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ON-CHAIN CRYPTO LENDING


Cryptocurrency is a new concept in the finance industry and still not many people are aware about it. It is yet to become a mainstream currency but that idea will take a whole amount of time in order to come in action.

Because of the same, you will not find vendors or shopkeepers that accepting cryptocurrencies in the majority part of the world. Cryptocurrency is one of the most buzzing topics in the world right now.

People are showing interest in borrowing and lending of Cryptocurrency and the time Cryptocurrency becomes prominent in the whole world, it will be historical.

One of the struggles that are going on right now in the Cryptocurrency industry is the budding knack to alter the borrowing and lending/loaning activities in traditional banking.

Before proceeding with what is holding back on-chain crypto lending, to understand the thorough meaning of Cryptocurrency is imperative.

WHAT IS CRYPTOCURRENCY?

An online medium where you can easily exchange money using some cryptographic tools and functions in order to make financial transactions is known as cryptocurrency.

This is not like Paytm or Google pay at all.  It uses blockchain technology to maintain the transparency and immutability. The best thing about cryptocurrency is that it is completely secure and confidential, which is why it is not controlled by any central authority. The nature of doing financial transactions with blockchain is comparatively secure and confidential than any other way of government control and interference. 

Cryptocurrencies do not physically exists. They are basically electronic currencies which exists peer to peer. You cannot just hold a bitcoin in your hand or keep them in your pockets. They are digital currencies. But, that doesn’t mean they don’t value anything. You must have probably seen the rapid rise of virtual currencies over the past few years. 

You can easily borrow or lend cryptocurrencies just like any other online payment between two people via public and private keys. Minimal processing fee is charged which further allows you to avoid any other steep financial charges. 

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In simpler words, cryptocurrency is an online currency which is encrypted for security by cryptography. Therefore, it is very difficult to counterfeit this currency because of its high end security features. A lot of cryptocurrencies are based on blockchain technology which are decentralized and is connected by a network of computers. The one and arguably the most foreseen benefit of cryptocurrency is its organic nature that it is not lined up or associated with any traditional bank and that it is not issued by any central authority which renders government interference and manipulation. 

The first ever blockchain based cryptocurrency was Bitcoin which still remains on top and gets considered as the most popular and most valuable blockchain cryptocurrency of them all. Although there are a number of options available as an alternative cryptocurrency with different specifications and functions, but Bitcoin is the most trusted and preferred by most people. Some cryptocurrencies are even similar to bitcoin but apart from all of this cloning, it is still intact. 

BENEFITS OF CRYPTOCURRENCY

1. FRAUD: Cryptocurrencies are virtual or digital method based, hence cannot be counterfeited or reversed arbitrarily by the person who is sending it.

2. NO INVOLVEMENT OF THIRD PARTY: Generally, when you buy any property, cars or any valuable things, it mostly involves third party involvement such as payment delays, fixing of meetings, etc.  In short, cryptocurrency blockchain is like a large property rights database. These contracts can be designed and enforced in such a way where it eliminates or adds any approval or interference from any third party. 

3. ZERO TRANSACTION FEES: Usually, there are no transaction fee involved at any step in order to make financial transactions of cryptocurrency. Since, there is no transaction fee which dealing with cryptocurrencies, which is why many users are expected to engage with third party services in order to maintain their bitcoin wallets. 

4. IDENTITY THEFT:  Whenever you give your credit card details to anybody, you basically give them the access and the authority to engage with your full credit line, no matter the transaction is minimal, negligible or very small. Credit cards basically works on a ‘pull’ basis, where in, the money gets fetched from your account by pulling the designated amount whereas cryptocurrency works on a “push” mechanism which allows the holder to send exactly the amount what he wants without giving much details and information.  

5. DECENTRALIZATION: Blockchain technology is used by the global network of computers to collectively manage the database that records Bitcoin transactions which means that the Bitcoin is managed by its own network, and not via any other central authority. Decentralization means the financial transactions will get made on a peer-to-peer basis. 

6. INTERNATIONAL LEVEL RECOGNITION: Since the financial transactions made by cryptocurrency does not charge anything, be it interest rates, transaction charges, exchange rates or any other charges for that matter which is why it can be used internationally without being worried about any problems. Due to this, one can save a lot of effort and time which generally gets consumed while transferring the money from one country to the other. Transactions made by cryptocurrency are very easy and can be operated at the universal level. 

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DRAWBACKS OF CRYPTOCURRENCY

1. LACK OF SECURITY: There is no safety in order to protect your cryptocurrency from human error, technical glitches or frauds. There are chances that your cryptocurrency undergo some technical glitches and you could lose your cryptocurrency there and then.

2. LACK OF APPLICATIONS: Even though cryptocurrency is a growing trend, a lot of companies still haven’t come forward in order to accept digital money. There could be a few reasons for that such as not to be willing to take a risk with the fluctuating price, or the unawareness of what benefits cryptocurrency can bring about.

