Typically, when we think of taking a loan, we think of going to a bank, filling out a ton of paperwork and then getting denied the loan unless a guarantor or cosigner signs as well. However, blockchain banking startups like Salt and Coinloan aim to change this by creating a peer to peer lending platform on the blockchain. These platforms allow users to leverage their bitcoin and other cryptocurrencies as collateral for fiat loans. Lenders will post the terms that they are willing to lend, and borrowers will select the loan terms that best suit their needs.
The Teams Behind Salt and Coinloan
Salt hails from the land of the free, a.k.a Denver, Colorado, USA. Their CEO Shawn Owen, has a LinkedIn profile detailing his journey as a serial entrepreneur with F&B and the hospitality industry. It also shows Shawn to be an early adopter of bitcoin, since early 2011. Other members of the Salt founding team have a background in fintech as well as banking. One notable adviser in Salt is Erik Vorhees, a prominent member of the bitcoin community and the CEO & Founder of ShapeShift.
On the other hand, Coinloan has Baltic roots and is headquartered in Estonia. Their CEO Alex is an entrepreneur with 7-years experience in Finances and IT. He has a very strong technical background and even graduated with a Masters in Applied Mathematics and Informatics. Prior to founding Coinloan he was the Founder of IT Security group, a company that specializes in developing security solutions for payment processing and blockchain technologies. Most of the founding team from Coinloan used to work in IT Security group as well.
How Peer to Peer Lending Works
Lenders commit cash fund to the loan and at the same time, the borrowers will post their collateral blockchain asset in a multi signature smart contract. Borrowers can post bitcoin, litecoin, ethereum and many other kinds of cryptocurrencies. The borrowed funds are deposited directly into the borrower’s account. After that, the collateral assets are stored and the borrower will make monthly payments on the loan. Once the loan is paid back, then the collateralized asset will be paid back to the borrower.
As an example, a one year $100,000 loan with a 10.00% annual percentage rate (APR) has twelve scheduled monthly payments of $8,791.59 representing repayment of principal and interest on the loan. At origination, the $100,000 loan balance is secured with $125,000 of bitcoin (125% of the loan amount), which is posted to a multi-signature wallet as collateral. The borrower and lender each retain a private key to the wallet, along with a third-party custodian.
Payments are made monthly, similar to a bank loan. Based on the example above, the borrower’s first monthly payment of $8,791.59 will reduce the loan to $92,041.74. This represents $833.33 of interest and $7,958.26 of principal.
Default occurs if the borrower is unable to act, or chooses not to meet the maintenance notice, there will be a partial liquidation transaction along with the lender and custodian, resulting in the sale of the amount of collateral needed to return the loan-to value ratio to 80%. It works similar to a margin call.
Salt will be starting straight out of Denver, Colorado and is set to launch their blockchain backed lending platform, BTC collateralized loans and loan fund by the end of 2017. In 2018, they will be launching ethereum collateralized loans in Q1, credit cards in Q2 and altcoin collateralized loans in Q3.
By contrast, Coinloan is still currently running their ICO. By 2018, they hope to obtain payment licences in Q2, develop mobile applications for IOS and android by Q3 and enter the Asian market in 2019.
To be eligible to participate in a Salt loan, participants must have at least one Salt token, be at least 18 years of age and own an asset on a blockchain. Membership is staggered into three different tiers, with the entry package costing 1 Salt a year. This gives the participant access to $10,000 worth of credit a year. Premier membership cost 30 Salt a year and gives access to $100,000 worth of credit. Loans above $100,000 are for enterprises and require contacting the company for details.
By contrast, Coinloan only sets the requirement that the minimum loan amount is $50. They believe in “lending for the people” so there is no division between who can participate as a lender as a borrower. This allows to participants to act as borrowers and lenders simultaneously
Why Take Out a Crypto Loan
With cryptocurrency appreciating at exponential rates, most early adopters find themselves in a precarious position. They would like to spend the money they have made on luxury items like Lamborghinis, but also don’t want to miss out on future price appreciation for their cryptocurrency holdings. By taking out a cryptocurrency loan, borrowers are able to spend on luxuries while still enjoying crypto gains. On the other hand, lenders get to earn interest on the loans they give out as well as price appreciation on their cryptocurrency holdings.
Greater implications are that Salt opens up credit services to many of the unbanked who do not have access to banking services. This is because most loan approvals are very fast and can take just minutes. Also more people have access to a smartphone than banking services in third world countries.