Why Loans Are Better When They’re Decentralized (#GotBitcoin?)
In the feverish quest to decentralize anything even remotely open to decentralization, one of the most promising areas is finance and the financial industry. This shouldn’t be too surprising, given bitcoin and the origins of blockchain technology, but at a time when even babies are being put “on the blockchain,” the emergence of decentralized finance (DeFi) provides welcome proof of crypto’s real utility and applicability. Why Loans Are Better When They’re Decentralized (#GotBitcoin?)
And while DeFi is covering a wider range of areas — from remittances to derivatives and investments — its most promising sector involves credit and lending. That’s because, thanks to the openness, security and transparency of blockchains, it’s possible to make loans and credit available to a larger pool of people than ever before, while the interoperability of blockchains opens up the possibility for creating a spectrum of new lending products and services.
But even though the sector has expanded considerably over the past year or so, decentralized finance still needs to put in plenty of work before it can compete with legacy financial systems. At the same time, users need to be careful when using early stage and untested DeFi platforms and services, just as they need to be aware that not all DeFi systems are truly decentralized.
DeFi might be a relatively new and ill-defined term, but its meaning is simple, referring to the use of blockchains, cryptocurrencies and/or smart contracts in providing financial services to clients. And when it comes specifically to loans and credit, there are numerous platforms, services and companies that are harnessing decentralized ledger technology for the purposes of lending services.
The most well known of these is MakerDAO, which lends its stablecoin — DAI — to users, who gain their loans by depositing ether (ETH) with the Maker system as collateral. According to the recently launched DeFi.Review website, it’s the biggest decentralized finance platform by a comfortable margin, having roughly $508 million in ether locked up in its platform. Behind it is EOS REX, which has deposits of EOS worth around $437 million, and which lends to users who want extra EOS in order to stake the cryptocurrency for extra CPU/NET bandwidth on the EOS blockchain.
Both of the platforms above are infrastructural, in that they serve primarily to support crypto economies and ecosystems — be this the EOS blockchain in the case of EOS REX or various cryptocurrency markets in the case of DAI. As such, they arguably don’t satisfy the common sense or traditional definition of lending and credit, given that they aren’t awarding loans to the general public. Meanwhile, the fact that they both account for approximately 86% of the total amount of assets locked up by DeFi platforms (according to DeFi.Review) is an indicator of how young the sector still is.
Why Lending Is Better When It’s Decentralized
Nonetheless, as young as DeFi lending may be, there are many other platforms besides MakerDAO and EOS REX that are offering credit via decentralized means. Launched in September 2018 and having around $42.4 million locked up, Compound is a decentralized money market where you can lend your own stores of crypto in order to earn interest, while the peer-to-peer lending platform Dharma was launched in April and has roughly $23.91 million locked up, either as ether or DAI. On top of this, there’s a long list of competing platforms, including Cred, BlockFi, Lendoit, SALT, NUO, ETHLend and Colendi.
Another one of these new DeFi lending platforms is Bloqboard, which lets users borrow or lend a range of crypto assets on the Ethereum blockchain, from Wrapped Ethereum to BAT, ZRX and DAI. Its dashboard is fairly simple, with visitors being able to choose to borrow or lend any supported crypto and with them being presented with the variable interest rate they’ll benefit from or have to pay. It also enables customers to use Ledger or MetaMask to interact with the Ethereum blockchain and track their transactions. And as Bloqboard’s head of growth, Nick Cannon, explained to Cointelegraph, such transparency is a big part of the reason why decentralized lending and DeFi more generally is likely to take off.
“DeFi brings magnitudes greater accountability and transparency to investors making for a healthier financial system. These products will broaden access to sound financial investments no matter what geography you reside in.”
On top of greater accountability and transparency, decentralized finance will also bring the benefit of greater security for users and their funds, something pointed out to Cointelegraph by Guillaume Palayer, a co-founder of decentralized crypto asset management platform Betoken.
“The main advantages are the control, security and permissionless nature offered for the end users by DeFi products,” he said. He went on, saying:
“Permissionless because everyone can access it without conditions and independent of your local financial system’s health. Security and control because the vast majority of DeFi products are non-custodial and offer the option to opt-out of their service with a simple transaction.”
As both Palayer and Cannon suggest, the decentralized and geographically nonspecific nature of blockchain means that DeFi lending is more open to a wider market of customers than centralized alternatives. But in addition to this, decentralized lending is more open in a financial sense, and for two primary reasons.
First of all, most blockchain-based credit platforms don’t actually require users to have a good credit score or even a credit history, with many covering the risks they take on by requiring collateral — often in the form of crypto — from borrowers (as in the case of MakerDAO, for instance).
“With a decentralized loan, you’re not dependant on having access to a credits system and you are able to customize the duration and the cost of the loan however you want,” Palayer explained. “As far as I know, no centralized loan providers offer this kind of advantage in a trustless fashion.”
The fact that you don’t require a credit score is in evidence, for instance, with Nexo, which offers instant loans in over 45 fiat currencies. Nexo co-founder Antoni Trenchev told Cointelegraph:
“As long as you have crypto assets, you can immediately borrow cash that is delivered straight to your local bank account.”
Nexo claimed to have issued $300 million in loans to over 170,000 users in the seven months leading up to March, while Trenchev also reports that the use of blockchain and crypto-based collateral means that loans can be made extremely flexible for users, both in terms of the amount borrowed and in terms of the conditions attached to lending: “There is no fixed repayment schedule, no strict maturities. As long as you have sufficient collateral to secure your borrowed funds, you have the flexibility to repay your loans at any time with cash or crypto assets.”
