Today we’ll be talking about our solution to a problem many crypto-believers face: how to spend you crypto without selling it? Just to clarify, paying for something in crypto is equivalent to selling it in the sense that you will no longer own it.
The answer is a platform where users can take out fiat loans with cryptocurrencies as collateral to get the best of both Worlds. We primarily hold, or rather “hodl” our crypto because we expect its value to increase in the future, which in trading terms is called a “long position”. People don’t like to sell their crypto because they fear missing out on potential profit generated by an increase in the crypto’s value. When you take out a fiat loan while locking your crypto as collateral on the INLOCK platform, you still get to keep the crypto while having access to the purchasing power of it at the same time. The USD value of your crypto is locked in at the time of loan contract formulation, so when you pay it back, you only have to pay the original amount plus interest and the platform fee, regardless of what happened to the value of your crypto. To help you understand why someone would take out such a loan, we outlined a scenario below.
Some of our users take out loans to cover for expenses they would have otherwise paid for with their crypto, and some only need the cash to cover for a short term liquidity problem (with the intent of keeping the crypto when the contract expires). Following the first example, if we want to buy a plane ticket for $1000 and only have Bitcoin, we can lock let’s say $1300 worth of BTC (0,18 BTC at time of writing) as collateral to get a $1000 loan with 30% overcollateralization to allow room for volatility (minimum overcollateralization value is 5%). Instead of INLOCK holding a centralized pool of liquidity, we have institutional lenders compete for borrowers on our platform by offering loans to borrowers after they submit a lending request. In this instance, let’s suppose we took out a loan for 6 months with 10% APR (which equals to 5% interest for the given contract period [$50]). The platform fee we have to pay for using INLOCK is 0.25% of the USD value of the collateral at the time of contract formulation ($3.25). This means, that for $53.25 + the amount the bank charges to deposit the $1000 into your account (0.1%-05%, $3 on average), so for $56.25 we have a $1000 loan for 6 months. If Bitcoin decreases in value, we have the option to add collateral at any point or to extend our loan if we still believe it will go back up. On the other hand, if Bitcoin goes up by more than 5.425%, we just bought plane tickets cheaper by using INLOCK, whereas we would have gained nothing if we had sold 6 months ago. If we go with the same scenario, but with the intention of buying back our BTC (paying back the loan), we can just pay the $1056.25 and buy it back at the price it was 6 months ago. The platform accepts BTC, ETH, BCH, LTC as collateral, with a new cryptocurrency being added every 6 months.
Just like in the case of a traditional bank loan, if you don’t pay in time, the bank will foreclose on your collateral. In the case of a mortgage, where your home is the collateral, foreclosure due to the lack of payment would be a terrible experience. When a bank sells your assets to cover for the loan they gave you, they usually sell at a highly discounted price to get their money back as soon as possible. In the case of crypto backed loans, the value of collateral is very easy to calculate and it can be instantly liquidated.
This is an insanely efficient way of accessing the purchasing power of our crypto when going for long, it’s the ultimate answer to the hodlers dilemma.
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Originally published at loan.inlock.io on September 4, 2018.
