Crypto Firm Voyager Digital Secures a $500M Line of Credit From Alameda Ventures to Cope With 3AC Exposure

June 26, 2022 Bitcoin.com

Three Arrows Capital Allegedly Owes Voyager Digital $655M — Crypto Firm Is ‘Unable to Assess’ if It Can Recover the Funds

June 23, 2022 Bitcoin.com

Bitfarms sold 3K Bitcoin as part of strategy to improve liquidity and pay debts

June 21, 2022 Coin Telegraph

Bitcoin

“Selling a portion of our BTC holdings and daily production as a source of liquidity is the best and least expensive method in the current market environment," said chief financial officeJeff Lucas.

Canadian crypto mining firm Bitfarms sold roughly $62 million worth of Bitcoin (BTC) in June, using the proceeds from the sale to reduce its debt.

In a Tuesday announcement, Bitfarms said it had sold 3,000 Bitcoin in the last seven days, roughly 47% of the crypto mining firm’s roughly 6,349 BTC holdings. According to the company, it will use the funds from the BTC sales — $62 million — to “rebalance its indebtedness by reducing its BTC-backed credit facility with Galaxy Digital.” The sold crypto seemingly included 1,500 BTC Bitfarms used to reduce its credit facility from $100 million to $66 million in June, bringing its debt down to $38 million at the time of publication.

According to Bitfarms chief financial officer Jeff Lucas, the mining firm is “no longer HODLing” all the Bitcoin it produces daily — roughly 14 BTC — instead choosing to “take action to enhance liquidity and to de-leverage and strengthen” the company’s balance sheet. Bitfarms said it also closed a $37-million deal with NYDIG to finance equipment, bringing the firm’s liquidity to roughly $100 million.

“While we remain bullish on long-term BTC price appreciation, this strategic change enables us to focus on our top priorities of maintaining our world-class mining operations and continuing to grow our business in anticipation of improved mining economics,” said Lucas. “We believe that selling a portion of our BTC holdings and daily production as a source of liquidity is the best and least expensive method in the current market environment.”

#Bitfarms Adjusts #HODL Strategy

• Pays down BTC-back credit facility to US$38 million
• Currently holds total of 3,349 BTC
• Daily BTC production of approximately 14 BTC adds further liquidity

More info: https://t.co/xCcIUHkWsU

$BITF #BTC #BitcoinMining #Blockchain pic.twitter.com/L58siaA99c
— Bitfarms (@Bitfarms_io) June 21, 2022

Bitfarms held a reported 4,300 BTC as of January, worth roughly $177 million when the crypto asset was at a price of more than $41,000. Founder and CEO Emiliano Grodzki said at the time the company’s strategy was “to accumulate the most Bitcoin for the lowest cost and in the fastest amount of time.”

The move from Bitfarms came amid extreme price volatility among major cryptocurrencies including BTC and Ether (ETH). On Saturday, the price of Bitcoin dropped under $18,000 for the first time since December 2020 but has since returned to more than $21,000 at the time of publication. The ETH price experienced a similar drop to under $1,000 on Saturday — an 18-month low — before rising to more than $1,200 on Tuesday.

How a DAO for a bank or financial institution will look like

June 19, 2022 Coin Telegraph

Banking

A DAO-based financial industry means lower fees across the board, accessibility, and transparency. Would it be possible?

Global banking network as a DAO

Imagining a DAO-based global banking network may seem far-fetched at the moment, but not impossible.

If blockchain technology is widely adopted within the financial industry, it is not hard to imagine a future in which banks are run as DAOs. In such a scenario, bank management would be decentralized, with power vested in the hands of the network’s members.

Furthermore, the adoption of DAOs will likely result in a more equitable distribution of power within banks and financial institutions. It could lead to a more democratic form of governance, one that can better meet the needs of all stakeholders, including customers, employees and shareholders.

A global banking DAO would also mean transparency across the board, lower fees and increased public access to financial services. Until then, what remains to be seen is how quickly these organizations will embrace this new model of governance.

The impact of DAOs in banking and financial institutions

The adoption of DAOs in banking and financial institutions will profoundly impact the way these organizations are managed.

