Current market situation and how æternity is changing the game
Blockchain technology holds the potential to deliver far more than an alternative means of value storage and transfer. While the launch of the Bitcoin blockchain in 2009 brought the first truly peer-to-peer payments platform to the world, the rapid evolution of blockchain technology has made possible to create peer-to-peer financial ecosystems with far more functionality than value transfer.
Decentralized finance, or DeFi, leverages blockchain technology in order to create decentralized, peer-to-peer alternatives to traditional financial instruments or systems that are free from middlemen or third party control.
Crypto lending is one of the most obvious applications of blockchain technology and cryptocurrency, and has captured a significant amount of attention over the last few years. Unlike traditional fiat currency lending, cryptocurrency is automated, in many cases decentralized, and is executed in a completely code-based ecosystem.
To take things to the next level, a more refined and nuanced technical approach is needed. This would allow for people from all walks of life to access the wide plethora of features that blockchain technology has to offer. Luckily, æternity has created a blockchain-powered environment in which anybody can create their own blockchain token or network, for any purpose – including DeFi or crypto loans.
However, before we take a closer look as to how æternity blockchain is a game changer, let’s cover the basics:
What is Crypto Lending?
Crypto lending is a broad term used to define the ever-growing environment in which people can use cryptocurrency in order to acquire a loan and this gain access to financing – be it in fiat or in crypto. It works in a similar fashion to peer-to-peer lending, where lenders and borrowers are connected via online platforms, but the trade currency is crypto instead of fiat money.
This concept allows market participants to lend or borrow using cryptocurrency as collateral for access to stablecoin or fiat loans which can then be used as, say, investment or working capital. Loans are granted in exchange for interest rates on the asset, much like taking out a loan with a bank. But, there is a crucial difference – market participants often don’t need to complete complicated application processes or credit checks in order to start lending or borrowing, which allows them to access funds faster and leads to a more stable and fast capital flow.
How Does Crypto Lending Work?
The key concepts that drive crypto lending are decentralization, automation, and enforcement by code. DeFi – Decentralized Finance – and by extension crypto lending, cut out the middlemen and human administrative elements, allowing for greatly reduced fees and significantly faster execution.
Crypto lending represents a significant portion of the DeFi industry which is, for reference, valued at USD 68 billion, at the time of writing.
The majority of crypto lending is executed as loans for fiat currency / stable coins, like we mentioned already. Cryptocurrency lending platforms and DeFi services connect borrowers to lenders, who then proceed to agree upon a loan.
These loans are backed by cryptocurrency collateral – something the borrower uses to cover the loan and guarantee its return. Lenders provide fiat or stablecoin assets to borrowers in return for an agreed-upon interest rate. Borrowers place the crypto collateral for their loan under escrow, which is released when the principal and interest is paid in full.
Crypto lending can also operate in the opposite direction, with borrowers placing fiat currency or stablecoins in return for crypto assets.
Why is Crypto Lending Disruptive?
Crypto backed loans and the crypto lending market are a major step forward for the blockchain and cryptocurrency ecosystems. In simple terms, credit or lending markets significantly increase the amount of work that can be performed with assets by temporarily transferring them from static holding to immediate use cases. That way, the value that these assets represent is used to generate more value and push the system forward.
The ability to rapidly exchange value between crypto and fiat markets, while generating value through interest, dramatically increases the utility of crypto assets. On the one hand, this allows the lenders to generate an income of value on assets they are not using at the time. On the other hand, the borrowers are able to access fiat currency or crypto assets and could capitalize on arbitrage or market-making.
The DeFI ecosystem has the potential to deliver far greater value than traditional savings accounts – some crypto lending platforms, for example, currently provide interest rates of 8% on average for lending stablecoins. Savings accounts across the USA, on the other hand, can provide less than 1% interest.
What to Know Before You Get Started
Crypto lending involves a number of terms that should be understood before getting started. These terms include:
- Interest is the cost of borrowing money typically expressed as an annual percentage of the loan. Interest is calculated as a percentage of a loan or deposit balance, paid to the lender periodically for the privilege of using their assets. The amount is usually quoted as an annual rate, but interest can be calculated for periods that are longer or shorter than one year.
