Bitcoin Lending Unlocks New Era Off-chain

Trump’s victory has opened up the possibility that DeFi could open up the entire financial landscape.

Lutnick, who has been nominated to be the next commerce secretary, has not given up on his financial business, particularly with stablecoin giant Tether. Lutnick’s Cantor firm is itself one of the custodians of Tether’s USDT stablecoin, Now he plans to pursue partnerships based on it, hoping to explore lending businesses backed by bitcoin.

The history of lending, from on chain to off chain

Lending is the cornerstone of DeFi, even more important than trading. Under the money multiplier mechanism, the lending model based on excess collateral is the real source of DeFi TVL, and the stability of lending is demonstrated by on-chain stablecoins such as DAI.

Briefly, DeFi lending can be traced back to the early bull market in 2017, when MakerDAO launched DAI, the first decentralized stablecoin backed by ETH and ETC, marking the beginning of DeFi lending.

Compound then launched an Ethereum-based collateralized lending protocol in 2018, which allows users to pledge assets for an annualized yield while lenders pay interest.

It is worth mentioning that Compound was also the first driving force of the “Farming” model, which was the first time that people verified the feasibility of on-chain finance under the stimulus of APY madness.

Over time, the DeFi lending space has gradually developed multiple representative projects. Among them, MakerDAO, Compound, and Aave emerged as the top three most influential lending platforms. Among them, MakerDAO is not only one of the earliest DeFi applications, but also famous for issuing DAI, a stablecoin anchored to the US dollar. Its TVL has accounted for more than 80% of the entire DeFi ecosystem.

In a nutshell, Compound’s contribution has also been to devise dynamic lending rate models that provide more market-oriented rates for both lenders and borrowers. Aave has built on this foundation by introducing innovative features such as flash lending, interest rate Swap, and liquidity provider (LP) tokenization.

Flash loans, which innovated by allowing users to borrow money without collateral but which must be repaid in the same transaction, were responsible for much of the DeFi Summer of 2021. The core of this lending method lies in its atomicity, that is, all operations are either successfully executed or all rolled back, thus ensuring the security of transactions and zero risk of funds.

Flash lending is also the first successful unsecured lending model, which greatly enhances the efficiency of funds on the chain. For example, users can arbitrage the price difference between different exchanges by borrowing funds through flash lending, buying tokens on one exchange, and selling them on another exchange to earn the difference.

But flash lending was also a big part of why the last bull market ended, with overstacked “DeFi Legos” jumbled like building blocks that face the brutal process of deleveraging as well as the magic of leveraging up.

From blockchain to the mainstream, BTC is worth more than ETF

In the US election, BTC’s price was closely related to Trump’s election, but the nature of ETFs drained liquidity from the chain, leaving DeFi projects unable to absorb BTC’s hot capital spillover. Lutnick’s lending model is expected to change all that.

The model Lutnick envisioned was not complicated, even a version of MakerDAO/Aave/Compound, in which clients could use bitcoin as collateral to secure a dollar loan from Cantor Fitzgerald, with an initial capital of $2 billion that could grow to tens of billions of dollars.

Of note is the relationship between Cantor and USDT, which has been Tether’s custodian since late 2021 and is believed to hold as much as $39 billion of Tether’s U.S. Treasury reserves under Cantor Fitzgerald’s custody. Thanks to their good relationship, Tether will be the financial backer of the lending program. Cantor Fitzgerald also processes billions of dollars of Tether’s monthly transactions.

It isn’t clear whether the project will lend cash in dollars or stablecoins, which would provide a seamless connection between traditional financial markets and DeFi.

Prior to this partnership, Cantor Fitzgerald had been appointed as the authorized dealer of the Bitcoin spot ETF. It was already deeply exposed to the various processes of the cryptocurrency market, such as stablecoins and ETFs, and the launch of the crypto platform was just a step forward.

Cantor Fitzgerald, for example, has managed billions of dollars in reserve assets, including U.S. Treasurys, for Tether for years. The Treasuries are held under Cantor Fitzgerald’s custody and, thanks to its status as one of only 25 primary dealers in the country, it can even trade Treasuries directly with the Fed.

Mr. Lutnick has also vigorously refuted allegations that USDT’s reserves are opaque and inadequate, saying the firm reviews Tether’s balance sheet every quarter. Enough to support USDT, which had a market cap of about $83 billion at the time

In July, several former Cantor executives co-founded Digital Prime Technologies, a crypto lending platform primarily for bitcoin spot ETF operators.

What’s more, Lutnick has a close personal relationship with Trump. He is not only the CEO of Cantor Fitzgerald, which supports bitcoin and cryptocurrencies, but also the co-chair of the Trump transition team. Lutnick’s views on bitcoin are also highly aligned with Trump’s, with a strong belief in Tether’s financial health and an emphasis on the role of dollar-backed stablecoins in addressing high U.S. inflation.

In addition, Lutnick stressed the importance of stablecoins to the U.S. economy, arguing that they are “the foundation of the U.S. economy,” and that the issuance and circulation of stablecoins actually drives demand for U.S. Treasuries, helping to strengthen the dollar’s digital competitiveness and potentially further entrentrate the U.S. ‘s dominance in global financial markets.

Concluding remarks

As Trump moves closer to the White House, Lutnick will also bring USDT to the White House. If the BTC and USDT lending model can be implemented, the entire dollar will be digitized and the global financial market will usher in a new pattern.