DAOs can help rebuild customer trust in banks, especially in an increasingly digital age where customer expectations have changed. Applying DAO governance models in banks may just be what the industry needs to bridge the gap between fintech and established financial institutions.

In addition, DAOs can support banks in tapping into new markets and customer segments. The remittance market, for instance, is currently underserved by traditional financial institutions. With DAOs, banks could reach these customers through innovative products and services.

How will DAOs empower advisers and investors?

DAOs will undoubtedly influence the conduct of financial advisor relationships and investment management.

Smart contracts can automate many tasks done manually by investment managers such as performance monitoring, compliance checking and asset allocation. This will free up time for advisers to provide other value-added services to their clients.

The use of tokens will also give investors the right to decide on the DAO’s operational methods. Consequently, this could further better transparency and accountability on the part of financial advisors.

Structure of a DAO in banking and financial institutions

Since DAOs don’t prescribe to traditional physical or hierarchical structures, it will likely look different within a financial institution compared to the standard centralized model.

Banks will most probably preserve a certain type of structure or hierarchy as required by law and regulations even as they adopt DAO. In actual business operations, however, a DAO can be organized in several ways.

For example, a DAO could be arranged around specific products or services, with each team responsible for its own area. It may also be constructed geographically, with teams located in different parts of the world.

It is worth noting that even within a traditional institution such as a bank, the very structure of a DAO connotes a level of decentralization that assigns power to its members equitably.

A DAO’s rules and regulations are encoded into smart contracts, enforced by the network of computers that run its blockchain. The DAO’s token, if any, also plays an important role in the organization’s governance.

This token will power the smart contracts and give its holders a say in how the DAO is run. Using a token also opens up the possibility for a DAO to raise capital through an ICO, which could fund the development of new products and services.

As for the DAO’s governance model, it can follow the structure of several DAOs like ConstitutionDAO, JuiceboxDAO, Ethereum Name Service DAO and Friends With Benefits DAO. To read more about governance models in DAOs, check out our DAO governance models: A beginner’s guide.

How do DAOs work for a bank-like business model?

DAOs can provide several services for banks, including asset management, compliance and lending.

Banks today are already using blockchain technology for things like payment, clearing and settlement, trade finance, identity and syndicated loans, according to The Financial Times. However, there are still many unexplored areas in banking where a DAO-based model might be useful:

Fundraising

In the crypto world, initial coin offerings (ICOs) are breaking down the barrier between access to capital and traditional services like capital-raising firms. Likewise, banks can use DAOs to raise capital from a wider pool of investors via ICOs.

Loans and Credit

Using decentralized technology in banking can eliminate the need for gatekeepers in the lending industry. DAOs provide more secure ways for people to borrow money, not to mention lower interest rates and better terms.

Trade Finance

DAOs could also streamline trade finance by digitizing paper-based processes and automating manual tasks. This would make it easier for banks to keep track of their transactions, thereby reducing the risk of fraud and establishing trust among global trade parties.

Securities

A DAO can help banks issue, manage and trade securities, both digital and traditional. Through tokenization of traditional securities such as bonds, stocks, and other assets and placing them on blockchains, banks can facilitate the creation of capital markets that are interoperable, efficient and accessible to the greater public.

Customer KYC and Fraud Prevention

Since DAOs are transparent and decentralized, they offer a way for banks to verify the identity of their customers while preventing fraud. Using smart contracts, banks can automate customer onboarding and KYC processes. Blockchain technology also offers financial institutions an efficient and secure platform for sharing information with other firms.

How can DAOs benefit banks and financial institutions?

Since DAOs are transparent and decentralized, they could make banks and financial institutions more accountable to their customers and clients.

DAOs may help restore trust in the banking system, which according to recent studies, has plummeted to a low of 29% post-pandemic.

Trust remains the most valued aspect of banking among consumers worldwide, according to Statista. Hence, if banks wish to remain in their customers’ good graces, they must offer more than just great rates and products. They need to rebuild the trust.

Top accounting firm Ernst and Young released survey results highlighting the sweeping banking landscape changes in recent years. Consumers, for one, now place fintech on top of their “most trusted financial services brand[s]” list at 33%, with banks lagging far behind at 12%.

