Lendingblock co-founder Steve Swain (pictured) speaks to AltFi about his plans for the exchange.
Many of the hottest businesses within the world of blockchain and cryptocurrency are “picks and shovels” businesses – those concerned with supporting the adoption of the technology by providing tools and services, such as wallets and exchanges, to users.
Lendingblock is one such business. The soon-to-launch platform is, in its founder Steve Swain’s words, “an open exchange for cryptocurrency loans”.
“Borrowers and lenders of cryptocurrencies can come to our platform and we run an open and transparent and fair exchange,” he said, in an interview with AltFi. “So we take an offer from lenders and requests from borrowers and we match them in the same way that a stock exchange works.”
Swain currently has a working alpha version of the platform up and running, with a full launch planned for the summer. Still to do before then is the completion of the platform-build. The business is also seeking approval as a regulated exchange from the Gibraltar Financial Services Commission.
“We want to be regulated as an exchange from day one,” said Swain. “We think that’s really important for our users and for investors. We’re proactively seeking to be regulated rather than being an unregulated exchange.”
Lendingblock is in the middle of a three-stage Initial Coin Offering that will conclude in April. The first phase has already been completed, raising the equivalent of $500,000. The offering has a hard cap of $10m.
But how does the platform actually work? Swain explained that it functions very similarly to securities lending in capital markets. Borrowers on the platform are those keen to access working capital, support trading strategies or to hedge their portfolios of cryptocurrency. Swain described them as mostly professional or institutional investors.
In the world of crypto-investing, many opportunities require investment to be made in a particular type of cryptocurrency. To invest in Lendingblock’s ICO, for example, investors will need to use Ethereum. But what if an investor is rich in Bitcoin but doesn’t hold any Ethereum? That’s where Lendingblock steps in. The platform enables the investor to borrow Ethereum using his or her Bitcoin as collateral.
The interest rate on loans is set by market demand, similar to how rates are set on say RateSetter (a peer-to-peer lender). The interest itself is paid in LND – the token that has been created via Lendingblock’s ICO.
“It really simplifies things if they can use one common cryptographic currency to both pay and receive interest across a portfolio,” said Swain, explaining that he expects many users to hold portfolios of loans secured by different assets.
The Lendingblock boss expects most of the borrowers on the platform to be sophisticated credit investors or institutions. But the lending side will likely be more open because the risks are, according to Swain, offset by the fact that all loans will be fully collateralised.
“On the lending side it can be anybody who has a position in cryptocurrencies,” he said. The plan is to allow these lenders to hold their assets passively and to earn a return. Swain called it “a combination of institutional lending but also crowdlending”.
He told AltFi that he knows of one company – a firm he expects to be a customer of the exchange once live – that is currently lending out Bitcoin at 15-25 per cent.
Lendingblock is hoping to differentiate itself based on the range of currencies that can be lent out on the platform. “Our goal is not to be restricted to specific coins. There are a couple of lending platforms at the moment that are focused on certain types of coins. Our view is that we want to be as broad as possible,” said Swain. However, he conceded that the platform will begin with the bigger coins.
“Initially we will be doing top ten market capitalisation. The reality of it is that, particularly when you’re looking at collateral, it’s going to be better to use something that is established and more liquid because the amount of collateral you would need for something that doesn’t have the depth of liquidity and very high volatility. So we expect that most of the collateral that’s going to be provided will be the big names, the well-known names [Ethereum, Bitcoin, etc.]. But in terms of what you borrow, it can actually be much broader.”
The volatility of cryptocurrencies is well-known – a characteristic some may feel make them unsuitable as a form of collateral. Swain has a series of mechanisms in place to mitigate the risk of price-swings, not least the blockchain on which the whole platform runs.
“We’ll use a statistical model that looks at the volatility of the value of the collateral. And then we’ll use a value-at-risk methodology which basically looks at what is the daily volatility of the price. We’ll set up a lower bounds for the amount of collateral, and then if the collateral relative to the principal drops to the lower bound, we essentially notify the borrower that they need to top up the collateral… Or we can release. So if the collateral rises relative to the principal then we can essentially release the collateral,” he explained.
The process of releasing collateral, if required, is automated. It is, to quote Swain, “codified in the smart contract”. The same can be said of how interest payments are managed: they are distributed to a syndicate of lenders automatically.
It is impossible to say, at this stage, whether Swain and his co-founder Linda Wang will make a success of Lendingblock. What is clear is that the model is very different to the typical peer-to-peer/crowdlending platform.
In a recent interview with AltFi, Michel Rauchs, Cambridge Centre for Alternative Finance’s cryptocurrency and blockchain lead, described two types of crypto-investor: long-term investors – the ones that only invest in so-called blue-chip coins – and shorter-term investors.
Rauchs’ long-term investors know what they’re doing. They buy coins such as Bitcoin and Litecoin and hold them in cold storage for years at a time, paying little attention to price fluctuations. Rauchs calls them “purists”.
If Lendingblock pans out as envisaged, it may make an attractive source of yield for these purists, since they’ve no other use for their holdings in the short-term. Could this group be the making of the platform? Time will tell.