Secondly, in many cases, the decentralized, blockchain-based nature of DeFi lending systems allows companies to offer credit at a lower cost, something that obviously makes obtaining loans more affordable for a wider group of people. “Borrowing and potentially the costs of payments in distributed systems are lower,” Alexey Ermakov, the CEO and founder of decentralized payment apps Aximetria and PayReverse, said. He continued:
“Among other reasons, this is due to the fact that in the case of blockchain-based credit systems there are no compliance costs and/or they are significantly lower, and costs are also lowered by the ability to make electronic mortgages and provide loans on the basis of smart contracts.”
Feeding into the openness of decentralized lending platforms is the burgeoning area of blockchain interoperability and atomic swaps, which promise to give users more options when taking out loans or lending crypto.
“Another huge advantage that stems from DeFi’s permissionlessness is interoperability,” Palayer said. “You could take out a DAI loan from MakerDAO and convert it to Ether using Uniswap or Kyber Swap to gain leverage. The possibilities are endless, and we feel everyone should be excited about this.”
And from a more general and macroeconomic perspective, the increased openness and accessibility of decentralized loans should result in higher productivity for the global economic system, as outlined by Cannon:
“As the market matures, decentralized lending services will source more ‘dead capital’ from around the world.”
Put differently, blockchain-based loans will have the effect of putting “dormant” crypto to work in the wider economy, with hodlers having the opportunity to borrow or lend without ever renouncing the underlying ownership of their cryptocurrency.
“Many have been purchasing cryptocurrencies as a very long-term investment, expecting their value to grow hundreds even thousands of times,” Trenchev explained. “Naturally, such investors do not use their crypto for payments. They do not trade it. They simply keep their assets with the expectation of having exponential returns by just holding.”
Future Challenges And Future Promise
There’s little doubt that the world of blockchain-based lending is a tantalizingly promising one, but the fact that it’s still in its infancy should give potential customers and the industry more generally pause for thought.
First of all, the vast majority of DeFi platforms are still untested and in development, and as SALT’s head of product, Rob Odell, told Cointelegraph, this means that users should be careful when choosing a service:
“Be vigilant about researching your options,. For all its advantages, most DeFi applications are still very new — they need time to work out all the kinks and be battle tested.”
Odell also noted that users should consider “how limited the offerings of some of the DeFi loan products can be. For example, right now, MakerDao only works with Ether,” and while MakerDAO is (like certain other platforms) planning to add more cryptocurrencies in the near future, its current limitations are one indicator of how much distance DeFi has to travel before it can compete on the same level as legacy systems.
As with pretty much every area in which blockchain technology is being applied, education will be one of the first key areas in ensuring that DeFi can expand, mature and realize its potential. “There are a number of challenges but I think education is the greatest,” Jeremy Lam, product lead at OmiseGo, a finance-oriented scaling network for Ethereum, said. He added:
“DeFi platforms will often require the capacity of the individual to be in control of their own private key. I don’t think most people are ready to handle such a responsibility. Also related to education, we have to consider who is using DeFi services. How do we protect people with insufficient financial knowledge from losing money on products they don’t understand?”
One thing that potential users need to be educated about is that some DeFi platforms will be more — or less — decentralized than others, something that could potentially put them and their money at risk. “A Service provider needs to fulfill certain conditions to be a true DeFi service,” Stani Kulechov, the CEO and co-founder of the Swiss-based AAVE, which runs the Ethereum lending service ETHLend, warned. He went on to say:
“First and foremost, ensure that the service provider does not hold your assets. This means that there must be a smart contract that holds the funds and secondly ensures that the transactions are conducted via smart contract and not through a third party signing. You should choose DeFi projects based on transparency and track record.”
More fundamentally, decentralized lending won’t succeed and make significant headway until the industry pinpoints — and builds itself around — gaps in the credit and loans market it’s well-positioned to solve. “As mentioned, education is a large challenge,” Lam said.
“The other huge challenge is to properly understand what problems DeFi is trying to solve and onboard the users that are experiencing that pain.”
And while there is certainly a demand for loans that don’t require a credit history, the fact that most no-credit DeFi platforms ask for crypto as collateral would mean that the success of such platforms is predicated on the general and widespread adoption of cryptocurrency.
And while we certainly haven’t yet reached the “widespread” adoption of crypto, there is some indication that adoption has increased in recent months, with around 9% of Americans now owning bitcoin (according to an April self-selected survey from Blockchain Capital), compared to only 2% in November 2017. There is, then, genuine hope that the DeFi sector will capitalize on this growth, with figures belonging to this sector confident that it will overcome its challenges and make good on its potential.
“I’m very confident about the tremendous ecosystem’s growth we could witness in the next coming years,” Palayer affirmed. Similarly, Odell said, “While it’s still very early, decentralized finance will eventually be the norm if the promises of transparency, openness and access are fulfilled by these solutions.”
BlockFi Drops Minimum And Fees On Interest Bearing Crypto Accounts
BlockFi has done away with minimum deposits for its BlockFi Interest Account (BIA).
Under its new rules, anyone can deposit bitcoin, ethereum, or the gemini dollar and allegedly get up to a 6.2 percent annual return.
BlockFi told CoinDesk on Friday that while the price of bitcoin and other cryptocurrencies has risen substantially since BIA’s launch in March, it dropped its minimum deposit requirement because of consumer demand. BlockFi previously mandated a 0.5 BTC, 25 ETC, or 2,500 GUSD minimum on deposits before the rule change.