3. PRICE FLUCTUATION: One of the most noteworthy disadvantages that cryptocurrency has is the fact that price keeps on fluctuating constantly which makes it quite difficult for the users to accept and use the cryptocurrency. It might take a lot of time to develop the trust of people on cryptocurrency because of its fluctuation in price. 

WHAT IS A BLOCKCHAIN TECHNOLOGY?

A blockchain is basically a growing list of records which are also known as blocks. Further, blocks are linked to one another using cryptography. Each block consists of a cryptographic hash of the previous block along with other things such as transaction data and a timestamp. 

In simple words, it is a time-stamped series of data which is not owned by any single entity, whereas it is managed by a set of computers. Each and every block is bound to one another using chains (cryptographic principles) and are totally encrypted. Blockchain network has no central authority which is why the information in it is open for anyone and everyone to have a look at. Since, the nature of blockchain technology is transparent, which is why everyone involved is responsible for their actions. 

The blockchain technology isn’t as simple as it looks it. The basic idea is just too hard to follow when you go deep into it. It’s efficiently a database that’s authorized by a broader community, rather than a central authority. The on-chain technology can solve the ‘credit’ problem. But, everything is not as easy as it looks like. 

There are some of the significant points that are holding back the on-chain borrowing and lending on cryptocurrency and hence not letting them enter the mainstream world. The most prominent and what are thought to be the points to ponder upon are as follows. There could be other reasons as well but these are what I think are worth sharing. 

1. Credit and security are two main things that is taken into consideration by borrowers and lenders. This technology will take some time to gain the trust of people as there are still people who have not granted complete trust in this blockchain technology. 

2. There is no full proof solution comprised of on chain borrowing and lending. A lot of credit checks are required for which some third party KYC would be needed. To ensure that the money is coming through legal channels, credit check was required. We would need a full proof on chain solution that’s trustworthy. 

3. A lot of people are not thoroughly aware about how fast they can settle trades. In the crypto world where prices tend to fluctuate dramatically in a short period of time, dedicating a 25 minute time would be a lot and not worth it. 

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Being known about these major obstructions which are obstructing the blockchain borrowing and lending of cryptocurrency, it is important to know the facts or answer as to how to get past these impediments.  As long as the credit and security is concerned, borrowers and lenders should know that their data is going nowhere and is safely secured with no hacking risks whatsoever. Along with that, technology is really helping us get past these issues like for the effective side of borrowing and lending including the KYC procedure to ensure that their finances are secured and way past any fraudulent risks. All the three issues can be taken over with some solutions for sure but the only way out to look at them is to first trust the blockchain technology. 

In order to create a trustworthy on-chain lending environment, there has to be a trusted liquidity provider who can manage and help the market to the exposure of risks. This will ensure the borrowers and lenders that their finances are secured and way past of any further market risks. 

HOW DOES BLOCKCHAIN TECHNOLOGY WORK?

In simple words, Blockchain technology is basically a transparent ledger which is publicly accessible and allows borrowers and lenders to transfer the ownership of units very securely using encryption methods.

The ‘Bitcoin’ network marks for the very first and successful operation of the blockchain technology. This technology uses decentralized agreement to maintain the network which means that nobody has control over it, be it banks, corporation, or government. Therefore, as large as the network grows and becomes decentralized, it become more secure than ever.  

However, the potential of blockchain technology is not limited to ‘Bitcoin’ only. As such, it has gained a lot of attention and appreciation in a variety of industries including financial services, charities and nonprofits, the arts and e-commerce. 

Blockchain has gained a lot of appreciation in the finance market over the years and is making its mark on top. 

The reasons because of which the blockchain technology has gained so much appreciation is due to:

1. Decentralization: 

It is decentralized, which means that it is not owned by any single entity. 

We were more used to traditional kind of services before ‘Bitcoin’ came along. 

The idea is very simple, you have a centralized entity which stored all the data and you would have to interact solely with this entity to get whatever information you required. Banks are also the example of centralized services. All your money is being kept there and the only way as to which you can make a transaction or pay someone is just by going to the bank. 

Centralized system has served us for many years and in many ways. 

But, in a decentralized system, now one single entity will not store all the information. In fact, everyone in the network has all the access to the information and can access that information whenever or however they want to. 

In decentralized network, you can directly talk to whoever you want without even going to banks or places. That was the main idea behind the discovery of Bitcoin. Only you are in charge of your money and not anybody else. You can access your account wherever you are, whenever you want to. You can send or borrow money from anyone without any hustle of going to banks. 

2. Security: The data is secured and cryptographically stored inside. Nobody other than you can access your information and your data is secured in the database. You can transfer the money to anybody or can have transactions between borrowers and lenders and nobody will even get to know about that. Your money is cryptographically stores inside and is secure along with your whole data.

3. Inflexible: No one can change or play with the data that is inside the blockchain which means that the blockchain in inflexible or unchangeable. Inflexibility literally means that if something has been entered into the blockchain, it cannot be changed. This will be immensely valuable for financial institutes. 

