As the cryptocurrency economy continues to grow and evolve, a few platforms focused purely on borrowing and lending have appeared and are continuing to garner support. Each one has their own quirks, as well as their own unique features. Generally speaking though, they all focus on some form of borrowing against cryptocurrency collateral.
In this article, we’re going to go over two of the currently running lending operators, their features, quirks, and dark sides. We have also covered each platform separately so take a look for a more detailed review of each:
Arguably the first one on the scene, Salt came out with a broad social media ad campaign last year and got many thousands of enthusiasts interested in the project. Their slogan was “Hold Your Assets, Get your cash”.
Their sales pitch went something like this. A lot of times, people need cash in order to pay for all sorts of expenses in life. If you hold a lot of your assets as cryptocurrency, the only way to access the value within them is by selling them. The problem with selling cryptocurrency, generally speaking, is that cryptocurrency has been rising in value in the last few years. Selling would probably end up costing you more. This is simply because, by the time you’re ready to repurchase the crypto, prices will have gone up.
In their original video that appeared on YouTube, Salt Lending gave the example of selling bitcoin in January 2017 and then buying it back after the price jump seen last year.
While they don’t explicitly mention this, borrowing money against cryptocurrency actually can prevent (at least temporarily) the need to pay capital gains tax.
Here’s how the process of getting a Salt loan works.
First, you’ll need to create an account on their website. Then, you’ll need to verify your ID by submitting copies of documents. At press time, only customers with US bank accounts are supported. However, US nationality does not appear to be required. Next, you’ll need to activate your account by paying one SALT token. SALT tokens have been ranging in price from $3 to as high as $12 in recent months. Today they are around $5 each.
This token is then used to pay for one year of membership for the basic level. Basic level membership entitles you to up to one loan at a time, and for borrowing up to $10,000. Higher tiers are available, but they require a higher SALT cost.
Next, you’ll need to deposit your cryptocurrency collateral. At this time, Salt only accepts bitcoin and Ether as collateral. The company claims that they plan to expand to other currencies at a later date. At one point, their main page included listing Ripple and NEM as potential collateral choices.
Once your loan is approved, the US dollars will be sent to your bank account within a few days and a loan contract will have begun. Once a month, you will need to make a loan payment.
Originally, loan payments could only be made in US dollars. However, a few months ago the company announced that borrowers could use SALT tokens to repay principal and interest on their loans. At launch, the SALT tokens were given an official valuation by the company of $25 each. This means that each token would entitle you to up to $25 worth of “services” from the company. This amount was later increased to $27.50. Therefore, at this time, it is possible to get a loan in US dollars, and completely repay it using only SALT tokens.
To make the SALT token more interesting, the company also announced a new upcoming scheme that has not yet been released. The new scheme is called “proof of access”.
The idea is that a borrower may choose to deposit additional SALT tokens and lock them in their account in exchange for a number of benefits. For example, having a sizable proof of access score could entitle you to lower interest rates or other preferable terms on loan contracts. The company has yet to release the exact details of proof of access, however in an official email that was sent to Salt followers, these basic details were outlined.
The Bitter Side of Salt
The problem with Salt Lending is that while the company promises that if you repay your loan, you will get all of your collateral back, there is a strong risk that you could lose collateral. This would happen in the event of a margin call.
A margin call is when the valuation of your collateral goes down to such a degree that the company algorithms will demand that you pay them to rebalance the loan to collateral ratio. In simple terms, imagine that you borrowed $10,000 and you used 1.25 bitcoin as collateral when bitcoin was $10,000 each exactly. At this point, your loan is 125% over-collateralized. This means that there is a little wiggle room in the event that bitcoin drops as much as 25%. If, however, bitcoin values drop to let’s say $5000 each, your loan-to-value ratio is now unfavorable to the company. At this point, it is likely that a margin call would occur.
Once the margin call goes out, the borrower has a set amount of time to respond. Their choice of responses can be either to deposit additional collateral, to repay enough of the loan to rebalance it against the collateral or to suffer the liquidation of collateral and even potentially face a fee for doing so.
