquently describes the rise and fall of crypto lending and that, to date, credit was utilized to either lever speculative trading or finance assets through asset-backed loans (mostly to miners) within the crypto market.
He goes on to say "The major use case missing from crypto credit is business loans" as such lending activity has to date been deemed nonsensical within the crypto ecosystem. This is because "crypto companies, similar to the underlying coins themselves, should be viewed as call options. In a default scenario, you will get wiped out regardless of where you sit in the capital structure. Assuming that, it's better to just own the token — because at least you get to participate in the upside"
At Florence Finance we concur with Arthur's thinking and stated as much on our whitepaper originally published more than a year ago. In order to make the yields in DeFi more sustainable, it is critical that the following happens:
1) Become more transparent.
2) A larger proportion comes from lending activity based on real-world companies and/or assets that have no direct correlation to crypto market prices and/or liquidity other than through global macro trends.
The problem is real world lending is dominated by TradFi banks that are choking both the access to and the yield available from funding such lending activity through their own bloated cost structures and the regulatory overburden they operate under.
At Florence.Finance we have been working hard for the past year to enable stablecoin funded real-world lending to the SME segment of the credit market. Thereby providing an alternative source of funding for this socially important and underserved segment whilst aspiring to facilitate the most efficient/transparent means of creating credit & yield that is low cost, decentralized, and community driven.
We believe that real-world lending is DeFi's next Frontier and that projects such as GoldFinch, Centrifuge, MakerDAO's recent investment in US treasuries and corporate credit assets and our own Forence.Finance are all valid attempts to bring real-world assets/lending to DeFi. Their success will be systemically important if we are to break the extremely cyclical nature of crypto markets and their correlated (incestuous) leverage within the crypto ecosystem.