DeFi lending: intermediation without information?

Key takeaways

• Lending platforms are a key part of the decentralised finance (DeFi) ecosystem, but their institutional features mostly facilitate speculation in cryptoassets rather than real economy lending.
• Due to the anonymity of borrowers, overcollateralisation is pervasive in DeFi lending, which generates procyclicality. Reliance on collateral also limits access to credit to borrowers who are already asset-rich, negating financial inclusion benefits.
• For DeFi lending to make inroads into the real economy, it needs to tokenise real assets and rely less on collateral by developing its ability to gather information about borrowers; as such, the system is likely to gravitate towards greater centralisation.