Mar 11, 2019

On-chain Crypto Lending: The Path to the Mainstream

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One of the hottest topics in cryptocurrency right now is the potential ability for distributed ledger technology to transform the borrow and lending activities in traditional banking. This helps banks solve two major issues: application of legal actions and liquidity.

But “on-chain” technology could solve another essential, but less recognized, problem: credit.  In theory all the information is right in front of you on the blockchain, but the utopian world and the real world are two different things.

There remain some significant pain points that are holding back “on-chain” borrowing and lending from really taking off and entering the mainstream. I see the following three as the most critical:

So what’s necessary to get past these issues?

With these being three major impediments to mass adoption of on-chain lending, the question then becomes how to get past them.  When it comes to the maturity of technology and the safety of contracts, lenders need to be certain information will be safeguarded and clear from any hacking risks that could compromise them and the finances of their enterprise.  For the operational side of lending and borrowing including the KYC / AML process, technology solutions are certainly helping to streamline matters. For example, forms that pre-populate with publicly-available information would save significant time and money for everyone involved.  While these are all certainly very important, of the three hurdles to on-chain lending adoption, I look to trading and settlement as the greatest challenge to address.

To create a truly viable on-chain lending environment, there needs to be a trusted liquidity provider to help the lender manage margins and decrease exposure to market risk.  With better liquidity (an issue that’s certainly nothing new to crypto trading in general), the margin management process will be much more intensive, helping to increase margins and incentivize people and institutions to borrow and lend. And this all helps investors’ confidence in the solution.

The future for on-chain lending…

In time, on-chain lending will absolutely go mainstream. This is likely to happen in the next couple years and as we start to see the value of this adoption, there will be a significant inflection point. Enhanced products and technologies as well as operational efficiencies, aided by an improved regulatory landscape, should likely mean a bright future is ahead for on-chain lending.

There will no doubt be bumps in the road. But the same could be said of any major technology advancement.  Back in the initial “dot-com boom,” major players like eBay or Amazon might have outages driven by demand. Yet those days were not preliminary indications of failure, but rather high demand for a valuable  service. In these situations, the company or the industry as a whole learns, makes improvements and creates a better overall experience. The same will likely be true in on-chain lending. It won’t be necessarily a linear progression, but the overall trendline points in a positive direction. And this progress will benefit everyone involved.

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