Unlocking the Value of Cryptocurrencies: Digital Assets as Loan Collateral
The financial value of the cryptocurrency market is estimated at roughly $400 billion, most of which remains untapped because it cannot be used as collateral for loans and other financial instruments.
In 2018, the financial value of the cryptocurrency market was estimated at roughly $400 billion. Most of this value remains untapped because it is not integrated into the mainstream financial system and cannot be used as collateral for loans and other financial instruments. Considering the amount of under-leveraged value in the cryptospace, it is no wonder that the financial industry has started looking at digital assets as a new source of collateral. Will digital asset lending become a new norm? If so, how are fin-tech companies going to secure digital asset collateral in a viable marketplace? This article will explore how one new startup, the Depository Network, intends to answer both questions.
The easiest way to describe the Depository Network is that it combines traditional lending and blockchain technology. A blockchain is a decentralized network of computers otherwise known as nodes which collectively process, maintain and distribute a digital record of activity. Blockchains operate on a computer protocol that uses cryptography to replace the function third party intermediaries would otherwise play in verifying transactions. DEPO is a blockchain-based depository service for banks and other money-lending institutions (sub-prime lenders, consumer finance companies, crypto lenders and P2P lending platforms) world-wide to make it possible for them to accept digital assets as loan collateral.
What Needs does DEPO Meet?
The development of the internet has led to the creation of digital assets. A digital asset is anything that exists in a binary format and includes usage rights. Examples include cryptocurrencies, tokens, asset tokens, tokenized shares, and digital bonds. These globally are traded assets that have seen a dramatic rise in value with predictions of more massive growth in years to come. In addition to newly created blockchain assets, we are witnessing the beginning of blockchain digitalization of a huge number of assets from the traditional economy. In the near future, all commercial assets and shares, and most corporate bonds, government securities and globally-traded derivatives could be digitized or tokenized — enabling anyone worldwide to access them.
The problem is that currently financial institutions use depository services for real asset collateral but no such depositories exist for digital assets. This results in locked financial value for a market with huge capitalization. Thus, how enable the value of digital assets and develop the necessary blockchain infrastructure for their use? On the one hand, digital assets do not have the necessary liquidity for borrowers to be able to take advantage of their value quickly and easily. Borrowers must sell these assets to take advantage of their value, which involves high fees/taxes and eliminates the opportunity to profit from these assets in the future. On the other hand, it is expensive, time-consuming, and inefficient for lenders and private companies to build their own digital asset depositories.
Unlocking the Value of Digital Assets
Enter: DEPO. Any lender can use the DEPO infrastructure to build custom depository platform that accepts different types of digital assets as collateral. This service makes digital asset holders eligible for secure loans from certified banks or credit institutions. The system uses cryptographically-secure multi-signature wallets and the borrower always has one of the keys for signing a transaction. The terms for the collateral contracts are deﬁned by every lender individually through the use of “smart contracts” on the Ethereum platform.
DEPO users could program an autonomous trust agent designed specifically to receive a transfer of digital assets from a borrower as collateral, and either release the assets back to the borrower upon satisfaction and repayment of a loan, or transfer the assets to the lender or some other third party upon an event of default. The smart contract would read and execute the terms and conditions of the underlying loan agreement between the parties. Both the borrower and the lender would have confidence in this process because the underlying code would be transparent, unbiased and incorruptible.
What Makes DEPO unique?
There are several peer-to-peer lending platforms that accept certain types of cryptocurrencies — usually Bitcoin and Ethereum — as collateral for loans. However, these platforms work either as a marketplace connecting lenders with borrowers, who bear the entire risk for KYC and personal identification, or as lenders who use their own funds to issue loans to the borrowers. The DEPO model is very different. It does not provide loans directly, but enables lenders to integrate with the Depository Network and use it to accept digital assets as collateral. This avoids the risk of keeping personal data or having to be compliant with the regulations of different governments — the lenders are responsible for this part. DEPO is solely providing a customizable solution to broaden their loan portfolio.
The DEPO token will be used for lenders’ annual membership. No membership is required from borrowers. The borrower will pay small fees for deposit collateral in every case. The total supply of DEPO tokens will be 3 billion with half being available for purchase through the token sale.
If successful, Depository Network will be the world’s first multi-platform network that enables digital assets to be used as loan collateral, which would open up billions of dollars in value. The use of digital assets in the mainstream financial sector is also crucial for mass adoption of cryptocurrency. DEPO’s protocol would remove the need for centralized depositories and allow lending institutions to build independent depositories within the system. This would allow digital asset holders access to the full value of what they own. There is definitely a need for such a service but it remains to be seen whether DEPO will be the player that meets it successfully.
Full disclosure: I do not own DEPO tokens and I have not participated in the DEPO ICO. This article is not intended as investment advice. You should always do your own research.
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Unlocking the Value of Cryptocurrencies: Digital Assets as Loan Collateral was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.