Early withdrawal penalties have also been lifted on the BIA product and users can receive up to one free withdrawal per month.
“This update to our terms will make our products more widely accessible – which is a key theme of the crypto sector and part of our mission at BlockFi,” CEO and Founder Zac Prince said in a statement.
The company is eyeing an imminent Latin America market push which complements a launch in India earlier this year.
“By making BIA open to all, we plan to target clients in Latin America, where banking services and credit reporting are limited. BlockFi’s platform leverages blockchain rails to make wealth management products available on a much broader scale,” said Co-Founder and VP of Operations Flori Marquez in a statement.
“US-grade financial products have typically only been available to high net worth individuals in countries like Argentina and Costa Rica,” he added.
The product launch comes a month after the closing of an $18.3 million Series A round led by Valar Ventures. At the time, BlockFi said the funds would go toward launching additional products like BIA.
Can Crypto Exchanges Ever Be Truly Decentralized?
Earlier this week, British-American entrepreneur John McAfee, who is currently living “in exile” due to tax-related charges filed against him by the United States authorities, launched his own decentralized exchange (DEX).
The expressive crypto advocate’s McAfeedex.com is running on the Ethereum (ETH) blockchain, and, in McAfee’s own words, it is a “Wild Wild West exchange” that purportedly cannot be seized by regulators. “There is nothing to shut down,” he wrote on Twitter, “Our technology is the smart contracts forever residing on the blockchain.”
According to the businessman, the DEX, currently in beta, is open source and imposes no Know Your Customer (KYC) or Anti-Money Laundering (AML) requirements on its customers.
But can a crypto trading platform be fully exempt from regulations in the current, post-ICO environment, where authorities are actively prosecuting bad actors and discussing the possibility of digital assets in Congress?
In the new Crypto Myths series, Cointelegraph will attempt to debunk various assumptions circling around the crypto space.
What’s A DEX?
In the most basic sense, there are two kinds of cryptocurrency exchanges: centralized and decentralized. The former are much more popular, as they seem to account for more than 99% of the global cryptocurrency trade volume. As a testament to this fact, the largest and most well-known trading platforms — Coinbase, Kraken, Binance, Bittrex, etc. — are all centralized.
They act as middle men, connecting people willing to trade cryptocurrencies while holding their assets on company-owned wallets. As a result, once a trader deposits their coins onto a centralized exchange, he or she essentially hands over control of their private keys, trusting the platform with the safety of their assets.
This practice goes against the decentralized agenda prominent in the cryptocurrency space, namely the catchy, “Not your keys, not your Bitcoins” proverb. Last year, Vitalik Buterin, co-founder of Ethereum, went as far as to say that centralized exchanges should “burn in hell.”
DEXs, therefore, are built in such a way that allows users to retain ownership of their cryptocurrencies and private keys. Specifically, they are peer-to-peer (P2P) services that allow direct transactions between two interested parties directly on the blockchain. Moreover, given that DEXs use smart contracts to facilitate trade, they require far less supervision compared to centralized platforms.
While some people still find it easier to trust a third party with their private keys, DEXs have other major benefits over centralized exchanges, namely anonymity and security. Indeed, decentralized platforms are much more difficult to hack, since they rely on smart contracts. This contrasts with the regular breaches experienced by centralized servers, resulting in multi-million losses every year. Additionally, lax KYC requirements are also a plus for the cryptocurrency enthusiasts who value anonymity.
DEXs Are Still Lagging Behind Centralized Platforms. Why?
DEXs remain a strongly alternative option, as proven by relatively low liquidity rates. There are a number of reasons for that, experts say, like cost and speed of trading. Andrej Cvoro, CEO and founder of R&D blockchain firm Decenter, explained to Cointelegraph, “Centralized exchanges are of course historically older and hence had more time to accumulate both users and liquidity, win users’ trust and tweak the user experience.” According to Cvoro, even some supposed advantages of DEXs come with certain drawbacks, while security is also an issue:
“DEXes are trustless systems where users keep their funds within their wallets and have them exchanged through smart contracts, but this does involve on-chain interactions, which then includes waiting for transactions to be mined and paying required fees for them. DEXes also expose all orders and the accounts making them, which some users want to avoid. Finally, DEXes could also have security issues and have known to struggle with issues such as front-running”
User experience and institutional involvement are other factors that should be taken into consideration, according to John Todaro, director of research at TradeBlock, a provider of institutional trading tools for digital currencies. The analyst told Cointelegraph that centralized exchanges, by nature, would have more institutions and market makers using them, adding that:
“Given institutions typically operate within a specific regulatory sandbox, they are more comfortable trading through centralized exchanges than DEXs. Further, the majority of retail flows are concentrated on centralized exchanges. Using a DEX requires a deeper understanding of wallets and exchange order books than using a centralized exchange such as Coinbase which can be accessed via a smartphone app, and thus has limited the customer pool for DEXs.”
Decentralization As A Spectrum
Another crucial problem for DEXs lies within their name, as there is no clear definition that would fully explain what this kind of trading platform should entail. As the phenomenon became more popular last year, many well-known cryptocurrency exchanges like Binance and Huobi decided to use their brand to launch their own decentralized marketplaces while applying the same compliance principles. In fact, the majority of DEXs now follow regulatory standards like KYC and AML in much the same way as centralized platforms, Todaro said:
“Many DEXs have KYC/AML procedures in place and decide which tokens are added to their platforms. Regulators have shown in the past that DEXs are subject to existing exchange requirements, and if DEXs do not comply, DEX creators are subject to fines and other repercussions.”
