Blockchain Based Loans Are the Future of Lending

Peer-to-peer (P2P) lending is not something new. It has been in existence long before banks were around. The only difference is that it was based on interpersonal trust. However, people don’t always maintain the personal level of trust, hence the need for using intermediaries and other third parties. The role of the intermediaries is to protect the interests of the parties involved. However, for their services, the intermediaries would levy very high fees. Other than that, they may also end up complicating a relatively simple process.

Introducing Blockchain

The blockchain is a concept based on distributed ledgers. Therefore, it’s a system that’s decentralized and does away with the need for trust. As a result, you can transfer anything of value to another person without using a third party. According to experts, this will help restore faith in P2P lending, and help spark a revolution in the financial service industry.

Small and Medium Enterprises (SMEs), and individuals stand to gain a lot from this. Traditionally, accessing credit is not very easy for this group of borrowers. There are many obstacles that they must overcome.

Through blockchain technology, it’s possible to gain access to financial help without having to feel like you’re begging the banks. There have been lots of successful ICOs in the recent years. Successful crowdfunding campaigns have been run all over the world for different purposes. These two are proof of a willingness among the masses to consider other ways of raising capital.

Lending through blockchain technology is essentially P2P lending. This is a seamless process, which does away with intermediaries, making it simpler, faster and cheaper for the parties involved. Willing lenders and investors are directly connected to businesses and borrowers.

The blockchain is all about creating, sharing and transferring value. There are no geographic limits, which means that in a simple request, a borrower can receive financing from anyone, anywhere in the world at competitive rates that the conventional banking system would struggle to match or beat.

But, how do lenders make sure the borrowers are legitimate?

This is where smart contracts come in. Lenders can vet the borrowers and validate the transactions. There are other administrative tasks involved in the lending process that can also be done faster. Instead of waiting weeks to get funding as normal banks do, through blockchain technology, you can get funding in days or even hours.

This platform also gets rid of intermediaries that perform background checks. All the information regarding transactions is open to audits. It’s also possible to assign credit ratings to addresses instantaneously.

All the information about an address is available and can be scrutinized by anyone. A good example would be to enter any Ethereum address into Trivial. You will see all the information about the transactions that the account has engaged in. As a lender, if you notice any information that you aren’t comfortable with, you can simply withdraw from offering to lend.

What Do Banks Think?

Contrary to what most people might think, banks are embracing blockchain technology and incorporating it into their businesses. Some notable banks already onboard include Credit Suisse and ING. Their customers can swap liquid assets on the blockchain.

It’s not just individual lenders who are benefitting from blockchain technology, but large lenders like banks too. This is because this technology allows them to optimize and streamline their operations. This is a network that connects all the players. There’s transparency, and both the borrower and the lender have a clear view of the immutable ledger. What this means is that the cost of diligence, which is often shoved down on the borrower, is no longer applicable.

The decision-making process for banks is easier because they have access to information about the borrower's inflows, outflows, outstanding payments and so forth. They also have the option of running a creditworthiness check, which makes this process even faster.

To reduce the risk of fraud, and errors, smart contracts codify instructions, making the process automated and fully digitized. Mundane tasks automation reduces the workload, improves efficiency and makes this a less-tedious process. Other than that, blockchain also makes it easier for regulators, investors, and auditors to follow the trail of money or any other transaction, while at the same time protecting the storage and transmission of sensitive data.

Are the Masses Ready for This Lending Model?

The blockchain is still in the infancy stage, and it might be a while before we see widespread adoption. There are also challenges that make this difficult, especially when it comes to determining the creditworthiness of a lender, AML and KYC (anti-money laundering and know your customer) rules, verification of identities and getting new users on board.

Collecting loans offered on a blockchain might not be easy. This would push the limits of smart contracts regarding legality. We would also need to have an acceptable regulatory framework to spur cross-border P2P lending. Besides, the fact that blockchain lending is acceptable in some countries doesn’t make it acceptable or legal in all jurisdictions. In fact, there are countries that have imposed an outright ban on this technology so far. Courts can barely consider the validity of smart contracts in business transactions.

Records of transactions taking place are held in a distributed ledger. However, there are no procedures for risk evaluation, management, and enforcement. As a result, blockchain doesn’t seem to be feasible yet for complex operations. However, witty entrepreneurs are already adopting blockchain technology for simpler tasks, trying to harness its power to help inspire and revolutionize the lending market.

The following are some projects that are currently running on the blockchain platform:

BlockLoan

Many digital lending platforms have been developed in the past, though they have yet to succeed in addressing some of the key challenges that people encounter. Some of the main problems include real-time borrowing, transparency and a cost-effective process. Besides, most institutions will barely consider your proposal if you have limited or poor credit history.

It’s in the face of such challenges that BlockLoan finds its business idea. BlockLoan is a platform that uses blockchain technology to bridge the gap between lenders and borrowers efficiently and transparently all over the world.

Within the next 5 years, experts expect a 50% growth in P2P lending because of innovation and advancement in digital lending technology, and uptake of decentralized technology. As a result, more people should have access to an efficient lending platform.

