It seems that every day we are hearing about a new use case for blockchain technology.
The latest usage that is making waves in the world of finance and business, whilst scaring the banks a little bit, is blockchain-backed loans. This new concept of lending is about to turn the traditional bank-based system on its head as well as open up the lending market to those that were previously not able to access it.
So what’s the deal? Let us read on to find out more.
- What is a blockchain loan
- What are the benefits
- What are the cons
- Comparison of blockchain loan providers
What Is a Blockchain Loan?
Source: Salt ICO
There has been a lot of talk in recent months around blockchain-based lending solutions, but it is very much a fledgeling sector of the cryptocurrency world. Whilst in some respects it remains as a bit of a financial no-mans land, the need for a different option from the world of the centralized, overconsolidated banking industry is apparent.
With the financial crisis of 2008 still fresh in many people’s minds, and whilst the bail-out packages provided by governments and taxpayers appear to have worked for the time being, it is important that we come to terms with the fact that the future of finance is not going to be centralised, even if fiat currencies remain in the equation.
As a result of this, several new blockchain-based lending and financial services platforms have provided a unique response to the problems posed by traditional lending methods.
A blockchain based lending system allows an individual to borrow fiat money against the cryptocurrency that is held in their wallets. One can take up to 80% of the value of one tokens worth, as long as that token is held in the individual’s digital wallet.
This is a winning situation for all parties involved as the lender is able to get their money back with interest, whilst the borrower doesn’t have to put an asset such as their house on the line in the form of collateral.
The bonus for the borrower is that the cryptocurrency that they use as collateral can increase in value and by not having to part with it, they are not losing out on a potential windfall later down the line.
Once the term of the loan has finished, the borrower just deposits back the fiat currency that they borrowed, plus interest and the locked cryptocurrency assets are released. It really is that simple.
This is a ground-breaking innovation that will allow borrowers and lenders to directly challenge the prevailing methods of the P2P currency lending, through both centralized and decentralized blockchain-based versions.
What Are The Benefits of a Blockchain Loan?
The benefits of a blockchain backed loan are as follows:
- Those that have previously been unable to access loans due to the lack of a bank account or bad credit rating are able to access loans without any hassle. This means that a whole world of credit and possibilities can be made open to individuals that were previously restricted financially and circumstantially.
- It also means that borrowers do not need to have collateral such as property to put against the loan. They can just “freeze” their cryptocurrency and use that as collateral instead.
- Borrowers are not required to part with the cryptocurrency, instead, it is just held as collateral until the balance of the loan is repaid. Not having to sell the cryptocurrency means that they don’t have to lose out on any potential value increases that could prove very profitable in the future, as they are not actually parting with the coins.
What Are The Cons of a Blockchain Loan?
The only real “con” at this stage is the fact that someone wanting to borrow money would have to be in possession of a cryptocurrency in order to do so. Not everyone invested in Bitcoin back when it was a few dollars per coin, and to access the market now is rather costly.
Of course many see it as an investment and being able to borrow against something that is bound to increase in value in the future, without having to sell it, is a unique and interesting part of the concept.
Centralized vs Decentralised Blockchain Loan Providers
SALT gives users the ability to leverage their blockchain-based assets to secure a loan. They make it super easy to borrow money without having to sell your investment. They pride themselves on an easy application and sign up process, a fast approval time and no credit checks.
They also state that they offer competitive interest rates with no prepayment fees. They allow users to maintain their position and circumnavigate less than optimal tax events.
SALT is great because it allows the user to have the freedom to unlock their assets whenever they want and they do not have to worry about pitching a reason for the loan to the provider. They streamline every single step of the loan process and place importance on the value of the asset instead of the borrower’s credit score.
Borrowers are then automatically matched up with funds that are provided by an extensive network of lenders. SALT keeps the assets of each individual safely in a fully-audited, secure, safe, and private architecture meaning that borrowers can be completely assured that their cryptocurrencies are safe at all times.
SALT is the very first asset-backed lending platform that gives the holders of blockchain assets, access to liquidity without the need for them to sell their cryptocoins.
The company also gives the investors a unique opportunity for investors to lend against a high-growth asset class by means of a fully collateralized debt vehicle. SALT is a winning combination of traditional lending, secured by non-traditional collateral.