- Loan-to-Value, or LTV, is a ratio of the amount of money a client wants to borrow – a loan – and the amount of collateral that needs to provide – value. LTV percentage is calculated by dividing the value of the loan by the value of the collateral. In general, the lower the LTV ratio, the greater the chance that the loan will be approved and the lower the interest rate is likely to be.
- Annual percentage rate, or APR. This refers to the annual rate of interest charged to borrowers and paid to lenders. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees and additional costs associated with the transaction , but does not take compounding into account. APR provides consumers with a bottom-line number they can easily compare to rates from other lenders which allows them to make their choice more easily.
- Know Your Customer (KYC) procedures are a critical function that assesses customer risk. KYC is a legal requirement that must be met in order to comply with Anti-Money Laundering (AML) laws. Effective KYC involves determining a customer’s identity, their financial activities, and the level of risk they pose.
Centralized crypto lending platforms VS True Decentralized Finance
Centralized platforms usually entail a company, or another entity, that handles the onboarding procedure for users, like the implementation of KYC. These platforms usually have a custodial system in place to protect the assets. This higher level of diligence, while posing a higher cost of business, also means that centralized platforms are more likely to offer customized loan arrangements.
On the other hand, DeFi platforms operating on a truly decentralized level utilize the full power of blockchain technology. The rely only on algorithmic protocols set in code which use smart contracts created and designed with the specific idea of creating an environment for distributing crypto loans and interest rates payments.
DeFi platforms are non-custodial and focus exclusively on cryptocurrencies. The interest rates these platforms offer vary depending on market supply and demand, but they are on average lower than the rates centralized platforms offer. Most importantly, DeFi is more transparent than any centralized platform can be for the simple reason that anyone can access its protocols and that all transactions are recorded on blockchains that are public.
The very core of DeFi rejects the centralized nature of traditional finance and banking institutions, with DeFi platforms and developers working to recreate traditional financial infrastructure on decentralized applications or peer-to-peer architecture.
The DeFi revolution has catalyzed the launch of an entire crypto-backed credit industry virtually overnight, with multiple platforms offering both crypto lending and crypto-backed fiat loans. Let’s take a look at some representative examples of centralized and DeFi Platforms out there.
Bitcoin Suisse leans toward market makers and professional crypto market participants – but offers far more accessibility to retail traders. Bitcoin Suisse offers cryptoasset collateralized loans in fiat currency to borrowers in order to assist with liquidity management or cash flow.
Bitcoin Suisse offers loans in USD, EUR, GBP, and CHF in return for crypto collateral, or ETH and BTC loans in return for fiat collateral. Loans start at CHF100,000 and range up to CHF 50 million, with loan duration that starts at 3 months.
Notably, the interest terms offered by Bitcoin Suisse are provided on an individual basis and are assessed based on the liquidity and value of collateral provided, as well as the size of the credit, but its indicative interest rate is 10%. BitcoinSuisse states that they have acollateralization of credit of a minimum of 200% to protect clients against margin calls.
BlockFi provides USD fiat currency loans only, with cryptoassets as collateral. Like most crypto lending platforms, BlockFi determines the amount of collateral a borrower must deposit based on the LTV of a loan. BlockFi offers LTVs of up to 50%, with interest rates based on variables that include the location of the borrower, the type of collateral provided, and the size of collateral.
BlockFi demands KYC information from customers, which necessitates photo ID and identity verification. Loans are only available to users that complete the identity verification and KYC process. The BlockFi platform accepts BTC, ETH, and LTC as collateral, with loans starting at $5,000 and a starting rate of 4.5% ARP.
It’s important to note that BlockFi performs credit checks on borrowers, which can impact the interest rates offered. BlockFi LTVs range between 20, 30, and 50%.
Celsius is a centralized financial services platform, but provides users with the ability to loan cryptoassets or access cryptocurrency-backed loans. The Celsius platform operates through the Celsius smartphone app, which provides simple step-by-step tutorials on how to create crypto-backed loans.
