Moneychanging, Moneylending: Part I

How DeFi lending got here and what’s missing going forward

5 min readOct 10, 2020


Lending is the natural next step for any new nascent financial market. The house of Rothschild got its start by collecting and exchanging coins (moneychanging). Once they had enough value under their custody, the natural step was to put it to work (moneylending). Then they expanded by doing the same for rulers locally and then, doing the same across Europe.

That’s analogous to what happened in crypto. Bitcoin was the first natively digital asset to accrue meaningful value at scale for multiple people. Others came with different narratives but following a similar path. Narratives are not as important here. The sole point is digital accumulation of wealth.

Crypto before 2018: House of the Rothschild family, Judengasse, Frankfurt

The next natural step is to have lending. Lending has existed in some form or another in the crypto markets from the very beginning. Early websites like BTCJam had p2p lending functionalities and, arguably, the exchanges themselves were the first credit takers and providers, being through margin trading like Bitfinex pioneered at scale, or through perpetual futures leverage and funding, driven by BitMEX.

Let’s decentralize that

The banking version of The Jackson 5: The Five Rothschild Brothers

But the true quantum leap in lending happened once we had on chain ability to lend, liquidate and pay. And that came as a consequence of Ethereum smart contract functionality.

What is curious about lending is that it takes not only a technological improvement for it to evolve, but also using the technology in a way to coordinate humans in a slightly different fashion.

The Rothschilds had a technological improvement over what was prevalent before. They combined the use of new networks of roads and communication that were existent into something new. The family was able to effectively create a financial network between the largest Big Five cities of Europe (Paris, London, Frankfurt, Naples, Vienna) and redirect financial capital as needed between the different branches of their business, each ran by one of the sons of the patriarch Mayer Amschel Rothschild.

The on-chain capabilities to borrow and lend is a similar technological improvement. In lending, most of the time the innovation doesn't come from an actual technology (roads, telegraphs, telephones, internet), but as a way to access and coordinate previously uncoordinated pools of lenders and borrowers.

If you understand borrow and lending as simply the act of trusting, giving credit to one, the ability to do that in a semi-trustless manner is a step forward.

DEX and On-Chain Lending: moneychanging, moneylending

The current scenario of decentralized lending is dominated by 3–5 protocols, while the DEX space has 2–3 dominant players. The current ranking is very much different from what it was 6 months ago, so I would say it’s still an open field, and you can refer to better posts on the current scenario than this (e.g. Arjun Balaji’s Crypto Market Structure 3.0 ).

I prefer giving the 10,000ft view of how we got here and where I think we are going next. Not interested in having this post get stale fast, since I’m too lazy to write that often.

If you were an outsider or an insider who stopped following crypto in 2017 you would naturally think that two types of candidates would come to do be dominant in lending: funds and exchanges. They were gobbling the most assets and they could provide these assets eventually to people willing to get it, right? Well, some of them are doing, but they don’t really have is scalability and flexibility to give access to the way people wanted.

The moment we started having functioning DEXs and an explosion of token listings powered by yield farming, everything went up: prices, yields, trading volume, TVL. A mix of true innovation, but mostly novelty at the end.

Given decentralized lending is still overcollateralized, the current borrower wants two things: trade or access better yielding opportunities (provided by, surprise, surprise, trading). He wants to use whatever assets he owns as collateral and access to assets that offer those good trades/yields. So flexibility is necessary.

Interestingly enough the way it came about was for these protocols to coordinate people through social engineering and incentives. It’s much easier to become a dominant player in the crypto lending space now by trying to have better incentives (like farm tokens were, but these seem shortlived), better offerings (meaning more customizable by the customer), and more flexibility in terms, than having a large pool of assets to begin with.

The incumbents are better positioned to offer this, but still, it’s very much an open game. A solution that seamlessly couples DEX and lending, solving high fee issues has the ability to outgrow its competitors in the short term.

Another way to outgrow is by offering safe under collateralization. I’ve been taking security as a given here because it seems that for the most basic functionalities that are overcollateralized we have this figured out, but undercollateralized lending requires a different solution.

As an aside, note that all of this is different from what happens in the traditional market. In TradFi generally you want to have access to the cheapest available supply of credit (or access the highest paying demand for debt), and build on that. Here we have a slightly different paradigm.

What’s next after the game of chicken?

Much of the activity that is happening is driven by speculation and a bear market in DeFi could mean that volumes come down on exchanges and yields come down on lending protocols. The really large ones will not die, but others will become analogous to ghost chains: no lending and no trading taking place there.

Given that there is no natural demand for crypto other than trading, when trading volumes go away because people got tired of losing their pants repeatedly, you have a decline in activity in these platforms.

So is decentralized moneychanging and moneylending unsustainable in its current form? Sure. Is it naive believing that yield farming alone was the way forward? Sure. Is it all a game of chicken? Pretty much. But the game of chicken laid out the infrastructure foundation and validated the ideas for what comes next. This was the “Hey boys, each of you go to a different town” moment. What comes next is where the real game begins.

The lacking component for crypto is commerce. But that’s a subject for Part II