Experts expect that shortly, in the coming years, the Blockchain-backed technology will evolve significantly. Anyhow, the plan doesn’t provide a clear roadmap like the working methodology of programming and software. Here, we cannot accurately highlight what happens at each phase. However, Blockchain-backed technology can be understood not just as a modern platform for business, but also as an essential tool that facilitates other business processes. Blockchain can improve productivity, business operations, also increase revenue.
In traditional finance, lending mainly originates with banks.
They collect deposits from savers, bundle them together and then, reserving
some in case savers wish to withdraw, lend the deposited money out to
borrowers.
Crypto doesn’t (yet) have banks in the traditional sense,
however. There is no regulated entity that has a license to take in crypto
deposits and then lend them out. In fact, Bitcoin—to use one example—was
created to obviate the need for banks: no authorization is needed to send a
payment in Bitcoin from one holder to another, and each holder is responsible
for the custody of his or her coins (although this can be delegated at the
holder’s discretion).
What role would a
crypto bank play in a sector that doesn’t need it?
Given the proliferation of custody services, it seems that
there is a demand for centralized banking functions, even in a decentralized
ecosystem. It, therefore, shouldn’t be a surprise that this extends to the need
for deposits and lending.
Yet lending is a much more complicated function of
traditional banking than asset safekeeping—not as necessary (you don’t have to
lend out your assets, but you do have to keep them somewhere), but more transformative.
Crypto lending vs. traditional lending
Crypto lending is markedly different from traditional
lending. It’s not just the innovation in the technology powering smart
contracts, or the new types of assets that can be collateralized. The sector
also stands out for the flexibility and relative security (yes, really) of
credit. Let’s look at some of the operational differences.
·
Variety
and speed
First, crypto lending involves a much wider range of assets,
which confers a flexibility on market participants. Few traditional finance
platforms offer yields on such a wide range of assets. While it is possible to
lend various types of traditional securities and submit an even broader range
of assets (including real estate and art) for collateralization of a loan, the lending
of crypto assets involves less paperwork, fewer middlemen as well as lower (and
generally more transparent) fees.
Users of lending platforms, both centralized and
decentralized, can switch between assets with relative ease, depositing Bitcoin
(for instance) to take out a stable coin loan, or using their ether stake for a
Bitcoin loan that enables them to fund an exchange account in order to buy more
ether. This can be done in seconds.
·
Collateral
Collateral deposited for loans from these platforms is always
in crypto assets, which are more liquid than many types of collateral in
traditional markets.
What’s more, for now, most platforms insist on the collateral
of over 100%, sometimes as much as 150%, to offset possible asset price
volatility. Given the relative liquidity of these assets (compared, say, to
yachts and jewelry), should the market turn south and the loan-to-value ratio
decline, lenders could sell the collateral in the markets. This would in theory
stem their potential losses (although possibly accelerate the slump).
·
Regulation
For now, crypto lenders are not considered banks and do not
need special licenses. While this may be a deterrent to many potential
participants due to a lack of trust, it allows lending businesses to focus on
building a strong reputation through service and selective transparency. It
also allows them to keep costs down for users, as reporting requirements are
low.
CONCLUSION
Lending is such a fundamental part of traditional finance
that we take its existence for granted. Crypto markets are so young; however,
that lending is still an emerging concept. While some platforms have been
around for a couple of years, 2019 saw a flurry of product launches and an
awakening of interest from investors and traders, which contributed to solid
growth in deposits and originated loans.
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