Some experts are even reluctant to call those exchanges decentralized. “Today, most exchanges which call themselves decentralized exchanges are actually only non-custodial exchanges,” said Eyal Shani, a blockchain researcher at consulting firm Aykesubir. He elaborated:
“They do not own your digital assets, but the exchange operator is still much in control of everything regarding the platform. Any exchange that relies on a traditional web front to facilitate the order book, runs normal KYC/AML processes are not completely decentralized. But that’s a matter of definition.”
In Shani’s view, a true decentralized exchange would be the one that facilitates fee-free transactions between people without the need for KYC or AML, he noted:
“However, running such an operation is usually costly, and those who engage in that kind of business usually wishes to make a profit out of it. And this is where the law kicks in and dictates that if one is making profit out of the operation, he is de facto in charge of it, and requires that entity to run KYC/AML among other requirements”
Thus, to avoid potential confusion, decentralization should be seen as “a spectrum, rather than a binary, black and white classification,” Cvoro suggested, providing some specific examples:
“On one end, there are the least decentralized options, such as Binance DEX, that require KYC, have limited availability depending on the user’s country of residence and rely on centralized, server-based order matching, among other things. And on the other end there’s, for example, Uniswap that has no KYC whatsoever, has unlimited global availability and does everything on-chain without any accounts with admin privileges of any sort.”
So what about McAfee’s DEX, boldly marketed as an independent platform and backed by someone who is himself hiding from authorities in international waters? Shani said in an email to Cointelegraph, “To the best of my understanding, McAfee’s DEX does profit from running the operation, so I recommend him to ask the creator of EtherDelta what the SEC thinks of those kind of exchanges.”
Shani was referring to when U.S. authorities charged Zachary Coburn, the founder of decentralized crypto token trading platform EtherDelta, with operating an unregistered securities exchange.
Coburn neither admitted nor denied the allegations, but consented to pay the state over $300,000 in unlawful profits, along with other penalties. Although, McAfee is well-aware of the concerns of the Security and Exchange Commission (SEC) — at least according to his Twitter, where he wrote:
“SEC says as long as we follow AML and KYC procedures the http://McAfeedex.com exchange is OK. But we don’t follow either and why should we even if we could? We are just a window into the blockchain where people trade. This is for the people, not the Government. F*ck them.”
Thus, even though the McAfee DEX “does stand out as one of the more decentralized exchanges out there” due to having a decentralized listing process and self-custody on top of requiring no personal information for KYC and AML procedures, “there are still likely central points of failure on the back-end that regulators could target,” says Todaro.
Theoretically, it is possible to run a fully decentralized exchange, Shani told Cointelegraph. However, it would certainly involve much less profit for the owners, especially considering the current trading volumes that DEXs are demonstrating. Shani added:
“There is a way to run a truly decentralized DEX. But it could potentially be so expensive that it would scare away the small traders. For that to happen, in addition to having no KYC/AML, running the orderbook and saving all data on replicating systems. But even then the government could block those services, fine whoever is involved etc.. So we would need a decentralized DNS servers, decentralized ISPs and many more services which are great solutions. Yet, based on the current volume on the so called DEXes, it seems like a solution looking for a problem, rather than a true product-market fit.”
Indeed, based on the current trading history displayed on the McAfee DEX, it seems that the service has yet to experience a massive influx of traders. Todaro explained that generally, cryptocurrency traders tend to value other features besides anonymity and decentralization:
“There is a demand for fully decentralized exchanges, but I would expect the vast majority of traders and exchange users to prioritize liquidity, token availability (i.e. access to more tokens than just ERC-20s), and ease of use over a platform that ‘no one can block.’”
Therefore, it is still unclear whether the market is ready for a fully decentralized exchange, even if there is one. Given that the top-three trading platforms are calculating their each and every step (namely in the U.S. market) to avoid facing large fines from regulators, it would seem unlikely that a “true” DEX could perform that well in the current landscape — in terms of profit, at least.
Int’l Bank Regulator Is Studying Crypto Lending Capital Requirements
Global banking regulator the Basel Committee on Banking Supervision (BCBS) is working to establish how much capital lenders should hold to cover the risks generated by dealing with cryptocurrencies.
Business Reporter published the news on Nov. 7 that the Basel Committee — which includes banking regulators from the United States, Europe and Japan — agreed to publish a paper on the prudential treatment of crypto assets.
At the end of a two-day meeting in Madrid, the committee said that banks should take into consideration the riskiness of cryptocurrencies when considering crypto asset exposure:
“The Committee reiterated its view that the prudential treatment of banks’ crypto asset exposures should appropriately reflect the high degree of risk of crypto assets.”
The organization also noted that — given ongoing initiatives in the crypto industry — it will seek the views of stakeholders regarding the prudent treatment of crypto assets.
The Basel Committee also announced that it will look into the reliance of banks on unregulated third parties for services, such as cloud computing and data. The final consultation paper will come into force in January 2022.
The BCBS is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.
As Cointelegraph reported at the end of October, the institutional digital asset lending firm Genesis Capital released its Q3 report, which shows a growing demand for cash and stablecoin lending as the company added $870 million in new originations in the third quarter.
Crypto Platform Celsius Network Reaches $4.25 Billion In Total Loans
Cryptocurrency platform Celsius Network announced that it reached $4.25 billion in total crypto loan origination as of Nov. 12 in a press release shared with Cointelegraph.
Celsius reached $4.25 billion of cryptocurrency loans since the start of its activity in July 2018 calculated at current Bitcoin (BTC) prices, a 93% increase from the $2.2 billion reported on Aug. 1, 2019.
