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Introducing Lending By Blockchain Markets

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.

HOW DOES IT WORK?

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.

Have More Questions!!      

Email at:- sales@blockchaindevelopment.io

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