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  • Frank Tian

Unsecured Lending Coming on Chain

TransUnion is enabling consumer credit reports on the blockchain. This is achieved via the partnership with Spring Labs.

As native cryptos such as bitcoin absorb more funds (whether it holds as an investment asset in the long run is still in hot debate), traditional lending has found its way on the blockchain.

Investors can deposit their cryptos in exchanges or protocols to earn interest. Borrowers can borrow crypto and then pay interest and the crypto back at the end of the loan.

How is the risk of the loan being managed, without even knowing the borrowers? Many of them do not have established credit profiles anyway.

Borrowers need to put in their own cryptos as collateral. Due to the high volatility of native crypto prices, the crypto loans are overcollateralized - you can only borrow 50%-75% of the value of the cryptos you put down. This resembles the home equity loan.

Thus crypto lending is secured lending, so far.

The availability of credit bureau reports opens the possibility of unsecured lending on the blockchain. Exchanges and protocols can provide more differentiated loans and prices corresponding to borrowers' risk.

This will increase the overall loan demand, from borrowers currently not holding native cryptos.

The more diversified loans will better match the growing deposits from non-native crypto holders, attracted by stablecoins and returns.

Over time, the weight of native crypto lending will decrease, as more funds move on the chain. The traditional deposit/borrowing must have the stability to go with the scale.

After all, there are many use cases of blockchain technology beyond the native cryptos.

In the end, the crypto exchanges and protocols are just new breeds of banks - the younger, leaner ones, riding the new technology.

Consumer lending risk book, courses, resources:

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