Fintech is a broad category that includes any technology used to provide financial services, from mobile banking apps to online lending platforms. Banks have been slow to adopt new technologies, but the COVID-19 pandemic forced them to speed up their digital transformation to remain competitive.

Technically, FinTech and banks need not be mutually exclusive. In fact, many banks are now turning to fintech solutions to address various problems. One such option is DAO, which benefits both the banks and their customers.

What is a DAO in banking?

DAOs can help banks address common problems and streamline internal workflows by moving to a blockchain-based architecture.

Banks and financial institutions are some of the most centralized organizations in the world. A small group controls them, and their activities are often opaque. This centralization can make these firms susceptible to corruption, fraud, and mismanagement.

Since DAOs embody the characteristics of blockchain-based technology such as decentralization, transparency and security, they could assist in addressing the said issues.

A DAO for a bank or financial institution will be able to offer secure and efficient services without the need for a brick-and-mortar infrastructure, relying instead on DLT.

Benefits of DAOs

DAOs have many applications and are particularly well-suited for financial institutions and banks.

By eliminating the need for a centralized authority, DAOs help organizations become more efficient and reduce costs. Other benefits include:

Decentralized autonomous organizations (DAOs)

Decentralized autonomous organizations, or DAOs, are digital organizations powered by decentralized technologies that operate without the need for a central authority.

DAOs are built on distributed ledger technologies (DLTs) such as blockchain technology and are designed to be transparent, secure and efficient. They offer a new way of organizing business and governance models that could potentially disrupt traditional organizations.

DeFi transforming lending routes on the blockchain

May 14, 2022 Coin Telegraph

Coin Telegraph

Decentralized routes of lending and borrowing through smart contracts are allowing DeFi finally to overthrow the traditional finance sector.

The world of decentralized finance (DeFi) is gradually expanding to encompass a significant share of the global financial lending space by virtue of the inherently trustless manner of operation and the ease of accessing capital. As the crypto ecosystem has grown to a $2-trillion industry by market capitalization, new products and offerings have emerged thanks to burgeoning innovation in blockchain technology.

Lending and borrowing have become an integral part of the crypto ecosystem, especially with the emergence of DeFi. Lending and borrowing are one of the core offerings of the traditional financial system, and most people are familiar with the terms in the form of mortgages, student loans, etc.

In traditional borrowing and lending, a lender provides a loan to a borrower and earns interest in exchange for taking the risk, while the borrower provides assets such as real estate, jewelry, etc., as collateral to obtain the loan. Such a transaction in the traditional financial system is facilitated by financial institutions such as a bank, which takes measures to minimize the risks associated with providing a loan by conducting background checks such as Know Your Customer and credit scores before a loan is approved.

Borrowing, lending and blockchain

In the blockchain ecosystem, lending and borrowing activities can be conducted in a decentralized manner wherein the parties involved in a transaction can deal directly with each other without an intermediary or a financial institution through smart contracts. Smart contracts are self-executing computer codes that have a certain logic where the rules of a transaction are embedded (coded) in them. These rules or loan terms can be fixed interest rates, the loan amount, or contract expiry date and are automatically executed when certain conditions are met.

Loans are obtained by providing crypto assets as collateral on a DeFi platform in exchange for other assets. Users can deposit their coins into a DeFi protocol smart contract and become a lender. In return, they are issued native tokens to the protocol, such as cTokens for Compound, aTokens for Have or Dai for MakerDao to name a few. These tokens are representative of the principal and the interest amount that can be redeemed later. Borrowers provide crypto assets as collateral in exchange for other crypto assets that they wish to borrow from one of the DeFi protocols. Usually, the loans are over-collateralized to account for unexpected expenses and risks associated with decentralized financing.

Borrowing, lending and total value locked

One can lend and borrow through various platforms in the decentralized world, but one way to gauge the performance of a protocol and select the right one is by observing the total value locked (TVL) on such platforms. TVL is a measure of the assets staked in smart contracts and is an important indicator used to evaluate the adoption scale of DeFi protocols as the higher the TVL, the more secure the protocol becomes.

