Blockchain for Loans
Traditionally, when a customer applies for a bank loan, the institution guarantees it based on the credit reporting system. The risk associated with a loan is assessed based on various factors that indicate the customer’s ability to repay. Creditworthiness, debt-to-income ratio, homeownership status, etc. are all considered. In the United States, this information is provided by specialized credit agencies.
This level of centralization not only increases the risk of credit rating errors, but also increases the chances of sensitive information being leaked. With so much personal data concentrated in a few places, organizations become vulnerable and insecure.
When you apply for a bank loan, the bank must assess the risk that you will default on their loan. This is done by accessing your credit report and considering factors such as your credit score, debt-to-income ratio, and homeownership status. Based on this information, banks calculate the risk of default into loan fees and interest. This centralized system can be anti-consumer. Additionally, the concentration of this confidential information creates a significant vulnerability. Blockchain changes everything. With this innovative technology, banks can find more efficient and secure ways to process loan applications. Specifically, with the help of an encrypted distributed ledger, customers can apply for credit based on global credit scores without fear of exposing sensitive data. Alternative lending using blockchain technology offers a cheaper, more efficient and safer way to extend personal loans to a wider range of consumers. A cryptographically secure decentralized registry of past payments that allows consumers to apply for credit based on their global credit score.
Blockchain-enabled lending offers a safer way to offer personal loans to a wider range of consumers, making the lending process cheaper, more efficient and safer.
Examples of improved lending using blockchain
A company, SALT Lending, lends cash via blockchain. Users of the SALT Lending platform can borrow funds using Bitcoin, Ether, or blockchain assets as collateral. Loans are not approved based on the creditworthiness of the borrower, but rather on the value of the collateral. To use this platform, a user must purchase her SALT, the platform’s cryptocurrency. This grants the user her membership and makes the loan available. In 2022, SALT Lending has partnered with Cion Digital to expand its cryptocurrency lending solution to over 5,000 auto dealers across the United States. People looking to buy a car can use crypto as collateral for a loan, make a down payment, or buy the car outright.
Dharma Labs, a tokenized debt protocol, is another example of using blockchain to improve lending. The goal was to give developers the tools and standards they needed to build an online debt marketplace. However, in early 2022, OpenSea acquired Dharma Labs and closed the Dharma app as part of the acquisition. Blockchain startup
Bloom has introduced credit scores to the blockchain with a protocol for identity, risk, and credit scoring using blockchain technology. By partnering with credit bureau TransUnion in 2020, Bloom users can now check their credit score and get an overview of their loans and credit cards for free on the app. Most of these projects focus on creating liquidity through people’s existing cryptocurrency lending, but they are also strengthening the infrastructure to enable greater disruption of lending via blockchain.