Brian Pasfield, CTO of Fringe Finance, analyzed the prominent players in the crypto lending market and talked about why they dominate the Ethereum ecosystem compared to other DeFi protocols. He also shared his expert opinion on how to choose the right blockchain networks for crypto lending, the risks of lending and borrowing DeFi platforms, and the need to choose a secure platform to fix your coins in contracts.
Is there any particular blockchain that makes it the most efficient to take crypto-based loans?
The Polygon commit chain or high throughput chains like Solana, Fantom, AVAX, etc., are cheaper for efficiency. That’s the boring answer.
Now, another angle one can take would require us to consider also security… after all, what good is affordability if your chain is not the most secure it could be, right? In that regard, Ethereum is unparalleled. We have yet to see one major chain successfully attacked, so the ecosystem seems to have forgotten blockchain security as a top priority. Will we see it soon? Who knows. Does it make sense always to keep security as a top priority? You bet.
How does taking crypto loans affect the taxability of the user?
This is a complex topic as its answer lies in the jurisdiction in which the user lives. However, as a rule of thumb, taking a loan to optimize their capital can help a user not incur into selling their cryptocurrencies, which is a taxable event. As such, they can gain access to additional capital without declaring a cryptocurrency sale.
What are the risks of lending & borrowing DeFi platforms?
Both lending and borrowing through decentralized platforms require the user to lock tokens into a smart contract. Because of this, there are many things that can go wrong. We, however, can classify the possible risks a user incurs into the following categories:
- a) Liquidation loss: A user’s loan goes under the collateralization line, and they lose their collateral assets.
- b) Smart contract exploits: A malicious user finds a way to hurt the platform by attacking its smart contracts. This can give them partial or total access to the tokens locked in the platform. Some examples of what a can go wrong involve hackers changing proxy contracts, exploiting unsafe contracts,
- c) Flash loan attacks: A user takes advantage of a mistake in a platform’s logic that allows them to quickly execute multiple loans, profiting from each subsequent one. This is in particular dangerous for lenders since they are the ones that supply stablecoins for lending.
What is the reason that Aave and Compound, the crypto loan platforms, have dominance in the Ethereum ecosystem as compared to other Defi protocols?
Network effects and innovation. Aave and Compound launched early, have managed to stay alive for long enough to build significant network effects around them, and try and innovate often. Their innovations are also, more often than not, in pursuit of results that impact the overall Defi ecosystem, which has made them household names.
How does one ensure a platform is secure before locking their coins into its contracts? By being skeptical, looking for audits, and being insatiable regarding proofs of peer review.
“Auditing,” more than a binary assertion, should be taken with nuance in all circumstances. Going through a single examination does not count as an audit, nor should patching vulnerabilities without repeated tests. One could even say that, since every auditing firm has an inner culture and bounded procedures, going for multi-firm consensus could be the only way to reach real security.
Brian Pasfield, CTO of Fringe Finance
He is the CTO at Fringe Finance with 10 years of expertise in cryptocurrency, fintech, blockchain, and Defi. He has delivered technically-complex projects that have leveraged his engineering background and keen understanding of the industry trends and philosophies. Brian has also worked with industry blockchain bodies to lobby for legislation and government policy changes.