Cryptos Take on Revolutionizing the Lending Market

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by Alexandra Sayapina · 6 min read

A number of most innovative startups, with Estonia-based among the first, to revolutionize lending industry by introducing kind of disrupting fintech solution.

It’s become possible to get instant loans in live money using Bitcoin, Ethereum and other cryptocurrencies as collateral while still possessing your funds with an eye to their future growth. Smart contracts make this process transparent for borrowers, lenders and other market participants.

Herman Gref, the CEO at Sberbank, the largest Russian bank with State participation, has recently confessed that he had purchased his most expensive t-shirt for 12 bitcoins. The whole deal was worth only $5 at that time. But in the beginning of 2018, this amount of bitcoins would make up a fortune as it would equal to $98,184, according to the Bitcoin price from CoinMarketCap.

The internet is full of stories about people who purchased something for crypto when it used to be very cheap. Only over the past year, Bitcoin has grown in price by 1824%. Its rate has increased thousands of times in the past years, that’s why now the value of these transactions looks astonishing. For example, a guy from the US ordered 2 pizzas for 10,000 BTC, which now make up almost $100 mln. The reason behind this act was the lack of spare money and the availability of bitcoins, as he explained.

As the market evolves, now a tool has emerged allowing to get a loan with “real” – or fiat –  currency on the security of crypto assets. In other words, those who possess Bitcoin, Ethereum or other cryptos can unfreeze some of their funds and get instant money for their own needs, business development or hedging. At the same time, they don’t need to sell their crypto assets.

Startups ready to grant loans for such collateral emerge all around the world. Among them are: SALT Lending from the U.S., Nebeus from the UK, ETHLend from Hong Kong and from the Estonia.

The terms of such loans are significantly different from the standard ones because of the blockchain assets’ high volatility. For example, you may use 1 BTC to get a loan of $10,000, while its market value can vary between $15,000 and $20,000. Meanwhile, the loan rate may vary between 7% and 12% and sometimes reach 20% and even 120% per annum.

Such loans can trigger a real revolution in the lending market. Indeed, for the first time in 20 years a new asset has emerged that can be used to get a loan while smart contracts help to solve the problem of trust between the parties that can be located on different continents.

“The second generation of cryptos, starting from Ether, allows to set up the so-called smart contracts. In fact, this is the creation of certain conditions, the fulfillment of which is fixed by the whole system, regardless of will and desire of participants who signed this contract,” clarifies Maksim Akulshin, the co-founder and the Architect of

This tool can completely replace intermediate institutions, such as banks. For example, previously it was impossible to imagine a deal for buying and selling an apartment without these intermediaries. Now the conditions for transferring property rights after the payment is received can be registered in a smart contract.

This mechanism allows to ensure transparency while working with a borrower. “The one who takes credit is sure that we will not use his bitcoin, we will not sell it secretly, we will not be able to speculate with it. And when he returns the money he borrowed, he will receive back his pledge,” explains Aleksei Smolianov, the co-founder of and the owner of the Sauber Bank.

Besides, the information that the crypto currency is in the pledge is available to any user who is not even an client, since this information is open for external access.

The idea to offer the market the tool to give out loans secured by cryptocurrency appeared in the minds of co-founders a little over a year ago when it became clear that the development of the blockchain is irreversible. “We’ve been active in the microcredit market and we understand well both the market and the mechanism of its work: how the money should be paid from the technical point of view, how to interact with the clients,” says Aleksei Smolianov. “One of the companies represented in the group headed by Maksim Akulshin is an IT-company with more than 10 years of experience. We’ve been working together both in the area of B2B and in searching for fintech solutions”.

The analysis of the potential market has revealed two groups of users. The first one consists of those who possess only a small amount of cryptocurrencies, have almost no free funds and often deny themselves current expenses, travelling, business trips, rest, because they believe that this asset will grow and try to keep it. The representatives of the second group mostly have big amounts of cryptocurrencies and they need to hedge their positions.

The total amount of funds raised during the Token Sale shall be divided into two parts. $6 million will be spent on the launch: development of the platform, legal and technical audit, initial marketing. The rest of the funds are to form the Reserve. This part is estimated to amount at $100 million. The Reserve is required as a precaution against abrupt changes in volatility. The reason behind this measure is the sharp short-term slippage of price, which shows up in the market from time to time.

Suppose that a client has deposited bitcoin and received a loan of $7,000 when the price per 1 BTC was equal to $10,000. With, the maximum period for which he can receive such a loan is 1 month. If he returns the funds during this period bitcoin gets unfreezed and gets back to the client’s wallet.

But if the prices drop significantly, the client may face a margin call if the quotes drop below $7,000 per bitcoin. The client will receive a notification each time the price drops by 5%. He can reduce his risks if he increases his safety margin. If a margin call occurs, platform sells the collateral. If the prices fall sharply, it may be difficult to sell bitcoin at the needed price. This is when the insurance fund will help. This fund can buy the bitcoin in such a situation and sell it at the exchange when the price bounces back.

The project representatives are now in the midst of negotiations with institutional investors that are ready to place the funds when the platform is launched and provides audited reports.

Loans in are strictly regulated, 1 contract cannot exceed  $10,000, the maximum term of one contract cannot be more than one month, the commission is fixed. One user can execute several contracts.

A smart contract regulates the rights and obligations of all parties. If one participant fulfills the terms of the contract, the other party unambiguously fulfills it, too. Such approach will allow borrowers and creditors build relationships in a new way.

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Alexandra Sayapina

Alexandra is a software engineer who specializes in core banking systems development for financial and IT spheres. Taking strong interest in blockchain, cryptocurrencies, and IoT, Alexandra got deep understanding of the emerging techs believing in their potential to drive the future.