Meltem Demirors, the chief strategy officer at CoinShares, a leading cryptocurrency treasury management firm, recently posted an informative thread on Twitter in which she noted that consumer credit is a “massive business.”
1/ consumer credit is a MASSIVE business. US consumers hold $4 trillion in mortgages, student loans, auto loans, credit card debt, and more.— Meltem Demirors (@Melt_Dem) February 19, 2019
crypto credit started w/ co's like @btcjam and @RipioApp, in emerging markets, but has taken the world by storm.https://t.co/V484uuVybp pic.twitter.com/xnmrSjyEXY
Demirors, a mathematical economics graduate from the prestigious Rice University, pointed out that “US consumers hold $4 trillion in mortgages, student loans, auto loans, credit card debt, and more.” She added that cryptocurrency-based credit began with companies such as BTCjam, a globally accessible peer-to-peer (P2P) bitcoin lending platform, and RipioApp, another crypto-focused lender.
BlockFi, Compound Finance are Among Top Crypto Lenders
According to Demirors, there was “an explosion in crypto credit products” in 2018 as there are now firms including BlockFi, which lets users take advantage of their digital assets without having to sell them. Companies like BlockFi offer products that are similar to LendingClub, which is America’s most established “online credit marketplace”, Demirors explained. However, BlockFi’s lending services use bitcoin (BTC) as collateral instead of fiat-based assets.
Going on to mention other crypto-related lenders, Demirors noted that the Dharma Protocol has been designed to facilitate decentralized lending, meaning that “users connect without an intermediary to offer crypto (coins) as collateral for credit (a loan).” Other P2P lenders include MakerDAO and Compound Finance, both of which have been developed on Ethereum.
Acknowledging that all these services are “cool”, Demirors asked “who has enough crypto to lock it up for cash?” She argued that “most likely, investors” who’ve made substantial investments in the crypto space would be more inclined towards using digital asset lending markets “as a way to [leverage] existing coin positions to buy exposure to other coins.”
However, Demirors asked “what happens when 5%, 10%, or more of the circulating supply of a coin is locked up?” At present, at least 2% of all ETH has been locked up (most of it in the MakerDAO ecosystem) and about 10% of Augur’s REP token has also been locked in various contracts. According to Demirors, it won’t be “pretty” when users try to access the collateral that has been locked up.
Bitcoin Lending Must Become Trustless In Order To Attract Major Investors
Caitlin Long, a 22-year Wall Street veteran who is now more focused on the crypto and blockchain industry, believes bitcoin lending is not yet “trustless.” In a detailed post on Forbes (published in January 2019), Long argued that cryptoassets “need financialization to succeed.” She explained that “financialization requires the development of markets for lending”, however Bitcoin’s protocol has not been designed to allow effective crypto lending.
“Major fiduciary institutional investors” will only make substantial investments in cryptos if digital asset markets are developed in a trustless manner - which would allow businesses to “borrow money to finance investment in … enterprises," Long noted.