The Future Development Direction of the On-Chain Lending Market

On-chain lending protocols serve as an important infrastructure for internet finance, aiming to provide more equitable and efficient capital access channels for individuals and businesses globally, thereby promoting economic growth. Despite the vast potential in this field, the current user base remains primarily concentrated within the crypto-native community, with applications largely limited to speculative trading, which significantly restricts its market coverage.

In recent years, the on-chain lending market has rapidly evolved from the conceptual stage to several market-tested mature protocols. As of now, these protocols have attracted $43.7 billion in deposits and issued $18.6 billion in outstanding loans. However, compared to the global total outstanding debt of $320 trillion, the scale of on-chain lending remains insignificant.

Currently, the main demand sources for on-chain lending include:

1. Speculative trading: Crypto investors use leverage to purchase more crypto assets.
2. Liquidity Acquisition: Investors obtain liquidity of crypto assets through borrowing, avoiding direct sales.
3. Arbitrage Flash Loan: Very short-term loan used for arbitrage trading.

To enhance the practicality and market scale of on-chain lending, two key improvements are needed:

1. Expand the range of collateral assets Currently, the types of crypto assets available for collateral are limited, and they usually require a high collateralization ratio, which suppresses borrowing demand. Expanding the range of acceptable collateral assets can not only attract more investors but also enhance the lending capacity of on-chain lending protocols.

The specific implementation can be carried out in steps:

• First, include assets with high liquidity and frequent trading, such as stocks, money market funds, bonds, etc.
• Gradually expand to less liquid physical assets, such as tokenized real estate ownership.
• Ultimately achieve mortgage loans by collateralizing real estate, and enterprises financing equipment purchases through lending agreements, etc.

2. Promote low-collateral lending Currently, most on-chain lending protocols adopt an over-collateralization model, which leads to low capital utilization efficiency. By introducing low-collateral lending, on-chain lending can cover a wider range of borrowers, especially in the following areas:

• Personal Lending Market: Providing more competitive loan rates for low-income and middle-income groups.
• Small Business Financing: Filling the gap in the microloan market that traditional banks are unwilling to enter.

However, these improvements also bring a series of new challenges:

1. Managing debt positions backed by non-liquid assets
2. The liquidation issue of physically collateralized assets
3. Accurate determination of risk premium
4. Establishment of Decentralized Credit Risk Models

Despite numerous challenges, the future development prospects of on-chain lending are vast. As protocols gradually transition from crypto-native and investment scenarios to more efficient and practical financial applications, they will help eliminate financial inequality, allowing global businesses and individuals to have equal access to capital. The realization of this vision will greatly advance the financial system, making the cost of capital more transparent and affordable.