Blockchain Crypto Asset Loan Providers are Gaining Traction in 2018: Institutional Investors Next?
Crypto asset-backed lending platforms like SALT Lending, ETHLend and many more have been in the cryptocurrency ecosystem for quite some time now.
The philosophy behind crypto asset-backed lending is quite simple. Traditional asset-based lending is a business loan secured by collateral (assets). The asset-based loan, or line of credit, is secured by inventory, accounts receivable, equipment and/or other balance-sheet assets. Crypto asset-backed lending just uses the same principals but the assets are bitcoin or Ethereum. If people with crypto assets need money immediately and don’t want to liquidate their assets, they can use platforms that provide crypto asset-backed loans.
Blockchain lending was kicked off when the SALT project funded their ICO in August of 2017. Since then, the lending space became much more crowded. This was soon followed by the team at ETHLend who introduced the idea of P2P cryptocurrency loans on the Ethereum blockchain. Now, even institutional investors are looking to use these features to use in margin trading.
However, crypto asset-backed lending is not as simple as its traditional market counterpart. The volatility the crypto market experiences can make processes like issuing and receiving loans pretty tricky.
“Cryptocurrency lending platforms need to make sure the value of the loan doesn’t surpass the value of the collateralized assets, causing borrowers to default, leaving them in a bind,”
says Stani Kulechov, CEO of Aave – the parent company of aforementioned ETHLend.
Massive downturns, like the ones that happened at the beginning of the year, can be catastrophic for lenders. The vice-versa situation, during the times when crypto gains value against fiat rapidly, can be disastrous for borrowers.
Although borrowers are not protected much in the wild-west crypto ecosystem, lenders solve their problems by holding onto the assets until the market regains strength.
This situation, even though a massive problem doesn’t slow down the popularity of platforms like ETHLend and Nuo Lend, who have processed upwards of 4,500 and 1,800 respectively. The numbers are great considering the companies are in the first six months of their operations.
Extending risk management solutions of traditional asset-backed lending platforms should be done very carefully. However, if the execution is done right, it can be a good tool to protect against market volatility.
To take a real-world example, BlockFi offers a loan-to-value ratio of 35%. This means that one can take $35 worth of loans for $100 of collateral. ETHLend is more generous than BlockFi offering a loan-to-value of between 50 and 55%.
Despite gaining popularity, consumer-focused models of these models have to tackle a series of technical problems and other risks. “There are still several infrastructure problems. How do you source prices? How do you hedge against counterparty risk? How do you deal with hacks and custody issues?” asks Lucas Nuzzi who is the director of technology research at Digital Asset Research.
“As of right now I really can’t see these consumer lending platforms really getting much traction just because we just don’t have the basic tools to guarantee that counterparty risk is covered,” he added.
Nuzzi suggests that institutional investors should be the first to solve these problems. In fact, OTC crypto platform Genesis Global Trading has said to have lent upwards of $500 million since March 2018 to institutional borrowers.