A Fast-Growing Lending Network
The company also claims $450 million in customer deposits and collateral from loans under management, which represents a 50% increase from $300 million on Aug. 1 this year.
Furthermore, Celsius also reveals it paid its users $5 million in interest payments or 66% more than the $3 million paid by Aug. 1. The firm’s CEO Alex Mashinksy said:
“Celsius gives back 80% of loan interest to our depositors with no minimums, caps, fees or penalties — our incredible growth shows there is high demand for lending platforms that put the needs of depositors first.”
The company also claims to have over 50,000 users from over 150 countries and that over 150 institutions are amongst its customers.
A Quickly Developing But Unregulated Industry
The latest data shows that the nascent cryptocurrency lending industry is growing rapidly.
Additionally, a recently Q3 report released by institutional digital asset lending firm Genesis Capital revealed that the platform added $870 million in new originations during the quarter.
Still, some uncertainties remain as to how crypto lending should be regulated. As Cointelegraph recently reported, global banking regulator Basel Committee on Banking Supervision is currently studying how much capital lenders should hold to cover the risks generated by dealing with cryptocurrencies.
Uphold And Salt Partner To Bring Liquidity To Millions Using Crypto-Backed Loans
Uphold, a digital money platform providing access to investments and payments using blockchain technology, has announced a partnership with crypto-backed lending company Salt. Together, the two plan to provide users with cash or stablecoin loans using cryptocurrencies as collateral.
Uphold’s 1.7 million users can now secure loans through Salt against their holdings in Bitcoin (BTC), Ether (ETH), Litecoin (LTC), Bitcoin Cash (BCH), Dash (DASH), and XRP. The integration of the two platforms provides enhanced access to liquidity, enabling users to unlock additional value in their crypto holdings. Robin O’Connell, Uphold’s chief revenue officer, told Cointelegraph:
“Millions of Uphold users that are holding (or hodling) cryptocurrencies might want access to those funds without having to sell their crypto assets. The partnership with Salt allows users to free up liquidity, while maintaining the potential upside of the underlying crypto asset.”
SALT has also integrated Uphold wallets into its platform, allowing its growing user base to access Uphold’s products through their dashboard. The integration streamlines the lending experience for both Uphold and Salt users through collateral transfer and loan proceed payouts.
The Potential Of Crypto-Backed Loans
Crypto-backed loans from Salt ultimately allow Uphold users the ability to keep their crypto and receive cash, providing an easy solution to unlock the value of their assets without having to sell them on an exchange.
It’s important to note that Salt is a centralized cryptocurrency loan platform, providing loans to users in select jurisdictions. Other crypto-backed loan providers, such as ETHLend, are decentralized and cater to users worldwide.
Unlike traditional financial institutions, Salt allows customers to use their crypto assets as collateral to secure a cash (U.S. dollar) or stablecoin loan (a cryptocurrency backed by a reserve asset) in just 24 hours. This gives users the opportunity to fund large purchases, consolidate debt, or access working capital to scale their businesses with their cryptocurrency holdings.
“When applying for a loan through SALT, Uphold users can customize their loan by choosing their preferred loan type, loan amount, duration, and Loan-to-Value (LTV) ratio. SALT currently offers Loan-to-Value ratio options of 30%, 40%, 50%, 60% and 70% for crypto-backed loans and does not require customers to undergo a credit or income check,” Rob Odell, VP of product and marketing at Salt, told Cointelegraph.
Once a customer transfers the required collateral to Salt’s platform, Salt will reportedly fund their loan in about a day. Customers can choose to receive their loan proceeds in the form of U.S. dollars directly to their bank accounts or in a stablecoin (Uphold currently supports UPUSD, UPBTC and UPEUR). As soon as a borrower pays back their loan, they will have full access to their crypto assets again.
According to SALT, for the duration of the loan, collateral assets are locked in deep cold storage with private keys that have never been exposed to a network-connected device. These keys are protected by multi-signature processes. This security measure has been audited by the CryptoCurrency Security Standard (CCSS).
This differs from decentralized loan platforms, like ETHLend, where assets are allocated within an Ethereum smart contract, which could be considered more secure as the only parties able to interact with the loans are the lender and borrower.
A Real-World Appeal
According to Statista, there were over 42 million blockchain wallet users at the end of September 2019. Uphold currently has 1.7 million users, a number that it expects to increase rapidly in coming years.
By providing Uphold users with liquidity from crypto-backed loans, the firm hopes to achieve a number of otherwise untenable real-world use cases.
“If an individual who holds crypto wants to adopt a child, but does not have enough cash to pay for the adoption, they can borrow against their crypto holdings to secure a U.S. dollar loan from SALT to cover adoption costs,” said Odell.
Odell Also Mentioned That Businesses Can Take Out Crypto-Backed Loans To Cover Operational Costs:
“A crypto mining company that holds a significant amount of crypto needs fiat currency to cover operational costs, including purchasing more mining equipment and paying its employees. Given the company does not want to sell its crypto holdings for cash, the company takes out a business loan with SALT and uses a portion of its crypto holdings to secure the loan.”
These use cases are especially relevant for Uphold users, as many are located in Venezuela, Argentina, Uruguay, Paraguay and Brazil, and do not have access to easy liquidity. For example, following a major market crash in August, Argentina has been struggling with a debt crisis. Uphold aims to solve this for many of its users by providing liquidity through crypto-backed loans.
“A recurring trend in Latin America are areas with clear home currency volatility and/or government issues. Many users are looking for a secure and trustworthy solution to get out of their local volatile currency. While of course borrowing is a major value-added service to all of our Uphold Members, we feel it will see significant adoption among our Latin American user base in countries like Brazil,” said O’Connell.
