Given the fact that mostly all cryptocurrencies have a permanently set supply, they will invariably rise in value as cryptocurrency transactions rise. Even if cryptocurrency deflation cools off from where it is now, Crypto/fiat would still rise at a high rate due to population and economic growth.

So, I don't understand how loans would be feasible on blockchain.

Let's say I get a 1 BTC car loan at 1% interest that's amortized over 6 years, then the amount I would have to pay in dollars to cover the appreciation of BTC/USD along with the interest on the loan would probably be way above that on standard car loans.

To me, the only time it would be feasible to borrow BTC is when I am shorting BTC... Or am I missing something?


So, I don't understand how loans would be feasible on blockchain.

Lending and borrowing money via blockchain is similar but not equal to traditional methods.

The similarities:

  • Same parties: lender, borrower, broker
  • Same goals: those with capital wishing to increase their capital, those without wishing to increase their capital, a (optional) agent broker who receives a commission as part of their brokerage services.

The Differences are in how the process works:

I presume you are knowledgeable of traditional lending and borrowing mechanisms: banks, private loans, bond, equity, etc. So I'll cover the blockchain side of things.

You and I would sign up at a blockchain institution where the service of the firm is to match borrowers with lenders. I 'deposit' my blockchain assets and I either allow the firm to look for matches based on my preferences of interest rate, term, risk, and credit (in the abstract sense, not your FICO score); or pick and choose contracts to my liking.

The caveat for blockchains is that there is no known of recourse in case of default. The keystone basis of blockchain tech are the control and usage of private 'keys' (or password) matched to public keys that allow a user to control the 'data' associated with 'wallets'.

Unlike a traditional funding mechanism, if 'keys' are lost due to theft or malice (default), it is currently impossible to recover lost funds. No matter how powerful the judiciary and law enforcement system is in a given jurisdiction, they can't use a court order to brute force a solution to find the lost keys.

In a traditional lending environment, a creditor can go after assets that are tied to your identity and have monetary value (other forms of cash, real estate, vehicles, furniture, etc.) and liquidate them for their monetary worth.

Riskier? Definitely, but this doesn't mean that blockchain tech hasn't been used to facilitate lending arrangements with differing ranges of success.

To me, the only time it would be feasible to borrow BTC is when I am shorting BTC... Or am I missing something?

You are, the key point here is if the loan is in BTC or fiat currencies (USD, Yuan, Ruble, Yen, etc.) BTC can be the mechanism of which the current market prices of BTC to X is transferred, but the loan would still be valued in USD.

So if you enter into a contract for 10,000USD at 1% over 10 years, (simple interest). Your USD obligations for the contract would be $100 a year, regardless of the USD to BTC rates.

  • Year 1: BTC/USD might be 1BTC/1USD. Your debt obligation is 100 BTC.
  • Year 2: BTC/USD might be 1BTC/10,000USD. Your debt obligation is .001 BTC.

The best way to approach the system is to first determine A: if the underlying monetary system is deflationary or inflationary. Deflation benefits the creditor, inflation credits the borrower. But with blockchain lending system: no one can force the borrower who is in default to return the Blockchain based assets. With traditional systems: you have law enforcement and judicial systems available.

Here's something I wrote for LinkedIn.

  • $\begingroup$ Same problem applies tho. No one would convert crypto to fiat to make loans unless the interest on fiat were high enough to cover the loss of appreciation on crypto. Therefore no lending occurs. $\endgroup$
    – CDM
    Dec 24 '17 at 0:42
  • $\begingroup$ Again the missing link here is that you are still 'thinking in Fiat' when valuing blockchain based lending contracts. Lending occurs based on each party's perspective on the value of the contract, if one is interested in increasing their asset of one over the other, then the 'value of loss' in either would not be a problem. In other words, if I want crypto and don't mind monetary losses to use fiat to get it. Then I will still lend/borrow. My losses in fiat wouldn't matter. A real world-example would be forex. There are individuals willing to trade at a loss for USD because of the $\endgroup$
    – Bluebird
    Dec 24 '17 at 0:47
  • $\begingroup$ inherent value stability of USD compared to their national currency. (Think Argentina). $\endgroup$
    – Bluebird
    Dec 24 '17 at 0:48
  • $\begingroup$ @FrankFYC Are you willing to lend me 1 000 USD worth of money in any currency if I sign an enforcable contract promising to repay 99% of your loan (in your currency) in one year? Seems to me this is what OP is asking. Why lend 1 BTC and lose some of it instead of sitting on it. $\endgroup$
    – Giskard
    Dec 24 '17 at 10:52
  • $\begingroup$ @denesp Again, you are making the framing error of thinking of the value of a given currency in relation to USD. Approach the situation mathematically. 1 > 2. The reason someone would be willing to lend 1 BTC is because they accept the risk that at the end of the loan, they will receive X, where X>1. IFF the contract is stipulated in X and not USD. I understand what OP is asking, I am pointing out a framing issue where OP is thinking of the arrangement in USD rather than BTC, an issue commonly found in forex situations. $\endgroup$
    – Bluebird
    Dec 24 '17 at 11:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.