Crypto Meets MasterCard, But Decentralization Lags Behind

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Last week Nexo (NEXO) announced a MasterCard-branded credit card to let hodlers spend their borrowed crypto, bringing virtual assets forty million steps closer to mass adoption.

At first glance, the idea that cryptocurrencies should rely on legacy infrastructure is disappointing. Pundi X, for example, spent millions creating POS machines that can accept a range of cryptocurrencies at the point of sale, without friction or reliance on legacy institutions.

For Nexo, however, the move represents an acknowledgement of two things. First, that MasterCard’s footprint is too enormous to overlook. Second, the shift toward decentralization, particularly with respect to the crypto lending market, is going to take a lot longer than purists might hope.

Why Let the Perfect Be the Enemy of the Good?

Decentralization is the beating heart of digital currencies and of blockchain technology generally. Many find the idea of permissioned blockchains irreconcilable with the most important tenets of decentralization. If a blockchain is controlled by one party, it can be altered unilaterally and is therefore not immutable.

But if decentralization is the soul of crypto, mass adoption is its Holy Grail. By making it possible to spend cryptocurrency with the Nexo Card anywhere in the MasterCard network, Nexo seems to have accepted that decentralization might have to take a backseat to usability.

And Nexo, more than anyone, would know the difficulties of decentralization.

Crypto Lending: The P2P Movement That Quickly Reverted to Centralized Models

Nexo, backed by Arrington XRP Capital, powered by Credissimo, and using the secured crypto storage services of BitGo, is not the first entrant to the world of crypto lending. Its main competitors include BlockFi (backed by Mike Novogratz and custodied by the Winklevoss twins), SALT Lending, and Celsius. 

The crypto lending market began with ETHLend, a purely distributed, peer-to-peer lending market. But while ETHLend gained from its first-mover advantage and a hat-tip to decentralization, other platforms learned from ETHLend’s mistakes and understood that centrally-controlled entities still have a role to play.

Nexo is set to pay out dividends of almost two-and-a-half million dollars to its NEXO token holders in mid-August, suggesting that the product has had some success. BlockFi’s user base also continues to grow exponentially. SALT is a semi-decentralized platform, sitting between lenders and borrowers. Its trajectory staggered markedly, with its native SALT tokens, at one time worth $40, now selling for around 13 cents. 

ETHLend recently boasted monthly volumes of 12,000 ether, growing quickly this year. But it hasn’t been smooth sailing for the pure P2P player, and its volumes are a fraction of those of its more centralized cousins. 

Distributed lending is not particularly new, being well-established and regulated in jurisdictions like the U.K. and Australia for a number of years. Virtual currencies are now playing catch-up with the analog version, but it’s instructive that there has always been a third-party intermediary. 

The Challenges of Purely Decentralized Lending

Purely decentralized lending has faced a number of challenges. Just as many tokens rely on market makers to provide volume, distributed lending can easily suffer from a lack of liquidity. That’s why there has been rapid growth for centralized lending services like Nexo and BlockFi, and sluggish growth for decentralized, smart contract-based solutions, such as ETHLend.

ETHLend also suffers from the associated problem of isolation. Sitting within the closed ecosystem of the Ethereum network means that they are limited to a narrow corner of the already-tiny cryptocurrency market. Tokenized models are similarly siloed within their own ecosystems, making expansion difficult.

Nexo’s tie-up with MasterCard to provide lines of credit to crypto hodlers is a gesture to the reality that a purely decentralized economy is still far off. But Nexo’s CEO Antoni Trenchev argues that the “tokenization of the world is happening as we speak.”

He may be right. But in the sub-sector of crypto lending and borrowing,  that process may take longer than proponents of decentralization have hoped.

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