Celsius accepts a wide variety of cryptoassets as collateral, including BTC, ETH, LTC, XRP, EOS, DASH, BCH, USD, GUSD, PAX, USDC, DAI, and USDT. Loans start at $1,000, with terms ranging from 6 to 36 months. Loans with Celsius start at 1% ARP.
Hodlnaut, based out of Singapore, is a fintech startup offering financial services where customers deposit and lend crypto assets to margin traders and earn interest rates. By its own account, Hodlnaut lends out assets to established and vetted financial institutions that pay an interest rate and takes a small portion of the interest so earned, with passing the rest onto its users.
Hodlnaut is currently accepting deposits in BTC, DAI, ETH, USDC, and USDT and offer loans to corporations or institutions only and not to individuals.
MakerDAO is a decentralized autonomous organization that exists within the Ethereum blockchain. The company works on its stablecoin – DAI – in an effort to minimize its volatility with the holders of MKR tokens that govern DAI. With Maker, users are able to leverage ethereum assets to generate DAI, which is itself a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar.
MKR holders are in complete control and use their voting power to decide on key parameters that govern the entire system – the Maker Protocol – which includes features such as smart contracts, oracles, and governance features.
Compound is an algorithmic, autonomous interest rate protocol. It is a blockchain-fueled lending and borrowing dapp. With it, users can lend their tokens and earn interest or deposit their funds to the Compound smart contract as collateral to borrow against it. Compound is permissionless and is built on the Ethereum network.
The Compound protocol uses smart contracts to track the ownership and interest across a variety of lending pools.
Aave is another open-source non-custodial platform offering flash loans and flexible rates. It requires a loan to be atken out and put back in the same transaction, which allows for users to access crypto without any collateral. However, some people have found that it is somewhat complicated to use, which can present a hurdle towards adoption for common users.
With Aave, depositors provide liquidity to the market to earn passive income, while those who borrow can do so in an overcollateralized or undercollaterlaized fashion. The Aave protocol is totally open source, which means that anyone can interact with the user interface client, API, or the smart contracts on the Ethereum network.
æternity and Crypto Lending
æternity is specifically designed to operate as a highly secure, open-source blockchain protocol that facilitates the development, deployment, and operation of dapps at scale – and is therefore ideal for crypto lending and other DeFi applications.
Security is a key factor in creating reliable DeFi applications with blockchain technology. The flawless smart contract security provided by Sophia – æternity’s smart contract language – combined with the FATE virtual machine and protocol embedded oracles, allows æternity to create a uniquely interoperable and scalable ecosystem for decentralized finance and crypto lending.
The æternity network is already home to several DeFi projects that provide crypto lending services. SmartCredit.io, for example, originally launched on the Ethereum blockchain but later shifted to æternity in order to further access decentralization, interoperability, security, and high levels of scalability.
SmartCredit.io provides key components of an alternate blockchain-based financial system – the crypto lending/borrowing, the fixed income funds, and the integrations. It operates on a principle of fixed-term and fixed interest loans leading to a very low collateral ratio that is 2 to 2.5 times lower than the market average
Assetify, another æternity-powdered crypto lending platform, allows businesses to provide crypto-backed loans in just a few clicks. Assetify is licensed by Estonian FIU to store and operate digital assets, meaning that the entire process is vetted and secure. It uses multisignature wallets to store and secure funds, enabling a trustless link between the borrower and the lender, all the while ensuring that collateral can be tracked and is locked until the loan is completed. The æternity blockchain provides great functionality for DeFi applications,while delivering high levels of scalability with low fees.
While the crypto lending ecosystem currently operates in a relatively early stage of development, æternity is actively working to create secure, scalable solutions and tools that allow anybody to access financial services and products from anywhere – in an entirely open source and decentralized manner.
If you’re interested in the development of the æternity ecosystem and wish to contribute to the growth of the DeFi revolution, hop on over to æternity forum, the æppdevelopment community, or check out the latest æcosystem project information.