Exploring Borrower Behavior in DeFi Lending: A BIS Study

A recent study conducted by the Bank for International Settlements (BIS) has delved into the behaviors of borrowers within the decentralized finance (DeFi) sector, which commands tens of billions of dollars in total value locked (TVL) across various lending protocols. This pioneering research aims to unravel the complexities of user behavior and the dynamics of DeFi lending, highlighting the growing interest from traditional finance (tradfi) institutions in tokenizing assets like bonds and securities.

The study reveals a cautious approach among many DeFi borrowers, who tend to avoid over-leveraging to mitigate the risk of forced closures and auto-liquidation, where their collateral could be sold off by the protocol. Despite this, a minority still engage in high-risk leverage, vulnerable to the volatile nature of the crypto market.

This cautious behavior has given rise to a new wave of conservatism in DeFi, contrasting with its previous portrayal as a speculative and risky frontier. Protocols and decentralized applications (dApps) are now emerging to cater to this conservative trend, with Nolus, a cross-chain ‘lease’ protocol, serving as a prime example. Unlike traditional lending platforms, Nolus offers reduced margin call risk, triple the exposure, fixed interest rates, and ownership of the underlying asset, making it an attractive option for cautious DeFi users. Since its launch in June 2023, Nolus has processed over $50 million in transactions and attracted around 10,000 users, boasting a TVL of $4.9 million.

However, the study also highlights the broader risks associated with DeFi, including smart contract vulnerabilities and the threat of rug pulls, where protocol creators abscond with users’ funds. These risks underscore the importance of due diligence before engaging with any DeFi dApp.

With the TVL in decentralized lending surpassing $30 billion for the first time since mid-2022, and borrower behavior becoming increasingly conservative, there’s speculation that the DeFi industry’s reputation may be improving. This shift could lead to a more positive perception of permissionless protocols that operate without intermediaries, moving away from the skepticism that has traditionally surrounded the sector.