Crypto Lending Solutions: A Review of 3 Blockchain Lending Platforms
The proliferation of crypto lending platforms is the latest crypto solution bridging the gap with the traditional financial industry. These platforms offer institutional and retail investors the opportunity to access banking services previously only available in the traditional financial sector.
A typical crypto lending platform enables long-term crypto holders to put their tokens to good use by lending them for agreed-upon interest rates. Doing this beats the passive buy and hold investment strategy and users get access to interest rates that are higher than what the traditional banking sector offers.
The financial services provided by these platforms is on par with the services provided by traditional lending solutions. For this reason, crypto holders are increasingly adopting lending services as a way to make passive crypto income. This has led to an explosion of crypto lending solutions aimed at satisfying growing demand.
While this growth justifies crypto’s viability and presents crypto holders with another avenue to make profits, it also complicates the process of determining which platform will best suit individual needs for potential borrowers and lenders. In this article, we will explore three of the leading crypto platforms and highlight the key differences between them to help those interested make a more informed decision.
These Platforms Are BlockFi, Nexo And Celsius Network.
According to BitInfoCharts, 97% of wallets have less than 1 BTC, so the majority of the platforms have focused on retail investors.
BlockFi is a New York-based crypto lending platform. The startup has pulled off impressive funding rounds. In 2017, it raised $1.5 million in seed funding from Kenetic Capital, Consensys Ventures and SoFi. In 2018, the company was the first in the sector to receive an institutional credit facility from Galaxy Digital.
This year, it embarked on another round of funding, raising $18 million from Valar Ventures with participation from Fidelity, Susquehanna and numerous other strategic investors. BlockFi’s success in accessing financial backing has helped it in its quest to offer bank-like services to the unbanked.
According to BlockFi’s website, it takes an average of two minutes for users to access loans issued in USD on its platform that are backed by crypto assets. To borrow funds, all interested borrowers need to do is follow the sign-up procedure, enter the desired amount to be borrowed, and fill in the Know Your Customer and Anti-Money Laundering documentation. The platform will then instantly provide a loan offer. From there, the borrower deposits collateral in the form of crypto assets with BlockFi’s custodian, Gemini.
When this is done, the amount requested is issued in fiat to the borrower’s account or sent as a stablecoin to the borrower’s wallet. Note that with BlockFi, borrowers will need to post at least 150% in collateral to receive a loan.
BlockFi partners with Gemini to store users’ assets. Gemini is an NYDFS licensed custodian, is Deloitte-issued SOC2-compliant, and owns a cold storage facility. For assets in its hot wallet, Gemini has secured insurance from AON.
What Are BlockFi’s Limits And Rates?
BlockFi’s loan rate is pegged at a reasonable 4.5%, with a 25% loan-to-value ratio. Loans run for 12 months, and come with an option to pay the loan off before the term ends or refinance the loan when it’s due. As soon as the loan is repaid, the asset deposited is transferred back to the borrower. The only time the platform can choose to permanently and legally keep the collateral is when a borrower defaults on a payment.
Users of a BlockFi Interest Account can access interest rates as high as 8.6% when they deposit their crypto assets for others to borrow. Interestingly, BlockFi announced in September that it had removed the minimum deposit required before users can start earning interest.
On every Bitcoin (BTC) deposited into BlockFI, users are eligible to receive 6% in interest, which compounds to a 6.2% annual percentage yield, while the rate for Ethereum is pegged at 4%. When compared to the other platforms reviewed, it was clear that these rates are the highest.
For instance, if 1 BTC is deposited with BlockFi for 10 years, and the price of Bitcoin stays at $10,000 throughout the duration. After compounding the interest, using the standard formula for compound interest, at 6.2% APY, the account will earn 0.819397 BTC. This beats a model that relies on rates based on simple interest calculations.
Of the three platforms compared in this post, BlockFi is the only one that does not have clauses promising different rates for token holders. In other words, users do not have to own or pay with a native coin to access the platform’s low rates. They are not urged to buy tokens that have no use outside of BlockFi’s platform, nor come under regulatory scrutiny as to whether those tokens are a security or not.
Also, it saves them from worrying about the volatility of an extra coin. Lastly, it saves them from the hassles that come with reporting taxes on their primary coin (BTC or ETH) and the native token, which must be done separately.
BlockFi has embarked on various partnership deals to improve the platform’s liquidity. For one, the startup chose a licensed custodian, Gemini, to hold all deposited crypto assets. It has also teamed up with a third-party loan servicer, which is charged with managing loan contracts and repayments.
According to a report released in April, BlockFi has over $53 million assets under management. It is worth mentioning that BlockFi is planning to add more currency pairs to its platform, starting with the incorporation of the USD/LTC pair before the year runs out. There are also plans to launch a mobile app in the first half of 2020, which will make it easier for users to monitor their accounts and make deposits and withdrawals.
Celsius Network operates very much like BlockFi, as it allows lending and borrowing without the hassles plaguing traditional lending platforms. Here, users get to take out loans in euros, dollars or stablecoins. Unlike BlockFi, Celsius Network operates an ecosystem where depositors are entitled to 80% of its revenue.
The startup’s marketplace has institutions as the entities accessing loans, while individuals are usually the lenders. This model contradicts conventional financial systems that have institutions supplying funds. As revealed in a publication, Celsius Network allegedly onboarded over 100 active institutional accounts in the first half of the year. Celsius has enlisted two custody solutions for its digital assets. The first is BitGo, which is fast becoming the go-to custodian for crypto firms, and the second is Fireblock.
