Hidden behind the public view is one of crypto industry’s biggest secrets, the Shadow Debt Market, where cryptos worth billions of dollars are borrowed & lent on un-collateralized basis, between some of the industry’s biggest names. Given the huge amounts of money involved, one would assume that the technology behind the Shadow Debt Market is state-of-the-art, but it is shocking to find out that is in fact not the case.
Most people would be surprised by the unsophisticated ways entities borrow & lend cryptos on large scale. In the chat groups on Telegram, borrowers and lenders haggle over interest rates & durations of loans, as we are in an ancient bazaar and not part of the cutting-edge industry. There is no transparent price discovery of interest rates, be that an interest rate exchange or a public ledger with terms of all loans.
With the promise of high-interest rates, many platforms managed to attract billions of AUM from professional and retail investors, creating a massive supply of capital. The demand for debt was infinite during the crypto bull run, and all those cryptos got lent out further to the world’s biggest crypto companies . In the beginnings of the Shadow Debt Market, it was not easy to understand the capital flows that are today obvious.
The above-described Shadow Debt Market is in stark contrast to TradFi, where prime brokers monitor positions in real-time & stop-out loans when there is too much risk. The terms are recorded, albeit in private & centralized databases, available for audit or review by the regulatory bodies.