Crypto lending allows you to easily find borrowers who will borrow your Ethereum or Stablecoins and paying interest for this. If your crypto assets are just sitting in your wallets, then they will not earn any interest. However, by utilizing the crypto lending you will earn interest in your assets.
What is Crypto Lending?
Crypto Lending is the lending of cryptocurrencies or stablecoins on the blockchain. Crypto Lending is always collateral-based lending – borrowers have to use their crypto collateral to secure their loans. This collateral-based lending is protecting the lenders.
There are two key types of crypto lending:
- Custodial lending – the user does not control his assets (the platform has the users private keys)
- Non-custodial lending – the user controls his assets (the platform does not have the users private keys)
Custodial lending has 80% of the crypto lending market. A platform user has to deposit their crypto into the platform wallet. The platform will lend users assets either in the peer to peer mode or will consolidate them and will lend them via the OTC (Over The Counter) to the counterparties. Or the platform will lock these assets as collateral and will lend fiat or stablecoins. The borrower will receive either crypto, stablecoins, or fiat on this platform. When the borrower is not paying his loan, then the crypto collateral will be liquidated.
Non-custodial lending, also known as DeFi lending or Decentral Finance lending, has the other 20% of the crypto lending market. Their focus is on the Ethereum blockchain-based assets. Users control here their keys and the platform does not have access to the user’s private keys. Users can borrow crypto or stablecoins. Borrowing fiat is not possible in DeFi lending.
Our view is that custodial lending defeats the purpose of the blockchain – users will give away the control of their assets to third parties. Custodial systems are like traditional banking systems applied to the blockchain. However, the blockchain key idea is, that the users will control their own assets. That’s why our focus is on the non-custodial / DeFi lending.
Crypto lending has a very high collateral ratio. For example, the collateral ratio in DeFi is ca 350-700%. This means the user has to put down his crypto collateral in the value of 700 units to borrow the 100 units. The exception here is SmartCredit.io, which uses a much lower collateral ratio.
The key use cases of crypto lending are:
- Trading – 80% of crypto lending funds are going there
- Tax optimization – 10% of crypto lending. Selling of crypto is a taxable event, with taxes as high as 40% to 50% depending on the jurisdiction. Instead of selling the crypto assets, it’s easier to use them as collateral for borrowing and to pay 10% interest annually.
- Crypto economy – 10% of the crypto loans are used in the crypto to crypto businesses
Crypto Lending in SmartCredit.io
The SmartCredit.io lending process will transform each lender into a commercial bank. We eliminate intermediate steps that cause both extra costs, traceability, and slowness in loan processes offered by corporate banks.
Lenders and borrowers will be able to deal directly with borrowers without banks, payment providers, capital markets between banks. This will enable all users who benefit from the decentralized Blockchain system to earn profits as lenders or borrowers.
SmartCredit.io is a peer to peer crypto lending solution, co-founded by two ex Credit-Suisse Vice Presidents and CFA’s (Chartered Financial Analysts). The key problem’s which this platform solves are the following:
- Borrowers have today too high collateral requirements (i.e. Maker, Compound have ca 350% 400% collateral ratio), meaning their capability to borrow is low
- Limited choice of collateral – Borrowers on Maker or Compound have limited choice of collateral (just 4 or 8 tokens)
- Variable loan maturities (loan terms) – as most of the DeFi solutions are based on the money-market-fund concepts, then loans are not fixed maturities, but variable maturities. Although this is easy to implement and convenient for the borrowers – this results in too high collateral requirements for the borrowers. Using fixed-term maturities would enable to reduce the collateral requirements
- Fluctuating interest rates – most of the DeFi solutions are implementing the money-market-fund concepts. Money market funds have fluctuating interest rates. There are always herd movements in the markets. If the market thinks Ethereum is moving up, then users are borrowing DAI to buy Ethereum. This drives the interest rate of Ethereum down and DAI up. If the market thinks that Ethereum is moving down, then users are borrowing Ethereum to short it. This drives the interest rate of Ethereum up and of DAI down.
- Other platforms would like to earn revenues with value-adding services (like credit as an API service)
- Investors would like to earn passive income (with no activity)
- The majority of custodial solutions control the client’s private keys. For example, Nexo or Celcius is technically online investment platforms, which control clients’ assets. They can take clients’ funds at any time and in return, they pay interest to the client. The client can withdraw his funds, but technically Nexo / Celcius have custody of the client’s funds. This results in the “honey-pot” risk
SmartCredit.io offers the following solution:
- Non-custodial lending – only borrowers/lenders control their assets; no-one else has access to the borrowers/lenders assets
- Borrowers have 2x smaller collateral requirements
- Wide choice of collateral for the borrowers
- Fixed-term loans – this allows borrowers to reduce the collateral requirements
- Fixed Interest loans – this protects borrowers and lenders aginst the herding movements on the markets
- Personal Fixed Income Funds, enable a passive income for passive investors
- Non-custodial API for the other platforms – wallets, payment engines, marketplace
How does the Crypto Lending Process look Like?
As SmartCredit.io, we work as a DeFi lending product.
Our core crypto borrowing flow for the borrower is the following:
- The borrower submits the loan request
- He will submit the collateral to the loan
- If he wants, then he can enter his data for the credit score calculation – a good credit score allows to reduce the collateral requirements and the interest rate as well
- A lender will accept the loan request either via the SmartCredit.io application or via a Personal Fixed Income Fund
- The borrower will receive the funds, his collateral will be locked
- At the end of the loan period, the borrower has to pay back the loan
- If the borrower defaults or if the collateral value is sinking too much, then the collateral will be liquidated
Our core crypto lending flow for the lender is the following:
- The lender can accept borrower’s loan requests via the SmartCredit.io application. He will transfer the funds to the borrower. The borrower’s collateral will be held in the smart contracts until the end of the loan term.
- At the end of the loan, the lender will receive the principal and interest payments from the borrower
- If the borrower is not paying, then the borrower’s collateral will be liquidated and the proceeds will be used to pay the principal plus interest to the lender
- If collateral liquidation proceeds are not enough, then the loss provision fund will jump in and will fill the gap
- The lender can define as well a Personal Fixed Income Fund – if he does this, then the all lending process will be automated for the lender. This means the lender will earn passive income on his assets
What Had We Have Before – What We Have Now
People are used to the traditional financial system and they are not thinking so much about how this system is working. However, the traditional financial system has strong side effects on society (which were very visible during the Lehman crisis):
- Privatizing the benefits: In traditional credit systems, the interest rates brought by the loans bring benefits to the commercial banks. In the crypto credit system that is completely P2P, Smart Credit aims to distribute the benefits among all lenders by destroying the traditional credit system where only a few actors share their benefits.
- Socializing the losses: The crises caused by the centralized economic system, which reached the point of obstruction, had a negative effect on all investors, users, and providers. And the responses to these crises are socializing of the losses.
The traditional financial system is not sustainable. That’s why we need an alternate financial system. That’s why we need a blockchain-based financial system – and that’s why we created SmartCredit.io.