Launched back in October 2013, Cryptopay is both a wallet and a payment platform where consumers and merchants are able to transact with each other whilst being backed by Bitcoin payment protocol.
The company also offer loans and by using Bitcoin as collateral, borrowers can get an instant loan in GBP, EUR, or USD. The platform allows them to cut out the middleman, keep their cryptocurrency, and also to get cash whenever they need it.
The system doesn’t require any credit score system, so even those with less than favourable credit ratings can benefit from instant pay-outs.
The loans are also interest-free and can be taken out at up to 65% of the current Bitcoin rate. They offer great, around the clock customer service as well as an extensive FAQ section so that should you have any questions, they can be answered quickly and efficiently.
The company also offer a pre-paid card, as well as the ability to purchase Bitcoin at a competitive rate. You can also buy gift cards which can be redeemed in a variety of retailers such as Nike, Starbucks, and Amazon.
EHTLend offers decentralised peer-to-peer lending on the Ethereum network using blockchain and smart contracts. According to founder, Stani Kulechov, the aim of ETHLend is to create a world where everyone has the same access to finance regardless of their credit history.
The fact that it is completely decentralised means that there is no centralised authority or individual that has the power to stop you from borrowing or lending, and all forms of lending are available through the use of an Ethereum smart contract.
No assets are actually held by ETHLend which means that borrowers can be sure that their assets are safe and not vulnerable to hackers. They also provide the ability to borrow in parts of the world where there are no banks- through lending cryptocurrencies, one doesn’t need a bank account to be able to use the funds meaning that traditional restrictions imposed by banks become obsolete.
Predictions For The Future
As a result of this technology and concept, there are some lenders that are hoping to leverage blockchain tech and smart contract tech, further in loans.
This means that the terms of the loan would exist only within the ledger itself and this would, in turn, facilitate automatic functions in the loan such as payment and collection. This would have a huge impact on peer-to-peer, unsecured lending which would end up being more efficient, more secure, and much, much more reliable.
The fact of the matter remains that there are many flaws in the current lending model- individuals deposit savings in the bank which creates a reservoir of funds from which the bank can use to lend to other customers.
But when the bank lends money to another customer it is creating another reservoir of funds, as both the loan and the deposit can be withdrawn.
This is a dichotomy which is managed by the central bank by using fractional reserve banking which means that only a small fraction of the bank’s deposits are to be backed up by actual cash that is available on hand and for withdrawal. This is done to help the economy expand by freeing up the capital that can be loaned out.
The bank’s ability to loan money to customers is not just based upon its deposits, but also the central bank’s monetary policy which is usually representative of the current socio-economic condition.
The reality of the matter is that banks tend to lend first and look for the reserves later which means that their lending can be constrained only by capital requirement, not by reserve requirement.
Whilst deposits are often the main source of funds for every bank, the shareholder equity and profits that are created by the bank are also important parts of meeting the capital requirements that are needed in order to fund loans.
Before the advent of blockchain and cryptocurrencies, the concept of lending has always been a localised one that has been native to one country or jurisdiction and that is governed by the monetary policy of the applicable central bank.
Therefore borrowers are constricted by the regulations and legal framework of that particular country. In a developed country with a high liquidity of fiat currency, interest rates can be as low as 1% whereas, in a developing country with an emerging market, interest rates can be as high as 30%.
Those individuals that are lucky enough to have a great credit rating but that live in an emerging market country would have to pay a huge amount of interest when compared to someone with a poor credit rating in a developed market.
This is not fair and there is no doubt that it needs to change.
As such, cryptocurrencies are not affected by local issues and they can offer a global solution to borrowers, regardless of where they are, what their credit rating is, or how much they want to borrow. This means that people in emerging markets that were previously not able to get their hands on credit, will have the opportunity to do so.
But this is only the beginning of blockchain-backed lending.
As well as lending against the collateral of cryptocurrencies, the traditional bank-model could be significantly updated and improved by moving it onto the blockchain.
Loan agreements could be executed via means of smart contracts, and repayments or debt-related issues managed on a decentralised distributed ledger.
The outdated lending model, whether through a bank, an intermediary, or a decentralised platform such as one of the above, is stagnant.
Things need to change for the better of lenders, borrowers and the economy as a whole, and it could be that the blockchain has the power to solve the issues currently, and historically faced by the lending industry.
Read more about the Blockchain Changing The World.