Smart contract platforms have become a major part of the crypto ecosystem and make it easier to borrow and lend due to the efficiencies offered in the form of lower transaction cost, higher speed of execution and faster settlement time. Ethereum is used as a dominant smart contract platform and is also the first blockchain to introduce smart contracts. The TVL in DeFi protocols has grown by over 1,000% from just $18 billion in January 2021 to over $110 billion in May 2022.

Ethereum takes up more than 50% of the TVL at $114 billion as per DefiLlama. Many DeFi lending and borrowing protocols are built on top of Ethereum due to the first-mover advantage. However, other blockchains, such as Terra, Solana and Near Protocol, have also increased traction due to certain advantages over Ethereum such as lower fees, higher scalability and more interoperability.

Ethereum DeFi protocols such as Aave and Compound are some of the most prominent DeFi lending platforms. But one protocol that has grown significantly in the past year is Anchor, which is based on the Terra blockchain. The top DeFi lending protocols based on TVL can be seen in the graph below.

The transparency provided by DeFi platforms is unmatched by any traditional financial institution and also allows for permissionless access, implying that any user with a crypto wallet can access services from any part of the world.

Nevertheless, the potential for growth of the DeFi lending space is massive, and the use of Web3 crypto wallets additionally ensures that DeFi participants maintain a hold over their assets and have complete control over their data by virtue of the cryptographic security provided by blockchain architecture.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Neeraj Khandelwal is a co-founder of CoinDCX, an Indian crypto exchange. Neeraj believes that crypto and blockchain can bring about a revolution in the traditional finance space. He aims to build products that make crypto accessible to and easy for global audiences. His areas of expertise lie in the crypto macro space, and he also has a keen eye for global crypto developments such as CBDCs and DeFi, among others. Neeraj holds a degree in electrical engineering from the prestigious Indian Institute of Technology Bombay.

MicroStrategy may explore ‘future yield generation opportunities’ on 95,643 BTC holdings

May 3, 2022 Coin Telegraph

Bitcoin

As of March 31, MicroStrategy held a total of 129,218 BTC, which the firm reported had a carrying value of roughly $2.9 billion.

Business intelligence firm MicroStrategy said it will consider opportunities for yield generation on 95,643 “unencumbered” Bitcoin (BTC) held by its subsidiary MacroStrategy.

In MicroStrategy’s report for the first quarter of 2022 released on Tuesday, the firm said it “may conservatively explore future yield generation opportunities on unencumbered MacroStrategy bitcoins” as a consideration following a $205 million BTC-collateralized loan issued by Silvergate Bank in March. As of March 31, MicroStrategy held a total of 129,218 BTC, which the firm reported had a carrying value of roughly $2.9 billion, reflecting cumulative impairment losses of more than $1 billion and an aggregate cost of $4 billion.

“The original cost basis and market value of MicroStrategy’s bitcoin were $3.967 billion and $5.893 billion, respectively, which reflects an average cost per bitcoin of approximately $30,700 and a market price per bitcoin of $45,602.79, respectively,” said the firm.

Today, @MicroStrategy is the world’s largest publicly traded corporate owner of #bitcoin with over 129,200 bitcoins.

Please join the management team at 5pm EDT as we discuss $MSTR Q1 2022 financial results and answer questions about our business & outlook.https://t.co/UOSdCKQOSx
— Michael Saylor⚡️ (@saylor) May 3, 2022

According to the report, 95,643 BTC of MacroStrategy’s crypto holdings are “unencumbered” as of March 31, with 19,466 BTC held by the subsidiary pledged as collateral — roughly $820 million at the time of the deal — for a $205 million loan from Silvergate. The remaining 14,109 BTC were held directly by MicroStrategy.

MicroStrategy reported $119.3 million in revenue for Q1 2022, a 3% decrease year-over-year. In addition, the firm's non-Generally Accepted Accounting Principles (GAAP) expenses for the first quarter were $275 million, with $170 million from BTC impairment charges. The United States Securities and Exchange Commission reportedly sent a letter to MicroStrategy in January requesting the firm stop using non-GAAP methods of calculating its finances.

Since making a $250-million investment in Bitcoin in August 2020, MicroStrategy now holds billions in crypto following separate buys using the company’s cash on hand and proceeds of sales of convertible senior notes in private offerings to institutional buyers. The BTC price is $37,787 at the time of publication, making the firm’s 129,218 coins worth roughly $4.9 billion.

