A Revolution in Loans
One of the biggest criticisms of bitcoin is, if it truly is a store of value, why can’t anybody use them to get loans? Well, apparently you can.
Several startups have popped up allowing cryptocurrency holders to loan cold hard cash using bitcoin, ethereum, and other digital currencies as collateral. Among them are Salt Lending in the U.S., Nebeus in the UK, EthLend in Hong Kong, and eCoinomic.net in Estonia.
As you can imagine, the terms of the loans are quite different from the traditional ones. One BTC may get you a $10,000 loan while its market value can be 50% to 100% more. Meanwhile, the loan rate may vary between 7% and 12%, and sometimes surge as high as 120% per annum.
Such loans can purportedly trigger a revolution in the lending market, and they were all made possible by smart contracts:
“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 eCoinomic.net.
Smart contracts allow conditions of a trade, loan, or purchase to be registered within the blockchain and in the case of eCoinomic.net, free to view for any users. This ensures transparency for all the parties involved:
“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 eCoinomic.net and the owner of the Sauber Bank.
eCoinomic.net was founded a little over a year ago after it’s founders thought that blockchain development was “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 platform provides loans by “freezing” client’s coins as collateral and “unfreezing” them when he or she returns the funds within the allotted time. The loans are strictly regulated, with each contract having a ceiling of $10,000 and a maximum term of one month, and its terms are ruled by a smart contract which theoretically forces all parties to fulfill the terms. With crypto volatility as it is, the firm aims to manage risk through a projected $100 million reserve fund. It will also notify clients every time their coin values drop by 5%, and in some cases, execute margin calls when bitcoin quotes drop below $7,000. Clients, however, can increase their margins as they wish.
The company aims to launch a coin offering and is currently negotiating with institutional investors for potential funding.