It was already noon when Chen Wen left the blockchain conference. He checked his calendar and realized that five more blockchain-related conferences were waiting for him. He went across Beijing in a day to attend these events.
If it were half a year ago, Chen Wen would never set such hectic schedules for himself. After leaving a company that focuses on peer-to-peer lending, Chen Wen realized the booming demand for bitcoin and followed the blockchain craze. Since then, he had started an unreal lifestyle of working crazy long hours, multitasking and walking around.
“If I tell others that I’m still doing O2O, there is no chance that an investment institution will talk to me. The market is forcing us to enter the blockchain industry,” Chen Wen said. By moving about and drifting around the city, Chen Wen could interact with more people, have a more robust understanding of industry trends, and get more networking opportunities.
Since the second half of this year, an increasing number of people have started to pledge virtual currency as collateral for a loan. As a result, some programs such as cryptocurrency exchanges, cryptocurrency wallet, and third-party lending platforms emerged and competed for public attention.
A Diverse Range of Crypto Lending Platforms
The crypto-based lending platform is a variant of pledged loans in the traditional financial system. In the past, the guaranteed asset was usually the vehicle, house, and so forth. Now, the crypto-based lending platform involves the only cryptocurrency. Depending on its type, it is possible to pledge cryptocurrency for the cryptocurrency, promise cryptocurrency for legal tender, and pledge cryptocurrency for stablecoin.
“The model is relatively simple and stable,” Chen Wen said. According to him, the crypto-based lending platform has the advantage that traditional lending platform does not possess: cryptocurrency as the collateral mitigates the risk of having multiple mortgages. Moreover, pre-lending and lending controls become relatively simple. After the loan, there is no need to press borrowers for payment. If a person does not repay the loan, it is possible to monitor and take over his or her cryptocurrencies.
According to statistics, major crypto-based lending platforms that are currently on the market include ETHLend, EasyLend, Salt Lending, Libra Credit, JaneLending, KC Chain, Token Loan, and Lend Chain. At the same time, cryptocurrency exchanges, cryptocurrency wallet, and e-lending platforms have also entered the market.
Although they engage in the same business, each platform has its way of operating. We found that most of the cryptocurrencies that can be pledged using e-lending platforms are relatively stable, such as Bitcoin (BTC) and Ethereum (ETH). The corresponding pledge rate ranges from 30 percent to 70 percent. In China, all-in interest rates, which include upfront fees charged for loans, must be within the legally allowed annualized interest rate for loans. The permitted maximum legal rate in China is 36 percent annualized, and most e-lending platforms haven’t exceeded this legal limit. There are cases of cutting interest and charging additional fees. There are also platforms with an annualized interest rate for loans of nearly 200 percent.
“Cryptocurrency holders will pledge their cryptocurrencies to our platform. We will issue them legal currency at 30 percent of the real-time cryptocurrency price. The current annualized interest rate of the platform does not exceed 36 percent, and the product term ranges from seven days to 15 days,” the founder of JaneLending said. Based on the market trend, it is also possible that holders pledge cryptocurrency for the cryptocurrency. Established in 2017, JaneLending is the first crypto-based lending service platform in China.
Unlike JaneLending, Token-Loan is a platform that allows borrowers to pledge cryptocurrency for stablecoin (such as USDT). Lend Chain, on the other hand, provides services such as wealth management, using investment institutions as a medium to form fixed-income wealth management products, in addition to pledged loans. There will also be some project parties that pledge Ethereum. Annualized rates of return for these products vary a lot, depending on the subject matter and the length of the service term.
It is worth noting that the platform will set a corresponding warning line to avoid losses caused by the price volatility of cryptocurrencies If the cryptocurrency price falls below the warning line, the borrower will be notified to stop or cover the position. If the borrower chooses to finish, the platform will suspend the transaction, and the borrower needs to make the corresponding principal and interest payment to redeem his or her cryptocurrency. If the borrower fails to cover the position and the cryptocurrency price continues to fall, the platform will include the position forcefully and the cryptocurrency pledged by the borrower will be handed to the platform.
The way cryptocurrency exchanges work is more like stock allocation in the traditional financial system, using cryptocurrency in exchange for the cryptocurrency. At the present moment, cryptocurrency exchanges charge borrowers an interest rate between 0.02 percent to 0.1 percent, providing leverage ranging from one to 100 times. The higher the leverage, the higher the gain, but the risk to the borrower is also higher. When exchanges provide cryptocurrency allocation to borrowers, the corresponding pick-up and blow-up lines will also be set.
According to Chen Wen, the cryptocurrency wallet is built on its original service, adding new functions of lending and wealth management. On the other hand, the online loan platform for arranging crypto-based pledged loans are testing new projects similar to the cryptocurrency wallet. “These platforms are doing their side jobs offline and in secret. If the market opens in the future, they will immediately come in.”
Does the target population of crypto-based pledged loans overlap with traditional borrowers? The founder of JaneLending said no. “People who use the crypto-based lending platform understand cryptocurrency and are token holders. Most of them are not in actual need of money. They borrow money to invest. They might be experienced, investors.”
In general, those who engage in crypto-based pledged loans can be divided into several groups. First, individual cryptocurrency holders. These people do not have professional digital assets, neither do they have privileged access to investment channels or news. Therefore, they have an excellent demand for crypto-based pledged loans and financial management. Miners are the same.
Second, investment institutions at the business end need to pledge cryptocurrencies that have been invested, issued, and circulated in the market to obtain liquidity, considering the current bear market of the cryptocurrency industry.
Third, some project parties hope to make up for daily expenses by pledging cryptocurrencies they got during venture rounds. “For example, when it’s time to pay for an employee’s monthly salary, the company pledges its cryptocurrency on hand in exchange for fiat money to pay for the salary and other expenses,” a cryptocurrency project representative said.
E-lending platforms can find users more efficiently and accurately. “The operation of blockchain depends heavily on community. The initial users are mainly located in the community of cryptocurrency exchanges. Project parties can often find the right time to introduce their projects to the public or bring in acquaintances by participating in cryptocurrency-related offline events. Chen Wen interpreted this approach as developing a new user base on top of the existing cryptocurrency market.
To keep users, multiple platforms issue tokens in their systems. These tokens can be used as money to pay for various fees, considered as pledged assets on the platform, and even loaned to other users. They can also increase the interest rate of promised loans.