Goldman Sachs offers first Bitcoin-backed loan as Wall Street embraces crypto

April 29, 2022 Coin Telegraph

Coin Telegraph

Goldman Sachs has offered its first Bitcoin-backed loan, showing further signs of increased interest in cryptocurrency from Wall St institutions.

Goldman Sachs has offered its first Bitcoin-backed loan, in a major step forward for institutional cryptocurrency adoption on Wall St.

A spokeswoman from Goldman told Bloomberg that the multinational investment bank had lent cash collateralized by Bitcoin (BTC) owned by the borrower for the first time in Goldman Sachs’ history. She added that the deal was particularly interesting because of its structure and 24-hour risk management.

Such a loan allows for a Bitcoin holder to borrow fiat currency such as the US dollar, by fronting up their BTC as collateral to the bank. The underlying volatility of Bitcoin can make these loans risky — if the price of bitcoin drops too far the borrower may be required to increase their collateral, otherwise they risk getting liquidated.

Last month, Goldman, which now sports its own in-house digital assets team, executed their first over-the-counter (OTC) crypto transaction in collaboration with the trading unit of Michael Novogratz’s crypto investment firm Galaxy Digital.

Goldman is not alone in its foray into digital assets, with fellow Wall St banks ramping up their movements into the cryptocurrency space as well.

On Wednesday multi-trillion dollar asset management firm BlackRock announced the launch of a blockchain-focused ETF. Earlier this month the firm also announced its involvement in a $400M funding round and partnership with Circle, the principal operator of the USDC stablecoin.

While overcollateralized crypto-backed loans have been a staple in the world of decentralized finance (DeFi) for some time — the crypto-collateralized loan is becoming an alternative method for institutions and governments looking to gain increased access to capital.

Yesterday, blockchain real estate platform Propy announced a partnership with Abra to offer its customers access to home loans using cryptocurrency holdings as collateral. On Wednesday, a new homeowner purchased an apartment in Austin, Texas, using a platform called USDC.homes. The deposit was staked crypto, and the mortgage was undercollateralized and based on the applicants credit score.

El Salvador is currently in the process of securing finances for its volcano bond; a Bitcoin-backed government bond that will be used to amass $1 billion in funding for the development of “Bitcoin City” and to increase the size of the country’s Bitcoin reserves.

Propy partners with Abra to provide crypto-backed real estate loans

April 28, 2022 Coin Telegraph

Abra

Cryptocurrency investors now have more options for purchasing property without having to sell their digital assets outright.

Blockchain real estate platform Propy has partnered with Abra to allow customers to obtain home loans using their cryptocurrency holdings, potentially widening the financial use cases of digital assets.

Propy customers can now put up digital assets as collateral for their real estate purchases through Abra Borrow, a cryptocurrency lending and borrowing service. Crypto collateral pledged on Abra is used to borrow United States dollars that can then be applied to home purchases.

The Propy blockchain records the entire transaction process, serving as the technical and legal framework for buyers and sellers. According to Propy, the blockchain records the transaction whether it’s made in crypto, nonfungible tokens (NFT) or traditional fiat currency.

Abra is a crypto-focused wealth management platform that has been around since 2014. The platform allows users to generate yield on their crypto, borrow dollars against their holdings and trade digital assets. Abra has received backing from several major companies, including Amex Ventures, the venture capital arm of American Express, which contributed to its $55 million Series C funding round in September 2021.

While early crypto investors have generated significant wealth over the years, their access to traditional financial products such as mortgages remains limited. Decentralized finance, or DeFi, applications are attempting to fill the void. As Cointelegraph reported, a new homeowner in Austin, Texas recently purchased property through a mortgage obtained from USDC.homes, a crypto loan service based on Circle’s USD Coin (USDC).

If you're buying a home in the future, you'll probably be using NFTs. Here's how crypto is changing real estate in the meantime. https://t.co/jiLT9Uojvd
— Cointelegraph (@Cointelegraph) February 19, 2022

Fintech startup Milo is also offering crypto mortgages to homebuyers wishing to use their Bitcoin (BTC) as collateral. Meanwhile, decentralized mortgage lender Bacon Protocol launched a program in September 2021 that allows homeowners to exchange a lien on their property for an NFT that represents a percentage of the property they bought.