From the information gathered from its website, there are no withdrawal fees, early termination fees, or default fees charged on the platform. The startup purported that the decision to enable a zero-transaction fee platform was to ensure that users get the appropriate returns on their investments.
Likewise, it recently launched its app to makes activities like depositing, borrowing, withdrawals, and account monitoring significantly easier. Also, the app comes with a feature named Cell Pay, which allows crypto onboarding at lightning speed.
To get started, a user simply needs to select the coin he or she wants to send, enter an amount, create a link for the transaction, and send it to the desired contact. The recipient only needs to click the link and follow a simple procedure to claim the coin. This beats the lengthy method of waiting for the recipient to get a wallet and send his or her address.
Celsius Network’s Rates
Celsius Network offers 8.95% as its loan rates. However, borrowers that intend to service their loans with the platform’s native token, CEL, can access rates that are as low as 4.95%. Owing to its goal to help users maximize their profits, Celsius Network is offering 8.15% as the interest rate on deposits disbursed in fiat currency, 4.3% on BTC deposits, and 3.75% on ETH deposits. However, native token holders have the opportunity to receive a 10% interest rate on their funds.
According to Cryptoslate, Celsius Network has processed over $4 billion worth of crypto loans. Another report revealed that it has over $375 million worth of assets under management. Furthermore, Celsius has incorporated Bitcoin.com’s trading platform into its ecosystem. This allows users to purchase a variety of crypto assets. Seeing as the platform has no lockup periods, users can withdraw their crypto whenever they like.
By and large, the launch of its app has optimized withdrawal speed. Combining this with the growing number of crypto pairs supported by the platform shows how serious Celsius Network is about providing wide coverage for the crypto community. At the time of this review, the network offers over 20 crypto pairs for its users.
Nexo is also a crypto lending service, which has adopted a business model similar to the one Celsius Network runs. Individuals deposit collateral and are instantly eligible to access a revolving credit line. According to a report, Nexo has given out loans worth more than $700 million to 200,000 clients since it launched. To ensure that the platform remains compliant, Nexo has implemented KYC procedures and partnered with Chainalysis to confirm that assets deposited are not sourced from illegal activities.
Nexo uses BitGo as its custodian. BitGo’s cold storage comes with an insurance policy that covers losses of up to $100 million through an arrangement with Lloyd’s of London. More importantly, it charges zero fees. Users are allowed to withdraw their funds or make deposits at any time. In other words, the platform has no lockup period. Like the other two platforms reviewed, this platform adheres to strict KYC and AML requirements. To do this, Nexo utilizes Onfido, a popular ID authentication technology.
Like Celsius, Nexo pays dividends to token holders on the profit generated by lending. Token holders receive 30% of the platform’s profits. Since its launch in May 2018, Nexo has distributed $3,321,645.84 worth of dividends — the highest amount of dividends ever paid out by a blockchain-based company. The annualized dividend yield is an impressive 12.73%, which surpasses all of the highest dividend-paying stocks in the S&P 500.
The platform offers 24/7 account fraud monitoring features for each coin deposited. Similarly, there is a rate calculator embedded on the website, which allows potential borrowers to calculate the daily, monthly and yearly earnings on a given deposit as well as the maximum amount they can borrow against their specified crypto collateral.
Nexo offers 11.9% as its loan rate while Nexo token holders have access to loans at a lower rate of 5.9%. For its interest rates, lenders make 8.00% on the funds made available to borrowers on the platform. Depositors get to earn daily, as the interest rate compounds. This provides a secure high-yield passive income without any fees or commissions
As mentioned earlier, Nexo claimed to have processed loans to the tune of $700 million. If this assertion is anything close to the truth, then the platform should offer high liquidity. That said, its partnership with Mastercard for its debit card launch makes it easier for users to spend money equivalent to the worth of their digital assets.
Aave Ascends Market Rankings As Flash Loans Explode
Aave is climbing the DeFi and market cap rankings as its flash loans see daily volume exceeding $100 million.
Decentralized finance (DeFi) loan protocol Aave has seen an explosion in the number of flash loans issued — with the daily value of said loans growing more than 1,000% since the start of July from $11 million to more than $130 million as of July 27.
The record loan issuance has seen Aave ascend to rank as the fourth-largest DeFi protocol by locked funds, with nearly $392.9 million in capital currently tied to the project, according to DeFi Pulse.
The value of Aave’s LEND token has also exploded by nearly 500% over less than two months, with LEND rallying into local highs above $0.3 for the first time since price discovery. Aave is now the 34th-largest crypto asset by market cap with $362 million.
Flash Loans Propel Aave’s Market Rankings
Aave describes its flash loans as “the first uncollateralized loan option in DeFi,” allowing traders to instantly borrow funds provided that the liquidity is returned to the pool “within one transaction block.”
The loans are intended for use in arbitrage and collateral swapping, allowing users to dictate instructions via smart contract to execute transactions. A 0.9% fee is charged on the gains from the transaction, with the fee being distributed among the platform’s liquidity providers.
Should the borrower fail to meet the loan condition, “the whole transaction is reversed to effectively undo the actions executed until that point” and ensure the safety funds in Aave’s reserve pool.
Flash Loan Attacks Cripple BZX
Despite their new-found popularity on Aave, flash loans have been a part of the crypto ecosystem since the launch of the open-source banking protocol Marble in 2018.
However, flash loans were maliciously leveraged in two attacks that saw nearly $1 million lifted from DeFi lending platform bZx in February by a liquidity provider who was able to manipulate oracle pricing to purchase thousands of tokens at enormously discounted prices.
