Between ICOs, private enterprise blockchains, publicly used cryptocurrencies, and institutional crypto hedge funds, there’s a lot of activity to monitor in the crypto/blockchain space.
One area that is little talked about but thriving nonetheless is cryptocurrency lending in its many shapes and forms. Crypto lending allows users to preserve their crypto holdings, borrow bitcoin for investment or trading, and more. Here are some of the platforms involved and the astonishingly high volume of their business.
Peer to Peer Crypto Lending Platforms
DApps like ConsenSys startup ETHlend allow users to lend or borrow fiat in exchange for staked collateral crypto, with one use case being that it allows that people heavily invested in crypto and in need of funds can borrow fiat against their collateral to avoid having to cash out their crypto holdings and potentially lose out on gains.
The platform serves another, more disruptive purpose – users can take out loans to finance their education, business, home, or anything else they need, and they can do it without requiring a bank account. Borrowers need to stake an equal amount of collateral before they can take out a loan, but the platform can still give people with savings a massive boost, essentially doubling their money and allowing them to negotiate their own terms like interest rates with the lenders.
One of the benefits of peer-to-peer lending is that credit ratings are not usually an issue – the borrower either has the collateral or doesn’t. If they can’t pay back the loan, the lenders are covered with the collateral, and if they can, the lenders profit from the interest. Because there is no banking infrastructure or any overhead cost whatsoever (gotta love DApps), it’s possible to negotiate interest rates that are lower than those of banks or credit unions.
ETHlend has loaned out $15 million USD so far in smart contract fiat lending in under a year, pretty much destroying any argument that there are no functioning DApps out there being put to any use. It’s likely that ETHlend will be classified as non-compliant with US law if regulators get around to investigating it, meaning it may not be available to US users in the future.
ETHlend uses LEND as a native token which allows users to benefit from a 25% discount in token deployment fees, but also accepts any ERC20 tokens. LEND has a market cap of $20 million and a 24h turnover of over $400,000.
Pros: Ethlend is hugely ambitious and stands to disrupt the entire lending market among many other industries. The potential for an international, decentralized lending marketplace is great and could help finance businesses and education for the 2 billion unbanked people in the world with many other use cases as well.
Cons: The system is complex and potentially vulnerable at the moment. It could be negatively impacted by a sudden drop in the price of Ethereum. For a decentralized lending marketplace to truly flourish, ideally there will be the option of uncollateralized loans as well to enable people to finance large projects without a lot of initial capital, but this requires rigorous credit score checking.
In the event of loan default, repossessing assets or tracking down people in debt around the world would be difficult and possibly not legally enforceable depending on the conditions and status of the agreed upon smart contract.
Another popular P2P crypto lending platform is SALT. SALT focuses more exclusively on lending to customers who want to preserve their crypto collateral to borrow against it, and only allows accredited investors (who are required to be millionaires) to participate in the lending process. Choosing not to allow P2P fiat lending to the unbanked and only allowing accredited investors to lend are both most likely a result of the company focusing on US regulatory compliance.
SALT interest rates begin at 5.99% for loans under $75,000 and the service is available to customers in New Zealand, the UK, and certain US states providing they complete KYC checks.
Ethereum and Bitcoin are used as collateral and SALT tokens are used to pay membership to the site. SALT has a market cap almost $60 million and a 24h turnover of around $2.5 million.
Pros: SALT is secured, accredited, and legally compliant.
Cons: The platform has very limited availability due to the regional regulatory reqirements of this kind of lending. Only millionaires can become lenders, and the lending service is mostly just to allow people to borrow against their crypto with no plans to become a decentralized P2P lending marketplace to finance other projects.
Now we’re getting into the big money.
OTC crypto lending broker Genesis recently disclosed that it has loaned over half a billion dollars in just six months according to a report released earlier this month.
Genesis lends institutions sums beginning at $250,000, often for the purpose of shorting cryptocurrency or otherwise participating in the futures markets. The current order book shows outstanding loans of over $130 million since the launch in March with total cash flow reaching $553 million for all supporting assets.
Over the past year, through client feedback and the rise of derivative marketplaces, we saw a meaningful increase in the number of market participants wanting to borrow and/or lend digital currencies, the company stated.
The company noted a drop in the popularity of Ethereum loans from the launch with altcoin assets becoming popular loan currencies in Q3 and Bitcoin remaining consistently popular since the launch.
Hedge funds were initially the most popular clients with trading and arbitrage firms taking center stage over time. Genesis stated that firms “generally borrow digital assets to trade against derivatives like futures and swaps”, adding:
We believe this kind of activity will continue to pick up as derivative markets mature.
Pros: This kind of activity in the crypto market is huge – half a billion in crypto loans is headline news and demonstrates that there is major activity in the space.
Cons: Not all activity is good activity. When Barry Silbert, founder of Digital Currency Group which owns Genesis Capital, tweeted about the firm’s success, Twitter users were quick to remind him that loans of that size were most likely being used to short the crypto
Hi Barry, if you could stop lending to shorters, that'd be great. Thanks. pic.twitter.com/j6mc7skcuM
— John Cho (@JohnCho__) October 18, 2018
More to Come
Q4 will see the launch of the world’s largest exchange operator’s new “regulated ecosystem for buying and selling Bitcoin futures – ICE’s Bakkt is due to go live later this year.