Home sweet hodl: How a Bitcoiner used BTC to buy his mom a house

April 28, 2022 Coin Telegraph

Bitcoin Price

The story of the 28-year-old engineer who took a loan out against his Bitcoin to pay for his mom’s house.

There’s a special bond between mothers and their sons. For pseudonymous Alan, a 28-year-old engineer, a Bitcoin (BTC) loan helped his mom to buy a house.

Alan told Cointelegraph that he took out a Bitcoin-backed loan in 2021 — serendipitously on his sister’s birthday — to gift his mom the tax-free money. She then used the funds to buy a house in North Yorkshire, England, while Alan kept his Bitcoin.

*Yorkshire, England, known as “God’s own country.” Source: North Yorkshire City Council*

Alan first used Bitcoin in 2012, learning it was a useful currency to buy things on the internet. He used the peer-to-peer (P2P) service localbitcoins.com, whose team are regular Cointelegraph contributors, to buy Bitcoin.

Alan described the process of buying Bitcoin from real people as a “bizarre experience.” He explained that the experience 10 years ago is incomparable to using popular exchanges such as Coinbase, Kraken or Binance nowadays.

Over the course of his studies at university, Alan’s interest in Bitcoin waxed and waned until 2014 came round and the “less than 100 pounds,” or $130, that Alan had in Bitcoin had become a “couple of grand.” Alan explains the “transition” of Bitcoin the currency into something more:

“Bitcoin had actual utility, from buying things online to having actual value. I’ve now got this anonymous money, or ‘anonymous enough’ money, with actual value.”

Hodling onto Bitcoin over the long-term might make sense, as the P2P money created by Satoshi Nakomoto could be an investment tool or a store of value.

Fast forward to 2016, and the price per Bitcoin was around $753, or 600 pounds. Alan knew that it was “something worth buying,” but Alan was still a student and had his head down for exams:

“I didn’t have any cash, and any Bitcoin I did have I was using to buy things.”

Alan spoke to his dad, suggesting it might be worth “investing a couple of thousand” into the orange coin. Unfortunately, his father did not invest in 2016, but Alan hodled on.

The 2017 Bitcoin bull run swung around, and the price per Bitcoin reached almost $20,000. At the time of Alan’s second halving, the process whereby the Bitcoin miner reward halves, causing a supply shock, his Bitcoin was beginning to grow in monetary value.

In the summer of 2021, with the price in the $40,000s, Alan’s mom’s house negotiations came up in conversation. Alan knew how he could “help out,” and better yet, he knew he could take out a loan so he didn’t even have to sell.

He chose Celsius, a centralized finance platform dealing with decentralized cryptocurrencies to source cash. Despite interest in other cryptocurrencies and knowledge of decentralized finance (DeFi), Alan explained that using a centralized finance provider offers a “lower risk perception,” as they're backed by venture capital:

“You expect they’d be slightly more resilient than DeFi protocols. Plus, the 25% loan to value is a good limit they put on me because otherwise, I’d probably liquidate myself.”

On his sister’s birthday, sometime in August 2021, Alan took out a 25% loan-to-value, 0% interest Bitcoin-backed loan with Celsius. He swiftly transferred the money to his mom to reach the total sum required for the new house.

*Bitcoin price in August 2021. Source: Cointelegraph*

He put up 2.08 BTC as collateral to generate $25,000 for the purchase at a loan term length of 36 months. Alan’s mother was overjoyed with his generosity, and upon learning that the money came from a Bitcoin loan, Alan says she commented, “That’s cool!”

Cointelegraph reached out to Alex Mashinsky, CEO of Celsius for comment. He explained that it’s “an honor to serve a community that wants to do good for others,” adding:

“We hear lots of great stories about clients who start businesses, build businesses, buy houses, care for others, even climb mountains by using Celsius loans.”

Alan caveats his Bitcoin-backed loans experience by explaining that he has taken out further Celsius loans to buy other things, but in a word of caution: “Sometimes it’s good, sometimes it’s shit.”

