For those with a bit of experience in the stock market or other financial markets, the correction which followed crypto’s epic 2017 rally didn’t come as a surprise. About 70% of cryptocurrency holders missed the ATH (all time high) of their coins, where failing to sell at the top essentially meant leaving money on the table, which of course nobody does willingly. Stuck in a bad position doesn’t mean their beloved crypto is in some way bad, or that it’s not the right investment, it just implies that it wouldn’t be worth selling at the moment because either the price they bought it at was higher, or they reminisce higher valuations and would like to turn greater profit. Whichever the case may be, one thing’s certain: Most people don’t want to sell crypto holdings when a large profit can’t be realized!
So do they just let all their precious coins sit idle in a cold wallet waiting for them to appreciate in value, or could there possibly be a way to make use of them while waiting for the bulls to wake up? With Bitcoin down 70%, altcoins down 85–90% on average many believe we’re nearing the bottom. Those stuck in positions where they rightfully can’t make themselves cash out would like to buy more coins to diversify their portfolio, or because they’re bullish on a particular currency can use their existing crypto as collateral to take out a fiat loan. Although we love animals at INLOCK, we can’t deny we figured out an efficient way to kill two birds with one stone; our customers can hold on to their crypto while accessing the purchasing power of it at the same time. So how is this different from selling and buying back later, you wonder? When you liquidate your position (when you sell your crypto) you get the cash equivalent for it, but that’s it, you lose out on any possible future gains. If it goes down the next day, and you buy back, that’s good, you just made some money, but since all of us in crypto expect prices to rise with increased adoption, we didn’t buy to then sell at a lower price. When you lock your crypto assets as collateral to take out a loan, you retain ownership of it, while freeing up some of it’s purchasing power. Let’s suppose you have 1 bitcoin and would like to take out a loan with it at today’s $6432 price. INLOCK has a minimum overcollateralization value of 5%, meaning your collateral has to be a minimum of 105% of the loan you take out. As we know, a 5% fluctuation is very common even in a day in the crypto market, so we suggest overcollateralizing by at least 30–40%. We’ll go with 40% today. With an APR (annual percentage rate) of 8% and a 180 day loan contract, we’ll get 4% interest. Apart from the interest customers have to pay for platform usage which is 0.25% of the collateral value in $US at the time of contract formulation, in our case $160,8. The platform fee needs to be paid in ILK tokens, which then gets distributed between the various platform roles. To get a better understanding of how our token model is designed, please read the relevant section of our whitepaper. Okay, we discussed overcollateralization value and the platform fee, now let’s see what we get for our bitcoin: 6432–40%(2572,8)-160,8 = $3698,4. This is the amount we get for our one bitcoin placed as collateral. Sure, if we had sold instead of taking out a loan we would now have $2733,6 more, but would lose out on all future gains. When we pay back our original loan amount with the interest, we get our full bitcoin back, no matter where the price goes! I’ll repeat this last part because everyone must understand that this is the essence of crypto lending: You can get your crypto back at the same price as you locked it even if it increases in value during the contract period! The 40% overcollateralization value we specified ensures our contract doesn’t get terminated until the price of BTC drops by 35% (5% has to remain as the minimum overcollateralization value). If it however does drop below this price point, we’ll be notified and have a chance to add more collateral. If Bitcoin soars in value and we would like to have more liquidity, you can terminate the contract any time and receive the price difference minus the interest.
Other lending services in the field hold their own centralised pool of liquidity, which means they decide the interest rates on their loans. Since INLOCK merely acts as an intermediary service provider with financial institutions being the ones actually providing the funds for the loans, we let them compete for Borrowers on interest rates and loan duration. When a Borrower wants to take out a loan, they submit a lending request with the specific cryptocurrency they want to use as collateral and the loan duration. Financial institutions on the INLOCK platform who are eligible to do business in that region get notified of the request and are able to offer loans with slightly different terms. This organic selection between lending providers will result in a healthy and balanced microeconomy of Lenders and Borrowers on the platform, where everyone is strongly incentivized for honest behaviour.
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Originally published at loan.inlock.io on September 25, 2018.
