The seamlessis a key aspect of a vibrant economy. Anyone with an extra asset can lend it to put their idle capital to work, while people needing it to grow business or meet operational costs can easily access it.
Money markets are the platforms where borrowers and lenders can meet. Throughout history, money markets have been. Though the structure of money markets has altered with time, their role has remained unchanged.
How does the money market work?
Conventionally, money markets were centralized structures facilitating the deals between lenders and borrowers. Borrowers would approach money markets to get a short-term loan (under a year) that. If the borrowers can’t pay back their loans, the lenders can sell the collateral to recover the loaned funds. When the loan is repaid, the collateral is returned.
Borrowers are required to pay interest to the lenders (for providing them working capital) and a fee to the money market (for facilitating the deal). The interest ratefor borrowers as well as lenders. The fee paid to the money market helps them meet their operating expenses.
There is a problem with centralized structure, though. It simply puts too much power and influence regarding user funds in the hands of a single entity that can change the terms and conditions for other stakeholders in an arbitrary manner. Worse, they can even siphon off the funds in their custody gains. A decentralized structure provides a robust alternative to centralized money markets.
What is a decentralized money market?
Managed by a global community of stakeholders through a, the market rules out any role for intermediaries. In popular lingo, the money market is placed under the domain of decentralized finance (DeFi).
Let’s understand the functioning of a decentralized money market through an example. Fringe Finance ($FRIN) is a decentralized money market thatthe dormant capital in all-tier cryptocurrency assets by . The platform facilitates decentralized lending and borrowing. Fringe Finance is a primary lending platform where anyone can lend extra funds and to loan.
As mentioned, decentralized finance lenders and borrowers operate through on-chain programmatic code controlled by decentralized nodes, thus ending the monopoly of a single entity in control and reducing the points of failure. Here are a few benefits that decentralized money markets bring in:
In a decentralized environment, users don’t need tobefore engaging in any money market activity. Anyone online can earn interest on their capital and/or borrow funds for their needs seamlessly. The decentralized protocols have an .
In centralized money markets, users’ funds lie in the custody of the central gatekeeper. However, DeFi protocols like, and funds are directly in the control of borrowers and lenders. On-chain smart contracts, running on pre-defined logic, assure funds that cannot be compromised while users have full control on them.
Centralized financial markets have usually functioned in an undercollateralized and fractional reserve manner. These markets, under peer pressure to gain more business, allow borrowers to withdraw more funds than what they have deposited as collateral. Decentralized money markets follow overcollateralization, bringing stability to the system. The smart contract simplyof the borrowers who fail to pay back the debts.
Composability is a design principle that allows for components of a system to interoperate with one another. Various applications and protocols can interact seamlessly in a permissionless way., creating a blank canvas with endless possibilities for novel mechanisms like yield extraction and complex derivatives.
How upcoming decentralized money markets are stepping into unexplored territory
, money market protocols were tilted in favor of better known cryptocurrencies with and high liquidity. Upcoming money markets, however, are looking to try new models. Fringe Finance, for instance, focuses on altcoins having smaller market capitalizations and lower liquidity. Most DeFi money market protocols do not support altcoins and this is where Fringe Finance moves in.
As altcoins apply to a niche use case, they tend to be more speculative than large cap digital coins. However, as fewwere catering to such altcoins, the capital locked in them had gone untapped. Despite that, Fringe Finance has altered this scenario. Please be aware that altcoins are inherently more volatile, which does bring in some associated stability risks that the potential of profit can balance.
How does an altcoin money market maintain financial stability?
To neutralize, the money market protocol uses a slew of borrowing parameters and relevant mechanisms. Let’s continue the Fringe Finance example to better understand it. The parameters by Fringe Finance include a platform-wide maximum borrowing capacity for each collateral asset and automated computation of the LVR (loan to value ratio). For adequate implementation of these mechanisms, the system takes into account the asset’s available liquidity, historic volatility and other non-subjective metrics.
The platform offers a sustained model of economic incentives for all participants like lenders, borrowers, altcoin projects,, stakers and liquidators. For instance, it rolls out incentives for liquidators to help stabilize the platform like allowing native $FRIN token holders to from fees. To widen its operational base, a DeFi money market could include cross-chain collateralization, , fixed-interest loans, embedded insurance and a decentralized UI as the platform grows.
The future of decentralized money markets
In an environment where people have become wary of self-serving biases in centralized money markets, the. The latter usually provides governance rights to all holding native coins and presents a in its true decentralized ethos.
Similar to the money markets that used to focus on, novel projects are now focusing on altcoins, the value stored there. Going forward, it can be expected that upcoming territories previously untouched.