*CEO of Celsius Alex Mashinsky with Cointelegraph during Paris Blockhain Week. Source: YouTube*

Ultimately, Alain explained that while “Bitcoin gets a bad ride in the press, the more good things people do with it, the better.” Furthermore, he’s proved you don’t necessarily need to sell your Bitcoin to be generous.

“A lot of people have gotten incredibly lucky to turn small amounts of money into ludicrous piles of wealth. So yeah, give a bit back somewhere nice. Whether it’s family or just general charity.”

Alan concluded that everyone should “buy your mum a house,” or, better yet, he jokes, “buy my mum another house.”

Looking to take out a crypto loan? Here’s what you need to know

April 24, 2022 Coin Telegraph

Coin Telegraph

Cryptocurrency-based loans have grown to be one of the most utilized decentralized finance (DeFi) that have emerged from the cryptoverse.

Loans based on cryptocurrencies have become a mainstay of the decentralized finance (DeFi) universe ever since the smart contract-based lending/borrowing platforms began offering the service to crypto users. The Ethereum network, the first blockchain that scaled the smart contract functionality, sees most of the total value locked (TVL) on DeFi protocols dominated by cryptocurrency lending platforms.

According to data from DeFi Pulse, the top 4 of 10 DeFi protocols are lending protocols that account for $37.04 billion in TVL, just 49% of TVL of the entire DeFi market on the Ethereum blockchain. Ethereum leads in terms of being the most utilized blockchain for the DeFi market and the TVL on the network. Maker and Aave are the biggest players here, with a TVL of $14.52 billion and $11.19 billion, respectively.

Even on other blockchain networks like Terra, Avalanche, Solana and BNB Chain, the adoption of cryptocurrency-based loans has been one of the main use cases of smart contracts in the world of DeFi. There are about 138 protocols that provide crypto loan-based services to users, amounting to a total TVL of $50.66 billion, according to DefiLlama. Apart from Aave and Maker, the other prominent players in this protocol category across blockchain networks are Compound, Anchor Protocol, Venus, JustLend, BENQI and Solend.

Johnny Lyu, the CEO of crypto exchange KuCoin, talked to Cointelegraph about the choice of blockchain networks for crypto lending. He said:

“I would say the ideal blockchain for loans and DeFi does not exist, as each has its own advantages. At the same time, the leadership of Ethereum is undeniable due to many factors.”

However, he didn’t negate the possibility of the emergence of a truly ideal blockchain for DeFi. Kiril Nikolov, DeFi strategist at Nexo — a cryptocurrency lending platform — seconded this view. He told Cointelegraph:

“The short answer is ‘no.’ Most blockchains are crypto lending-friendly. However, among the primary properties to watch for are liquidity and reliability, while a secondary determining factor might be network fees.”

Considering that the liquidity and reliability of the Ethereum platform are the highest right now due to it being the most utilized blockchain within DeFi, one could consider taking advantage of the same and making it the blockchain of choice.

Prominent players

To start with, a borrower needs to choose between the major lending protocols on the network such as Maker, Aave and Compound. While there are a plethora of crypto lending platforms, in this piece, the most prominent ones are considered for the sake of ease of explaining and relatability.

Cryptocurrency lending essentially enables users to borrow and lend digital assets in return for a fee or an interest. Borrowers need to deposit collateral that will instantly allow them to take a loan and use it for the objectives of their portfolio. You can take loans without any collateral, known as flash loans, on platforms like Aave. These loans need to be paid back within the same block transaction and are mainly a feature meant for developers due to the technical expertise required to execute them. Additionally, if the loaned amount is not returned plus the interest, the transaction is canceled even before it is validated.

Since crypto-based loans are completely automated and simple for the average retail investor and market participants, in general, they provide an easy way to earn annual percentage yields on the digital assets they are hodling or even accessing cheap credit lines.

One important aspect of collateralized loans is the loan to value (LTV) ratio. LTV ratio is the measurement of the loan balance in relation to the value of the collateral asset. Since cryptocurrencies are considered to be highly volatile assets, the ratio is usually on the lower end of the spectrum. Considering Aave’s current LTV for Maker (MKR) is 50%, it essentially means that you can borrow only 50% of the value as a loan in relation to the collateral deposited.

