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Home Crypto News

Bringing community-based solutions to crypto lending can solve trust issues

tradingfxdaily by tradingfxdaily
December 20, 2022
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Bringing community-based solutions to crypto lending can solve trust issues
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A type of decentralized finance (DeFi) that allows investors to lend their crypto tokens in return for regular interest payments, the crypto lending space comprises both centralized and decentralized crypto entities that manage the entire process on behalf of their investors.

Offering high annual percentage yields (APY) to investors from whom the tokens have been borrowed, these lending platforms further lend the same assets in the form of collateralized crypto loans to borrowers.

However, despite providing businesses with easy access to capital and promising high yields for investors, the crypto lending space finds itself entwined in liquidity issues stemming from their unregulated and overleveraged lending practices.

As a result, crypto investors have either lost their tokens in debacles such as the Celsius Network meltdown or are gripped with fear that they may be unable to withdraw their crypto staked with distressed crypto lending platforms.

Major problems afflicting the crypto lending space

With major cryptocurrencies correcting by over 70% from levels last seen in November 2021, the crypto lending industry has been mired in a spiraling credit crisis, exaggerated by the crash of the Terra stablecoin in May 2022. The ensuing liquidity crisis has already consumed leading crypto lenders and hedge funds such as Celsius Networks, Vauld, Three Arrows Capital (3AC), Voyager Digital, and Babel Finance, further exaggerated by overleveraged trading and suspect business practices.

Consequently, the crypto lending space has been clouded with severe trust issues, with more lending platforms seeking fund infusions to tide over the current bear market.

As a niche market with limited offerings, investors or crypto firms often employ borrowed capital to indulge in speculation, hedging, or working capital.

Any over-exposure on the part of the borrower could put the lender at an immense risk of marking down the lent amount, leading to liquidity concerns in case a majority of the investors proceed to withdraw their deposited tokens. Making matters worse is the opaque nature in which most crypto lenders function, often using tokens staked by investors to pursue high-risk trades, all in the hope of turning a larger profit.

As in the case of Celsius Networks, many lenders continue to be at risk of becoming insolvent if cryptocurrency prices dip further, potentially setting off another domino effect.

What are the possible solutions to these overriding concerns?

The major problems with collateralized crypto lending are exposed during volatile market conditions, especially when cryptocurrency prices drop consistently. With a lender’s ability to repay investors hinging on price movements of the underlying staked tokens and the amount of collateral collected, there is a clear need to delink crypto lending and adopt a more community-focused approach to finding a solution.

One such example is BNPL Pay, a decentralized crypto platform where communities can create banking nodes to borrow and lend from one another.

Based on the assumption that communities can better manage trust, BNPL Pay allows each banking node to be self-governed and decide which loan requests to accept or decline. Borrowers, on their part, can set the loan terms, decide on the percentage of collateral they are comfortable with and provide any additional information as deemed fit.

As a result, both lenders and borrowers enter into an agreement with conditions set by both parties at the very start of the contract. BNPL Pay merely acts as a technology provider and facilitator without interfering with the assets covered by the contract.

With funds managed via the BNPL Smart Contract suite that is additionally audited by leading cybersecurity firm PeckShield, there remains no scope for BNPL Pay to misappropriate capital or face solvency issues in the event that a borrower defaults on payments.

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Where is the crypto lending space headed?

With crypto markets currently going through one of the most challenging bear periods yet, it is time for DeFi providers like crypto lenders to develop new business models unaffected by market volatility. Building trust within the stakeholder ecosystem is a must, and BNPL Pay has shown one unique way to do this.

As developers and entrepreneurs learn from the mistakes made by the growing list of bankrupt crypto lenders, the space will witness rapid transformation in the days to come. The focus needs to be on building solutions that promote financial inclusivity, targeting real-world businesses like mom-and-pop stores and solving their working capital requirements.

This will require crypto lenders to adopt more transparent business practices and adhere to stringent self-regulated disclosure norms, at least until a formal regulatory framework is mandated by the various governments worldwide.

What is certain, though, is that the next leg of growth for crypto lenders will come from attracting more mainstream crypto investors, focusing on their ability to help communities lend and borrow within themselves for greater trust and security.

Material is provided in partnership with BNPL Pay

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you with all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.

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