In analyzing the aftermath of the attack, crypto exchange Coinbase predicted that more “flash loan style oracle attacks” will target the DeFi ecosystem in future — warning that the “combination of flash loans and a web of composable DeFi protocols that interact in complex ways have created [a] new class of vulnerabilities.”
While there is a growing number of platforms offering crypto loans, the aforementioned platforms have shown remarkable results that justify their place at the upper echelon of the emerging market. That said, this article is merely the opinion of the writer and shouldn’t be taken as investment advice. As with all investment channels available to the crypto community, readers must carry out their own research before selecting the crypto lending platform that best suits their needs and goals.
Flash Loans Are Providing Instant Cash To Crypto Speculators
Money for nothing. That’s what a fast growing array of financial products dubbed flash loans are promising the crypto faithful.
The practice is the latest attempt by the digital-asset crowd to rewrite the rules of financial transactions, removing many of the current gatekeepers from the picture in the search to achieve what they call decentralized finance, or DeFi. As with most things crypto, the promise is great, with the perils often equally so.
Here’s how flash loans typically work: Borrowers can take collateral-free loans from lenders and use the proceeds for whatever they want. One of the most popular uses is to arbitrage discrepancies in coin prices on different exchanges.
The key is that the loan, the trade and repayment are bundled into the same block of transactions being processed on the Ethereum digital ledger and are executed simultaneously.
The time from borrowing to returning a loan typically takes seconds. In the example, the transaction gets submitted to the network, temporarily lending the borrower the funds. If the trade isn’t profitable, the borrower can reject the transaction, meaning that the lender gets their funds back in either case. As far as the blockchain is concerned, the lender always had the funds. The user pays blockchain processing fees.
“In a way, flash loans make everyone a whale,” said Nikola Jankovic, community manager at flash loan provider DeFi Saver, referring to the crypto industry nickname for large investors who are often able to move markets by themselves.
While there’s no hard number on the current size of the market, one of the biggest players, Aave, said it processed $2 billion of flash loans last year after starting up in January. Several competitors offer similar services.
— Eugin (@thegreenbutton_) February 2, 2021
“I can see them becoming big,” said Aaron Brown, a crypto investor and Bloomberg Opinion columnist. “The same thing exists conceptually in the traditional financial system. I can buy and sell things for many times my total wealth during a day, as long as by the end of the day everything nets out to a positive balance. It’s just with crypto there is no settlement delay, so to do the same thing you need flash loans.”
Stani Kulechov, Aave’s London-based chief executive officer, expects all cryptocurrency networks to eventually offer flash loans.
“At the end of the day, flash loans are going to be everywhere,” Kulechov said. The biggest flash loan Aave has processed to date was about $200 million, he said. Aave has about $3.9 billion in funding capacity, according to data tracker DeFi Pulse.
This democratization of finance can potentially make the crypto market more efficient.
“They have the potential to greatly increase market efficiency as there are no longer high capital costs to exploiting arbitrage opportunities,” said Jack Purdy, an analyst at researcher Messari. “When anyone in the world can execute these trades across disparate markets, it helps crypto prices converge, tightening spreads and reducing inefficiencies.”
But it also has drawbacks as well, which are unlikely to be overlooked by regulators. People have already used flash loan attacks to manipulate coin prices and to steal millions in funds, Brown said.
“Flash loans will continue to be associated with manipulation and hacks,” he said. “But they’re not really essential to those things, they just mean manipulators and hackers no longer need capital.”
And because they happen so fast, manipulators and hackers can likely get away with the spoils before anyone even notices them. They are gone in a flash.
Crypto-Collateralized Loans May Soon Bring New Investors To Space
“Traditional lending services generally do not exist in the digital currency industry, which means there aren’t many lenders for investors to choose from,” said Jon Melton.
Institutional investors will soon be able to receive Bitcoin-collateralized U.S. dollar loans through Silvergate Capital Corporation — the holding company of pro-crypto institution, Silvergate Bank.
According to an announcement from Silvergate, Coinbase Custody will be the custodian for loans funded through the bank’s Silvergate Exchange Network, or SEN. The network will provide access to capital through U.S. dollar loans collateralized by Bitcoin (BTC) while Coinbase holds the crypto in cold storage.
“Traditional lending services generally do not exist in the digital currency industry, which means there aren’t many lenders for investors to choose from,” said Jon Melton, Silvergate director of digital asset lending. “Our relationship with Coinbase Custody offers institutional investors increased access to capital efficiency so they can take advantage of market opportunities in the digital currency industry.”
Silvergate will offer loans starting at $5 million with an initial 12-month term. The firm’s announcement comes as the company behind crypto and fiat wallet and exchange app Abra, said it would be launching a service for crypto users to get cash from their holdings without selling, called Abra Borrow. Such loans could augment or replace traditional funding rounds for firms looking to enter the crypto space.
Since first announcing it would explore offering crypto-collateralized loans in 2019, Silvergate’s annual revenue has more than tripled, from $30 million to $91.5 million. The bank said at the time that its clients had significant interest for Silvergate “to be involved in the custody and transfer of digital assets between customers.”
In the fourth quarter of 2020, CEO Alan Lane said the bank would be expecting “increased demand” for these loans in 2021.
Though the number of digital currency deposits grew by $2.9 billion over the same period, the price of Silvergate Capital Corporation stock has been volatile in the first quarter of 2021, reaching an all-time high of $176.27 on Feb. 16 but falling 40% within three weeks.