This concept exists to provide moving room for the value of your collateral in case it decreases. This results in a margin call where the user is asked to replenish the collateral. If you fail to do so and the value of the collateral falls below the value of your loan or another predefined value, your funds will be sold or transferred to the lender.

The extent of the impact of cryptocurrency-based loans reaches out of the DeFi market since it enables access to capital for individuals or entities without a credit check. This brings a mass population of people across the world that have a bad credit history or no credit history at all. Since lending and borrowing are all driven through smart contracts, there is no real age limit for the younger generation to get involved, which is traditionally not possible through a bank due to the lack of credit history.

Considerations and risks

Since the adoption of DeFi-based loans has now risen to such an extent that even countries like Nigeria are taking advantage of this service and El Salvador is exploring low-interest crypto loans, there are several considerations and risks that are noteworthy for investors looking to dabble in this space.

The primary risk involved with crypto lending is smart contract risk since there is a smart contract in play managing the capital and collateral within each DeFi protocol. One way this risk can be mitigated is by robust testing processes implemented by the DeFi protocols deploying these assets.

The next risk you need to consider is the liquidity/liquidation risk. The liquidity threshold is a key factor here because it is defined as the percentage at which a loan is considered to be under-collateralized and thus leads to a margin call. The difference between LTV and liquidity threshold is the safety cushion for borrowers on these platforms.

For lenders, there is another additional risk related to impermanent loss. This risk is inherent to the automated market maker (AMM) protocol. This is the loss that you incur when you provide liquidity to a lending pool, and the underlying price of the deposited assets falls below the price at which they were deposited into the pool. However, this only occurs when the fees earned from the pool don’t compensate for this drop in price.

Nikolov pointed out another risk with DeFi lending platforms. He said that “Another one is bad collateral listing which could lead to disturbances of the entire platform. So, if you’re not willing to take these risks, we recommend borrowing from a platform like ours that guarantees you certain protections such as insured custody and over-collateralization.”

There have been several instances of hacks since the increasing popularity of DeFi including Cream Finance, Badger DAO, Compound, EasyFi, Agave and Hundred Finance.

Additionally, cryptocurrency lending and borrowing platforms and users both are subject to regulatory risk. Lyu mentioned that the regulatory framework on this issue has not been fully formed in any major jurisdiction, and everything is changing right before our eyes. It is necessary to separate borrowers from each other — private borrowers and companies of borrowers.

Essentially, the risks highlighted makes it critical for you to exercise extreme caution when deploying your capital in crypto-based loans, either as a borrower or as a lender. Paolo Ardonio, the chief technology officer of crypto exchange Bitfinex, told Cointelegraph:

“It is important that those participating in crypto lending on DeFi platforms be mindful of the risks in what is still a nascent field in the digital token economy. We’ve seen a number of high-profile security breaches that have put the funds of both borrowers and lenders at risk. Unless funds are secured in cold storage, there will inevitably be vulnerabilities for hackers to exploit.”

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Future of DeFi lending

Despite the risks mentioned, cryptocurrency-based lending is one of the most evolved spaces in DeFi markets and is still witnessing constant innovation and growth in technology. It is evident that the adoption of this DeFi category is the highest among the numerous others growing in the blockchain industry. The use of decentralized identity protocols could be integrated into these platforms for the verification of users to avoid the entry of scrupulous players.

Ardonio spoke further on the innovation expected in DeFi loans this year, stating, “I expect to see more innovation in crypto lending, particularly in terms of the use of digital tokens and assets as collateral in loans. We are even seeing nonfungible tokens being used as collateral in loans. This will be an emerging trend this year.”

loans

Global banking network as a DAO

The impact of DAOs in banking and financial institutions

How will DAOs empower advisers and investors?

Structure of a DAO in banking and financial institutions

How do DAOs work for a bank-like business model?

Fundraising

Loans and Credit

Trade Finance

Securities

Customer KYC and Fraud Prevention

How can DAOs benefit banks and financial institutions?

What is a DAO in banking?

Benefits of DAOs

Decentralized autonomous organizations (DAOs)

Borrowing, lending and blockchain

Borrowing, lending and total value locked

Prominent players

Considerations and risks

Future of DeFi lending

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