A Comparison Between the Collateralized Crypto Lending and the Repo Market (pt 1)

By WOOTRADE on The CapitalIntroductionSince 2018, the dominant trend in crypto has been the financialization drive that has pushed crypto closer to establishing itself as a legitimate asset class. The definition of financialization, in this case, is the increasing importance of financial markets, motives, and institutions in the overall operations. Over the last two years, the many new financial products and services that have launched have elevated the importance of financial operations within the crypto space. These new products and services have collectively created value through the vastly improved liquidity of crypto assets. The improved liquidity has been critical to attracting a constant stream of new capital entering the space.Many of the new financial products and services in crypto are, in fact, modeled after the traditional financial market counterparts. Specifically, one market that resembles its traditional finance equivalent is crypto collateralized lending. Collateralized lending only started in 2018, but the total loan origination volumes ballooned to $8 billion within a year. We decided to take a closer look at the fast-growing collateralized lending market and its traditional finance counterpart, the repo market. We analyzed the basic structure of both markets, crisis situations that occurred, and the key similarities and differences between the two.After our brief research, we came to the conclusion that having a fundamental understanding of the repo market mechanics will also further the understanding of the crypto lending market mechanics. Understanding the things that work well and the things that carry significant risk in repo could carry over into future risk mitigation efforts in crypto. Financialization, for all its benefits, carries significant risk, as shown by the boom and bust cycles in traditional financial markets. Therefore, crypto market participants should learn the lessons of the traditional financial markets to help facilitate the controlled growth of crypto financialization.A Comparison Between the Collateralized Crypto Lending and the Repo Market (pt 1) was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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