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.
- 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.