In Assyria and Sumeria, merchants made grain loans to farmers and traders that carried goods between cities. In ancient Greece and during the Roman Empire lenders that were based in temples made loans. Before banks ever existed, loans were peer-to-peer and people used to trust each other without the involvement of intermediates. Banks solved the loan trust issues but also added costs and additional layers of regulation and complexity. Banks are the transacting authority between the lender and the borrower. Crypto-backed loans are reviving peer-to-peer lending, removing third-parties or intermediaries from the system, reducing cost. Crypto loans are rapidly developing and can be seen as the future of the lending industry. They have the potential to disrupt the traditional banking system, making it possible to transfer ownership of any asset from one person to another without the involvement of a central authority.

Loans allow people to buy homes, cars, start businesses, and other things that can increase their standard of living. But getting a bank loan is hard. Without credit history or collateral, it is nearly impossible to get a loan from traditional banks. Borrowers often need to provide all kinds of documentation, verification, and authentication requests, which take time. Even if you manage to get a loan, it can take weeks to months and the interest will be high.

Cryptocurrency Peer-to-Peer (P2P) lending is person-to-person lending, matches borrowers and lenders directly. The lender provides a loan and the borrower has to pay back the borrowed cryptocurrency. Usually a crypto loan is collateralized by cryptocurrency assets and secured through a smart contract. Duration can range from a few days to months, and even years. The interest rate is based on the amount of cryptocurrency the borrower uses as collateral. Some platforms calculate interest rates on the LTV of each loan. Crypto lending platforms accept different types of cryptocurrency as collateral and give the borrowers either cash or cryptocurrency in return.

Cryptocurrency lending is a way that lets anyone get a loan, especially small-to-medium enterprises and individuals. The biggest factor in obtaining a loan is how much crypto a borrower is able to put up as collateral. Because cryptocurrencies are volatile, almost all crypto loans are over-collateralized. In general, they require collateral ratios of 150%+ to secure a loan, which provides some safe guards for lenders to manage risk. There is no credit score involved in the evaluation process.

While different companies implement and process loans differently, the final product is very similar. There are two main types of lenders: custodial and non-custodial. Some platforms take a centralized approach and use third-party custodians to hold the collateral during the duration of the loan, while others use smart contracts, very similar to an agreement between a lender and a borrower.

Over the past 18 months, crypto lending has grown significantly and has gained a lot attention. Approximately 244,000 loans have been originated. A month ago, Graychain released its first report on the collateralized crypto lending industry, estimating that $4.7 billion has been lent out over the history of the sector.

Genesis Global Trading, a market making trading firm in New York, had more than $500 million worth of loans in digital assets to its institutional clients in the 4th quarter of 2018, pushing their cumulative origination volumes to more than $1 billion.

Cryptocurrency lending firm Celsius Network has seen 2,165% growth in deposits since it opened its business last year. Celsius appeals to lenders by promising up to ~10.53% interest on their loans.

In July, Bitcoin.com partnered with lending platform Cred to offer up to 10% interest on BCH and BTC holdings. The lending platform enables borrowers to obtain $25,000 or more in fiat currency, in exchange for collateralized crypto assets.

A few weeks ago, Binance launched a lending business in its bid to attract customer deposits. Binance Lending, allows holders of BNB token, Ethereum classic (ETC) and Tether (USDT) stablecoin earn interest on their funds. The annualized interest rate is set at 15%.

Cryptocurrency loans platforms have been popping up everywhere, both centralized (BlockFi, Nexo and Celsius) and decentralized (Dharma, MakerDAO and Uniswap). For a detail look at all the different platforms in the market you can read this post on Medium: A look at 20 cryptocurrency lending Websites from Decentralized to Centralized.

The market for personal loans and peer-to-peer loans has enormous potential and is projected to grow at an explosive CAGR of 51.5% from 2016 to 2022 with the total market expected to reach $460 billion dollars by 2022.

Today, the biggest drawback is that loans need to over-collateralize. This becomes extremely hard when you’re looking to borrow large amounts of money or simply don’t have the necessary collateral. When unsecured or under-collateralized crypto-loans become available, DeFi will eat traditional finance and dramatically expand the global lending market.

For now cryptocurrency loans are growing and will continue to grow, because they give crypto investors access to liquidity, without having to sell their crypto. Crypto lending platforms are not just a place to get money without selling crypto. They are creative tools that help investors buy, sell, hedge and utilize their crypto portfolio to maximize returns.

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.

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