Bringing community-based solutions to cryptocurrency lending can solve trust issues

BNPL Pay: partnership material

A type of decentralized finance (DeFi) that allows investors to lend their crypto tokens in exchange for regular interest payments, the crypto lending space comprises both centralized and decentralized crypto entities that manage the entire process on behalf of their investors.

By offering high annual percentage yields (APY) to investors who borrowed the tokens from, these lending platforms further lend the same assets in the form of secured crypto loans to the borrowers.

However, despite providing companies with easy access to capital and promising high returns for investors, the cryptocurrency lending space finds itself embroiled in liquidity issues stemming from their unregulated and overleveraged lending practices.

As a result, cryptocurrency investors have lost their tokens in debacles such as the collapse of the Celsius network or are gripped by fears of not being able to withdraw their cryptocurrencies staked on struggling cryptocurrency lending platforms.

Big problems plaguing the crypto lending space

With major cryptocurrencies correcting by more than 70% from levels last seen in November 2021, the cryptocurrency lending industry has been mired in a spiraling credit crunch, exaggerated by the collapse of stablecoin Terra in May 2022 The ensuing liquidity crisis has already consumed major crypto lenders and hedge funds such as Celsius Networks, Vauld, Three Arrows Capital (3AC), Voyager Digital and Babel Finance, further exaggerated by excessive trading and suspicious business practices.

As a result, the cryptocurrency lending space has been clouded by serious trust issues, with multiple lending platforms seeking fund infusions to weather the current bear market.

Being a niche market with limited supply, investors or crypto companies often employ borrowed capital to indulge in speculation, hedging or working capital.

Any overexposure by the borrower could expose the lender to immense risk of reducing the lent amount, leading to liquidity issues should a majority of investors proceed to withdraw their deposited tokens. Making matters worse is the opaque nature in which most cryptocurrency lenders operate, often using tokens staked by investors to pursue high-risk trades, all in hopes of turning a bigger profit.

As was the case with Celsius Networks, many lenders remain at risk of defaulting if cryptocurrency prices fall further, potentially triggering another domino effect.

What are the possible solutions to these priority concerns?

The main problems with secured crypto lending are exposed during volatile market conditions, especially when cryptocurrency prices are steadily falling. With a lender’s ability to repay investors dependent on the price movements of the underlying staked tokens and the amount of collateral raised, there is a clear need to unplug cryptocurrency lending and take a more community-focused approach to finding a solution. .

One such example is BNPL Pay, a decentralized crypto platform where communities can create banking nodes to borrow and lend from each other.

Assuming that communities can better manage trust, BNPL Pay allows each banking node to be autonomous and to decide which loan applications to accept or decline. Borrowers, for their part, can set the terms of the loan, decide on the percentage of collateral they feel comfortable with, and provide any additional information they deem appropriate.

As a result, both lenders and borrowers enter into an agreement with conditions set by both parties at the outset of the agreement. BNPL Pay simply acts as a technology provider and facilitator without interfering with the activities covered by the contract.

With funds managed via the BNPL Smart Contract suite, further verified by leading cybersecurity firm PeckShield, there is no room left for BNPL Pay to misappropriate capital or face creditworthiness issues should a borrower default on payments.

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Where is the crypto lending space headed?

With the cryptocurrency markets currently experiencing one of their toughest downturns, it is time for DeFi providers such as crypto lenders to develop new business models unaffected by market volatility. Building trust within the stakeholder ecosystem is a must and BNPL Pay has shown a unique way to do this.

As developers and entrepreneurs learn from the mistakes made by the growing list of bankrupt cryptocurrency lenders, the space will see a rapid transformation in the days to come. The focus must be on creating solutions that drive financial inclusiveness by targeting real-world businesses like family-owned stores and addressing their working capital requirements.

This will require cryptocurrency lenders to adopt more transparent business practices and adhere to strict self-regulatory disclosure rules, at least until a formal regulatory framework is imposed by various governments around the world.

What is certain, however, is that the next leg of growth for cryptocurrency lenders will come from attracting more traditional crypto investors, focusing on their ability to help communities lend and borrow domestically for greater trust and confidence. safety.

The material is provided in partnership with BNPL Pay

Disclaimer. Cointelegraph does not endorse any content or products on this page. While we aim to provide you with all of the important information we may obtain, readers should do their own research before taking any action relating to the company and take full responsibility for their decisions, nor can this article be considered investment advice.

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