In the banking industry, blockchain technology can be effectively used to provide borrowers and other banking service customers with a variety of options, make the processes faster and reduce the costs involved.

BlockLoan’s mission is to turn the current banking system into a mature, transparent, simple and easy process for lenders and borrowers all over the world.

Secure Automated Lending Technology (SALT)

In the blockchain lending market, SALT is currently one of the biggest names in the industry. There are more than 55,000 holders and more than $126 million in market cap value attributed to SALT.

SALT members have access to lending facilities from a wide lending network that uses the borrowers’ blockchain assets to determine their eligibility and creditworthiness. Even though the approval process is subject to KYC and AML procedure, it’s still fast and efficient. Any collateral applicable in this procedure is stored securely in an ultra-secure architecture that’s fully audited.

SALT borrowers are subject to interests on the loans, as would be applicable on any other type of loan. Perhaps the difference between other loans and this type of loan is that when you pay back the loan, you receive your blockchain assets.

To finance loans that have blockchain assets as collateral, lenders must be properly incentivized. According to the SALT CFO, for you to borrow $100,000, you would have to deposit about $200,000 in Bitcoin as security and pay between 12% and 20% a year in interest.

The value of the collateral will change during the loan, given the volatile nature of Bitcoin, which means the borrower will have to make a few choices. If the Bitcoin value appreciates, you can add the increased value to the loan principal and in turn receive more capital from the lender. Alternatively, you can ignore and leave the loan as it is, receiving your blockchain assets at the term of the loan, at the increased value when you’re paying back the loan.

If the Bitcoin value plummets, affecting the LTV (loan to value) ratio, the SALT will get in touch with the borrower. They will advise you to either increase your principal payment or add collateral to balance your accounts.

Take note that all the lenders on SALT are accredited investors according to Regulation D of 17 CFR § 230.501 et seq. This means that they have been subject to and passed the lending suitability test. These loans cannot be transferred via blockchain, as in their current state, they are securities and can be transferred through the normal financial means.

If you have been exposed to the potential of SALT, you have a clearer understanding of their prospects in bringing cryptocurrency closer to the masses. Miners and whales, the biggest crypto holders so far, are more likely to appreciate the popularity of SALT. This is because most of them don’t intend to liquidate their crypto assets hoping for value appreciation in the future, but at the same time, they are also interested in spending their wealth as they see fit.

ETHLend

There are more than 172,000 ETHLend holders, bringing the market cap to $45 million. Theirs is a free market approach to lending, just in the same way P2P fiat lending works. They connect lenders to borrowers, who are free to negotiate the terms of their agreement, including the duration and interest rates. This platform is primarily hinged on Ethereum, though you can present any ERC20 tokens as collateral when taking a loan. Having agreed on the terms of the loan, borrowers who don’t comply will forfeit the collateral bound in their smart contract.

This is a global lending platform, meaning that if they have an Ethereum address, anyone in the world can borrow and lend. There’s no central control over ETHLend, which means that it’s a platform that would be appreciated by people who live in jurisdictions where access to financial services is curtailed, or inefficient for one reason or the other.

You don’t need a bank account to enjoy these services. You just need an Ethereum wallet address. To make the loans and fees as accessible as possible, interest rates applicable are not variable or pegged on the volatile value of the native cryptocurrency.

There are three main principles that have been responsible for the success and growth of ETHLend so far; easy access, transparency, and trust. However, they are not resting on their laurels yet. ETHLend plans to introduce more innovative features such as decentralized credit scores, crowd-lending, and on-demand lending.

There are plans to bring Bloom on board to help with risk assessment, identity verification, and credit scores. This partnership would allow borrowers to use the credit scores they gain when borrowing and paying their loans on ETHLend for credit services off-chain. This also makes it easier for lenders to verify the creditworthiness of a borrower and identify risks.

Ripio Credit Network

RCN has more than 6,600 holders and a market cap of $45 million. RCN has been in operation since April 2018, and the main target is the unbanked in Latin America, which is roughly 63% of the population.

The RCN protocol is built around the blockchain technology and smart contracts, bringing reliability and transparency to credit facilities. Regardless of the native currency, RCN connects lenders and borrowers from all over the world. One of the ways RCN attempts to make the conditions better for both parties is to reduce the cost of management and traditional brokerage fees.

While most blockchain platforms would do away with intermediaries, RCN introduces one, a Cosigner, which is the link between lenders and the RCN network. By default, this reduces your credit risk exposure.

The role of the cosigner is to act as a debt collector in the country where the borrower resides. This, however, puts a lot of responsibility on the cosigner. If they are unable to enforce loans for some reason, the overall value of the network would be at risk.

Interesting enough, the RCN reports to credit agencies from time to time information that’s also shared with banking systems. This has the potential to affect the eligibility of individuals that can participate in this lending system. However, like ETHLend, RCN recently contracted Bloom, who will help with risk management, assessment and credit scores.

You can trade different local currencies to receive RCN tokens, giving you access to decentralized credit facilities. You don’t need to own cryptocurrency to use these services, which makes it easier for most people who aren’t familiar with cryptocurrency to participate.