Until today, lending Ether on ETHLend required the borrower to pledge any ERC-20 compatible tokens such as DigixDAO or GOLEM token as a collateral for the loan. Alternatively, the borrower can pledge Ethereum Name Service (ENS) domains as a collateral for the loan.
Therefore, if the borrower would not pay the loan back, the collateral is transferred to the lender (who can sell the collateral on exchange or at auction). Using collaterals results that lending in decentralized crypto-world would be efficient since the collateral increases the threshold for not paying the loan back and decrease the loss of loan capital since the lender can sell the token on exchange or the domain at an auction for regaining any losses.
Unsecured lending as such is challenging in decentralized environment. This is due the fact that distributed ledgers such as Ethereum network works with pseudo-anonymous addresses. Since the transactions are irreversible, there is no assurance that an untrusted borrower will pay the loan back. This results to the point that unsecured lending would be unworkable if the untrusted borrowers would not repay loans.
ETHLend introduces reputation system for unsecured loans. ETHLend provides more trust on unsecured loans by adding a reputation system that is managed by the use of ERC-20 compatible Credit Token (CRE). On each secured (or unsecured) loan repayment the borrower is credited with Credit Token (1 ETH = mines 0.1 CRE). Therefore, Credit Token represents the borrower’s reputation, which is used to borrow without a collateral (0.1 CRE allows borrowing up to 0.1 ETH).
If the borrower does not repay a loan on any amount, whether it is secured or unsecured, the whole balance of the borrower’s CRE is burned (permanently deleted). Using a reputation system motivates the borrower to build reputation to borrow more without the use of collateral.
The decentralized application is accessed with the use of MetaMask. ETHLend also has a sandbox version of that is running on Kovan testnet. The latter is a good place to test the functionalities of decentralized lending.
Due diligence is required. CRE increases the threshold for defaults. However, unsecured lending is not risk free. Due to the pseudo-anonymous nature of the Ethereum network, there might occur misuse on unsecured lending, just as in the centralized lending. Therefore, lenders should explore and review the borrowers’ addresses on blockexplorers before deciding to fund loan requests.
More exciting stuff coming up. ETHLend’s Founder Stani Kulechov reveals that there are interesting expansion coming up. The ETHLend team will work hard during the next few months to expand lending to Bitcoin, Altcoin and maybe few other crypto-currencies. ETHLend’s financial and legal advisors are putting much research on KYC (Know Your Customer) compliance.
ETHLend declines to accept any VC funding. Unlike other blockchain startups, ETHLend does not have any venture capital fund backing the development. ETHLend has a team consisting of 16 people that found each other from the Ethereum and blockchain community. Since ETHLend is building a global lending market, the team wants to have a distance on traditional banking and institutionalized funding.
Stani believes that associating with traditional banking and fund raising might compromise the development of decentralized lending. “We do not want to be guided back to the hands of traditional banking. We truly have an opportunity now to create something unique, which will help many people in different parts of the world.” ETHLend is also preparing for an upcoming token sale (ICO) and the team has come up with an innovative way to fund the pre-ICO phase, which will be introduced within few weeks. Stani adds: “our idea might change permanently the way pre-ICOs are funded.”.
ETHLend is open for contribution at Slack. Anyone can join and assist and brainstorm with the team on the development of the global lending market. More discussion on ETHLend at BitcoinTalk or Reddit.