Centralized Finance, or CeFi, mimics the traditional banking industry by allowing individuals and institutions to use their cryptocurrencies as collateral to obtain loans, or deposit their cryptocurrencies to earn interest on a centralized platform.
Unlike Decentralized Finance (DeFi), where smart contracts replace intermediaries, CeFi lenders and borrowers transfer their risk to trusted third-parties. The primary participants within CeFi can be segmented into two categories: fdnstitutional providers like BitGo, Genesis, and BlockFi, and retail-oriented players, including Celsius, Nexo, and CoinLoan.
State of the Collateralized CeFi Lending Market
According to Arcane Research, the current size of the traditional collateralized lending market is estimated at $20 trillion. Conversely, the CeFi bitcoin collateral market is approximately 400'000 Bitcoin (BTC) in size, or around $30 billion depending on BTC prices. This represents just 0.15% of the traditional collateral market today, a mere drop in the ocean. 400'000 BTC is, however, a conservative estimate, as we will see when we briefly review the Q1 2021 loan originations of Genesis. Significant potential for growth exists, even if BTC were to capture only single digit market share. The chart below provides a perspective on the nascence of the BTC collateral market:
Additionally, this estimate does not take into consideration other cryptocurrencies like Ethereum (ETH), Litecoin (LTC) and Ripple (XRP), as data on altcoins used as collateral is relatively opaque. To provide context on the scale and scope of the CeFi crypto lending market, let us begin by briefly examining institutional lender Genesis, followed by retail contender Celsius.
Genesis sees Growth in Institutional Crypto Lending
New York-based Genesis recently published their Q1 2021 financial results, and the figures are staggering. Q1 loan originations amounted to $20 billion, where BTC and ETH comprised approximately 43% and 27% of loan collateral, respectively. This represents an approximately 163% increase in quarter-on-quarter growth, up from $7.6 billion. A similar trend can be seen across the institutional crypto-collateralized lending landscape.
There are numerous reasons for using BTC, or any of the large cap cryptocurrencies, as a form of collateral for obtaining a loan. The most common are leveraging up on existing crypto positions, exploiting arbitrage opportunities, market-making, and covering operational costs without liquidating existing holdings.
Celsius as a Retail Player
Retail-focused Celsius also offers the ability to borrow. However, they provide the opportunity for investors to earn yield while storing crypto on their platform as well. Yields are paid in a variety of formats, including BTC, ETH and Celsius’ native token, known as CEL. The retail lending and borrowing market remains hot. However, as with traditional loans borrowers risk breaching loan-to-value covenants when collateral values drop, thus triggering penalties.
Takeaways and the Road Ahead
CeFi is quickly evolving into a robust ecosystem, with a variety of increasingly sophisticated yet intuitive products and services introduced regularly. Although nascent, and generally shaped by retail demand, CeFi is rapidly garnering the interest of discerning institutional investors. While the road ahead is uncertain, institutional adoption of crypto-related lending and borrowing products and services are expected to continue to flourish, as firms bolster their balance sheets and embrace hot, warm, and cold custody technology.