Let us take it with the help of a hypothetical situation, suppose a hacker attacks block 3 and tries to make changes in the data. Because of hash function properties, even a slight change in the data will result in the change of the entire hash drastically. This means that if even a slight change gets made in block 3, it will result in changing the hash which is stored in block 2, now that in exchange will change the entire data and the hash of block 2 which will result in changes in block 1 and so on. This will result in the complete change in the chain, which is not possible. This is exactly how blockchains achieve inflexibility.

4. Transparency:

The blockchain is transparent which is how anyone can easily track the data whenever and wherever they want to. Blockchain has been widely misunderstood when it comes to transparency. People often misunderstand blockchain with being private and transparent. In Blockchain crypto technology, a person’s identity is hidden. Even if you look at somebody’s transactions that they made, you will not see the exact name, instead you will see some group of digits and letters to maintain privacy here. So, if you want to look at a person’s transaction history, you will not see “Max sent 2 BTC” instead you will see “2FH5gbhHVjNcyhj9vpFYEmvwT2TbyCt7NZJ sent 2 BTC”. While the real identity of borrowers or lenders is secured, you will still be able to see all the transactions that were made by their public address. This level of transparency is only possible in on-chain crypto lending and has never even existed before within a financial system. This is a whole new and interesting concept of having financial transactions and this will bring change in the financial industry in a couple of years. 

WHY DO WE NEED BLOCKCHAIN?

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1. Qualification verification: Employers need blockchain technology to verify the validity of education credentials, especially for those who have acquired through online studies. The possibility of discrepancy in the certifications or submitting the fake certificates and qualifications can be brought into the light, has left employers with no option than to look for ways to clamp down on the vice.

2. Digital voting: Digital voting through blockchains has not yet come into action but, in the future, the government may need blockchain technology to guarantee free and fair elections. Digital voting on a blockchain powered system is one of the breakthroughs that is currently being worked on as the technology has proved it can be relied upon to ensure secure and anonymous voting. There are a few countries like Sierra Leone who conduct elections on a blockchain system but there is still time and scope for it to be adapted by the whole world.

3. Distributed storage: In blockchain powered storage services, people may no longer have to worry about government peeping into their data. Blockchain makes it possible to store data on different computers on a network with high encryption that only one person can access. Presently, people have to rely on the services offered by Google Drive and Dropbox, among others for data storage. The problem with these services is that the companies offering the services are at times forced by the government to hand over people' data.

4. Intellectual property protection: Business need blockchain technology to protect their soft and intellectual property. By digitizing their IPs, business should be able to protect their investments when it comes to creations and innovations. Blockchain being an immutable technology acts as a perfect place to store, check and verify intellectual property.  However, with the use of blockchain technology there is hope of development of systems that people will use in the future to prove ownership in their creations.

5. Cyber security: Business and companies with operations online need blockchain technology, if they have to remain one step ahead of any kind of fraudulent and cyber-attacks. Data theft worth millions of dollars has become a common phenomenon given the strong demand for such information in the dark web.  Blockchain technology has already proved to be effective in recording data in a transparent, secure and resistant way. Blockchain powered systems are impossible to hack into without leaving a trace. Hacking being a major issue, blockchain technology promises to provide ledger for financial transactions that cannot be hacked.  The fact that the technology is immutable also makes it an ideal foundation for cyber security as guarantees both sides of a transaction are transparent and incorruptible.

FUTURE OF ON-CHAIN CRYPTO LENDING

If we consider the business perspective from a lenders point of view, blockchain holds a bright future and can certainly make some huge changes in the finance industry in coming years. To release its full potential, a lot of challenges needs to be mentioned. It is also important for the stakeholders in the lending business to accept the blockchain technology. 

Blockchain offers a huge variation of products which, therefore, allows customers at both the ends, be it consumer or enterprise to have the ability to choose from a range of loan products. Blockchain as an industry, would need to pay a little extra attention on the making of the products that meets the various needs of new as well as existing customers. Blockchain technology is here to stay, as long as there are people who hold cryptocurrencies.  

On-chain lending will absolutely be a thing in the coming years. Cannot say in the near future but certainly in the next couple of years. People will hopefully start to show their trust in this on-chain technology and may as well add value to this adoption. It will be a game changer in the results of inflection point. Any new technology that comes, instantly becomes the talk of the town and there will be no doubts that on-chain technology will make its mark for sure. 

As fast as this market is growing, we will definitely see higher competition in this field. In the next coming years, the peer to peer lending market is forecasted to reach at high bars in the on-chain crypto lending industry which further means that peer to peer platforms will look for ways to improve lending and scoring processes. This on-chain crypto lending technology will definitely play a major role in credits and transactions.

In simpler words, businesses, companies and even governments need blockchain technology to survive in this era where hackers are in constant pursuit of data. According to what is going on in the finance industry, it will not be vague to say that blockchain is going to have the same impact that the Internet had in the early 2000’s as people and businesses look for ways to protect their interests.

By Garima