Bringing Community 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 exchange for regular interest payments, the crypto lending space includes both centralized and decentralized crypto entities that manage the entire process at the name of their investors.

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

However, despite offering companies easy access to capital and promising high returns for investors, the crypto lending space finds itself embroiled 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 Collapse or are gripped by fear that they will not be able to withdraw their staked crypto from struggling crypto lending platforms.

Major issues affecting the crypto lending space

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

As a result, the crypto lending space has been clouded by serious trust issues, with more lending platforms seeking cash injections to ride out the current bear market.

As a niche market with limited offerings, crypto investors or businesses often use borrowed capital to engage in speculation, hedging, or working capital.

Any overexposure on the part of the borrower could put the lender at immense risk of reducing the loaned amount, leading to liquidity issues in case the majority of investors withdraw their deposited tokens. Worse still is the opaque nature in which most crypto lenders operate, often using investor-staked tokens to pursue high-risk trades, all in the hope of making a bigger profit.

As in the case of Celsius Networks, many lenders continue to face the risk of becoming insolvent if cryptocurrency prices fall further, which could trigger another domino effect.

What are the possible solutions to these overarching concerns?

The main issues with secured crypto loans are exposed in volatile market conditions, especially when cryptocurrency prices drop steadily. With an ability for lenders to repay investors based on the price movements of the underlying staked tokens and the amount of collateral collected, there is a clear need to unbundle crypto lending and take a more community-driven 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 to each other.

Based on the principle that communities can better manage trust, BNPL Pay allows each banking node to be autonomous and decide which loan applications to accept or refuse. Borrowers, on the other hand, can set the terms of the loan, decide what percentage of collateral they are comfortable with, and provide any additional information deemed appropriate.

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

With funds managed through the BNPL Smart Contract suite which is additionally audited by cybersecurity firm PeckShield, BNPL Pay has no possibility of misappropriating capital or facing solvency issues in the event of payment default. a borrower.

Where is the crypto lending space headed?

With crypto markets currently going through one of the toughest downturns 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 a unique way to achieve this.

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

This will force crypto lenders to adopt more transparent business practices and adhere to strict self-regulated disclosure standards, at least until a formal regulatory framework is mandated by various governments around the world.

What is certain, however, is that the next stage of growth for crypto lenders will come from attracting more traditional crypto investors, focusing on their ability to help communities lend and borrow within them. themselves for more confidence and security.

The material is provided in partnership with BNPL Pay

Disclaimer. Cointelegraph does not endorse any content or product on this page. Although we aim to provide you with all important information we may obtain, readers should do their own research before taking any action related to the company and take full responsibility for their decisions, and this article cannot no longer be considered as investment advice.

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