This is part of a blog series Can Blockchain Save Our Financial System?
This blog covers the benefits that blockchain technology can offer to lenders in a blockchain based financial lending system.
To read the previous blog post about Trading of Structured Finance Products on Blockchain, click here.
To learn about how Bloxable is building the most advanced debt platform using blockchain and smart contracts, visit us here.
Blockchain technology is still relatively new but we have seen an increasing adoption of the P2P ledger system in the financial sector. The technology is already being used in currency exchange, money transfer, creating financial securities and inventory management by retailers.
One area that has surprisingly lagged behind in blockchain adoption is the mortgage lending and servicing businesses. Blockchain, and smart contract in particular offer major efficiency in how we create, transfer and record property titles and deeds. Yet most lenders have been slow to take the technology on board.
Lending Platforms Underway
So far, there are few lending businesses using the blockchain technology — mainly because of the price volatility issues surrounding cryptocurrencies. For instance, authorities in Texas issued a cease and desist order against a cryptocurrency lending firm last month that had promised very high returns for their investors.
However, that is likely to change as lenders and technical experts start to see the extraordinary potential of digital loans and as the technology begins to gather wider recognition among regular citizens.
Digital Collateral Loans
New alternative lending startups are being designed that allow crypto investors to acquire loans backed by their digital assets as collateral.
One such platform, gaining recognition, is Lendingblocks. Designed to run on the blockchain technology, the Lendingblocks infrastructure lets investors earn a return on their digital assets without losing the ownership of these assets. Once the loan has been repaid, the collateral is forwarded to the borrowers and repayments are transferred to the lender.
Understanding the Blockchain Lending Process
Developers believe that blockchain based lending can be executed through smart contracts. Smart contracts work on the model similar to any other computer program’s if-then code.
The contract’s code and terms are written at the initial stage. Next, both parties of the contract can agree that once a condition has been met, the contract progresses to the next corresponding clause. Then, the parties can also decide how to resolve issues or what happens when conditions are not meant, such as a delayed repayment on a loan.
Once a smart contract has been set in place, it executes automatically and neither party can change or manipulate the underlying conditions, unless it has been expressly written in the code. Cancellation or renewal of the contract can also be built in at the initial stage.
One example of a contract condition could be the payment of loan installments or the transfer of the collateral from one party to another.
Advantages of Lending Through Smart Contracts
Lending banks and financial institutions have several ways to create value through smart contracts. First, the system adds complete transparency and auditability. A blockchain platform is based on the openly accessible digital ledger. The lender and borrower can access the record any time to check the history of transactions.
The blockchain also makes the process of loan generation faster and allows third parties to access and verify data regarding the borrower.
One particular benefit to lenders is liquidity. Smart contracts can be made transferable on the lending platform. This will allow the original lender to sell their smart contract and free up funds while allowing other lenders a ready market for investments.
By standardizing the process for loan repayment and processing across the entire industry into a commonly agreed upon smart contract, loans from different banks and be bought and sold more easily among more participants thereby increasing liquidity
Blockchain is in early stage and lending platforms are still in development. Some of the first systems we have seen in place show promise. We can be hopeful that as more lenders begin to seriously consider a move towards blockchain we will see much more efficient and digitized lending platforms in place.
To read the next blog post in our series, about Smart Contract Benefits for Borrowers, click here.
