Features of crypto-based lending

Borderless credit

Typically, lending requires local financial institutions to administer the loan in the region in which that loan originates. This limits lending to the jurisdictions that accommodate those particular institutions.

With a globally recognizable asset such as Bitcoin, lending can take place across borders as borrowers and lenders can connect through a shared platform with the borrower posting collateral that is familiar to the lender.

Using a platform such as ETHLend, for instance, someone in Argentina could borrow from someone in the UK using ETH as collateral. Should the borrower in Argentina default, the collateral (based in ETH) is paid over to the lender in the UK.

Better credit pricing

Lending using blockchain technology can lead to more efficient loan pricing. A specific credit rating can be assigned to a particular blockchain address meaning that all transactions involving that address are auditable and publically available. This means that prices are established using publicly available information. This reduces the costs of due diligence, which are usually passed onto the borrower.

Decentralized lending will also enable individuals to develop an international credit history. Given the number of disparate centralized credit systems, a decentralized model of lending will allow for a much more fluid and reliable system of developing a credit history.

Peer-to-peer value transfer

One of the key benefits of blockchain technology is that it offers an efficient way of enabling peer-to-peer(P2P) transfer of value. This allows decentralized value transfer since there is no central entity needed for the settlement of transactions.

Apart from settlement benefits, P2P lending can also offer credit risk diversification benefits. P2P lending can spread the risk of default across a number of lenders which removes the concentration of risk in a central entity.

Spreading the default risk over a number of lenders could benefit the financial system as a whole given that the risk would be spread across a number of individual borrowers rather than directed at a few banks. This could mitigate the impact of financial crises where default risk is primarily borne by centralized institutions such as banks (and governments) as seen in the 2008 global financial crisis.

Digital assets as collateral

Crypto-assets are yet to gain wider acceptance and recognition. Banks and other financial institutions do not yet consider crypto-assets as legitimate collateral, which means that crypto holders cannot use their crypto-assets to get loans.

Startups such as BlockFi have emerged to cater to this gap in the market by allowing a borrower to pledge their crypto-assets as collateral and borrow in fiat currencies such as US dollars or euros.

Global interest parity

There are significant differences in countries’ interest rates, particularly between emerging and developed markets. For instance, the central bank interest rate in Brazil is 6,5% (Selic interest rate at 31/12/18) compared to 2,25% in the US (Fed rate). These differences can be only explained by country-specific economic factors such as inflation, foreign exchange rates, and liquidity, and economic performance which are factors outside of the borrower's control.

Interest rates on a global P2P platform would, however, be based on the agreed upon rate between the borrower and lender. These rates may be much more favorable than local rates (especially in emerging markets where liquidity and access are low) as a global platform could facilitate higher liquidity through access to a broader lending network.

A P2P global lending model using crypto as collateral could provide a far more equal lending market and much more competitive rates, particularly for participants from emerging markets.

Automatic loans

A feature of blockchain technology is the use of smart contracts. Smart contracts are a set of coded rules that do not rely on human intervention for execution.

In terms of a loan, a smart contract could be used to code the terms of a loan for the purposes of autonomous interest payments, settlement facilitation and dispute resolution. For example, a smart contract could be implemented to settle the loan using collateral should there be a missed payment.

Essentially, a smart contract could be used to perform the same intermediary function of a bank without actually needing a bank!