What we do not know is how much time a borrower would have in order to respond to the call. Imagine, for instance, if you borrowed some US dollars, then got on a 16-hour international flight with no internet. Then when you landed, you discovered that your precious cryptocurrency had been liquidated against your will. This is a possible reality that must be considered before using a service that threatens liquidation.
The other downside for Salt is that it is generally a one-way street. This means that for the average person, all you can do is borrow money. For most average people, there is no way for you to act as a lender and earn interest on your cryptocurrency or fiat currency. This is in contrast to other fiat based peer-to-peer lending platforms like Lending Club, that allow for people to both borrow and lend. It is possible that the company could change their policy on this. But for the time being, that’s the way it is.
While Salt requires identity verification, restriction to US Bank account holders, and charges a membership fee, Ethlend offers a highly automated and more democratized solution to lending.
Ethlend works purely through Ethereum smart contracts and no money is ever held by Ethlend itself. While the platform is not completely operational yet, some loans are working and a lot of progress has been done in the last few months towards reaching a proper public release.
Ethlend works not by lending fiat currency but by lending Ether units. Further, Ethlend loans are backed by collateral, but instead of Ether or bitcoin, loans are backed by ERC-20 tokens such as Golem or OmiseGO tokens, among many other possible choices.
Basically speaking, if someone wants to be a lender (and apparently, anyone can be without restriction) they simply engage in a smart contract through the Ethlend platform where the rates and collateral are stipulated. The borrower deposits their ERC-20 tokens and the lender deposits there Ether. At this point, Ethlend contracts make the exchange and the loan has begun. The borrower then needs to make regular payments in Ether to the lender. If they fail to do so, then the lender may claim the deposited collateral for themselves directly.
If the loan is paid off normally and on time, then it will include a premium over the amount borrowed. For example, if a borrower gets one Ether, the total returned to the lender could be 1.02 Ether. In that case, the premium is 0.02 Ether or 2%.
As funds are only held between borrowers and lenders and never Ethlend itself, it does not appear that Ethlend would or even could ever liquidate assets in the event of a drop in valuation. This seems to be because the loans are based on cryptocurrency itself and not on a USD evaluation. Therefore, if the value of one Ether drops, as the loan is denominated in Ether itself, the value of the loan does not change.
According to Ethlend, their service is ideal for a number of purposes. For instance, cryptocurrency miners looking to get capital in which to get more mining equipment or get started mining. Further, anyone with any financial need could potentially borrow Ether and then sell it for fiat currency. This, in a sense, could turn out to be quite similar to how Salt Lending works.
With Ethlend, the advantage is that since the platform is wholly anonymous and automated. It is available to anyone on earth with no restrictions. Further, anyone can be a lender as well as a borrower and potentially earn interest.
The Downside To Ethlend
The downside to Ethlend is that as all loans are denominated in Ether, it can be difficult for a regular person to get what is essentially a cash loan if they need to purchase something that is not easily purchased with cryptocurrency.
If they do need traditional fiat cash, they would likely need to pay fees to an exchange such as Coinbase in order to get cash. Doing so could also appear as a taxable event and could be subject to capital gains taxes.
As a lender, if your borrower defaults you could end up with a bunch of ERC-20 tokens that you would then be responsible for selling in order to recoup your lost Ether. This is not without its own risks.
More players coming soon
While Salt and Ethlend are two services that are currently operating, they both still have a long way to go and are both admittedly in early development stages. Therefore, a lot is likely to change about the rules in which they operate under in the next few years. It is also entirely possible that blockchain collateralized loans could eventually be picked up by banks at some point in the future.
Other cryptocurrency focused players are developing new services as well that will offer their own advantages and quirks. One example is Celsius, which will allow people to deposit all sorts of cryptocurrencies into a mobile wallet and earn a regular interest rate for doing so. The service also plans to offer cash loans, but those loans again have the risk of getting a margin call. Another service called Everex wants to offer microloans to its customers, that would again be backed by crypto deposits.
Clearly, there is a lot of room for growth in this industry. As more and more wealth is put onto the blockchain, it is natural that the need for loans that use blockchain assets as collateral will grow.