A 2023 Primer for Crypto Credit Markets

  • Andreas Park, University of Toronto
  • Jona Stinner, Witten/Herdecke University

About this Report

This primer describes the ongoing evolution of cryptocurrency credit markets, starting with key differences between centralized and decentralized platforms. It outlines how different types of markets function, and touches on some of the risks and challenges associated with each one.

Cryptocurrency lending began with a centralized model that mimicked traditional finance. Lenders would deposit their assets with intermediaries who took control of the assets and made lending decisions. Without proper oversight, however, this model can expose depositors to the risk of mishandling by intermediaries, as observed with the FTX incident.

Decentralized peer-to-peer lending removes this risk by eliminating intermediaries, but it introduces an over-reliance on collateral, and cryptocurrency lending in general will fall short of its potential until it is better integrated with non-crypto assets. The paper presents several approaches, including liquidity mining, yield farming and flash loans, that address some of the shortcomings of the models in question.