What is Lendingblock? | The Ultimate Beginner’s Guide
Lendingblock is an open exchange that connects cryptocurrency lenders and borrowers. It’s one of the first forms of securities lending in the world of cryptocurrencies.
For example, with Lendingblock, if you’re a lender, you can lend any digital asset and earn additional income on your existing cryptocurrency assets. On the other hand, if you’re a borrower, you can access assets to support trading, fund working capital, or fulfill investment funding needs. Lenders can, therefore, gain interest on their loans while borrowers can use their cryptocurrency assets as collateral for short-term funding.
By having an open, real-time exchange coupled with a smart contract system to fulfill lending agreements, cryptocurrency assets can interchange hands without the need of an intermediate like a bank. By increasing the transparency and autonomy of the credit market, Lendingblock is, therefore, setting the foundations for financial infrastructure in the cryptocurrency economy.
In this beginner’s guide to Lendingblock, we will cover the following topics:
- What is Lendingblock?
- Conventional Securities Lending vs. Crypto Asset Lending
- How Does Lendingblock Work?
- The Technology Behind Lendingblock
- The Lendingblock Token (LND)
- Advantages of Lendingblock
- Disadvantages of Lendingblock
- How to Buy the LND Token
- How to Store Lendingblock
The Lendingblock (LND) token is issued by Lendingblock, a London-based company founded in 2017 by Steve Swain (CEO) and Linda Wang (CPO). Swain and Wang have many years of experience in consultancy roles and the credit market. Linda also previously worked as the CEO and co-founder of Lendr Limited, a robo advisory platform for lending and borrowing mortgages.
As seen on their website, Lendingblock is an open exchange that connects lenders and borrowers in the cryptocurrency economy. Lenders who want to earn additional income by long-term investment in crypto assets are matched with borrowers who are in need of working capital to finance their short-term strategies. Lendingblock allows participants to get the best rates in a fair, transparent manner.
To protect both lenders and borrowers, Lendingblock requires borrowers to place an appropriate amount of collateral for the loans.
A smart contract-based lending agreement specifies the type and level of collateralization required. The smart contract-based operational system manages collateral management, initial transfer, interest payments, default processing and eventually, repayment of the loans.
Before we move on and look at the technology behind Lendingblock, let’s look at the differences between conventional securities lending and crypto asset lending.
Conventional Securities Lending
Conventional securities lending is the transfer of assets from a lender to a borrower, typically in the form of shares or bonds.
- The borrower gives the lender collateral assets that exceeds the value of the loan in the form of shares, bonds, or cash and pays the lender a fee each month for the loan.
- The borrower also passes any dividends or interest payments to the lender.
- The lender is contractually obliged to return the borrowed assets at the end of the loan period.
- All securities lending arrangements use market standard legal agreements like the Global Master Securities Lending Agreement.
The global securities lending market is an extremely large market with an on-loan value of $2 trillion and a $180 billion year-on-year growth. Lenders received $9.16 billion in securities lending revenue in 2016 alone.
Crypto Asset Lending
Crypto asset lending through Lendingblock, on the other hand, involves a transfer of digital assets from one or more lenders to a borrower.
- The borrowers pledge digital collateral assets that exceed the value of the loan from the borrower. These collateral assets are securely locked.
- The borrower pays a fee each month for the loan which is distributed proportionally to lenders by the Lendingblock smart contract.
- Digital asset loans are not (yet) impacted corporate actions reducing additional servicing processes.
- The borrower is contractually obliged to return the borrowed assets at the end of the loan period. The borrowed assets are then distributed proportionally to lenders by the Lendingblock smart contract.
- If the borrower is unable to meet their obligations, the collateral is liquidated and the proceeds distributed proportionally to the lenders.
- Lendingblock smart contracts codify and execute terms modeled on the Global Master Securities Lending Agreement. The terms are agreed-upon by both the borrower and lenders.
There are two types of participants in the Lendingblock ecosystem: Borrowers and Lenders.
- Borrowers: Hedge fund investment managers, market makers, and proprietary traders with a need to borrow digital assets for multiple purposes like short selling, hedging, arbitrage, and fails-driven borrowing.
- Lenders: Institutional leaders, such as asset managers, hedge funds, family offices, individual participants in “crowd lending” who can gain access to lending opportunities not currently available to them directly.
There are five steps for Borrowers:
- Registration: Borrowers create an account and complete an identity verification and screening process
- Specification: Borrowers complete profiles specifying details of the loan they are seeking. These include loan principal asset and amount, duration, maximum interest payable, collateral to be pledged. After verifying that the collateral is available to prevent spurious offers, the borrowing request is then automatically matched to lending offers
- Initiation: Borrowers place collateral into the LND smart contract and wait for lenders to place principal into the smart contract until the loan total is reached
- Servicing: Borrowers make scheduled payments that are distributed to the lender by the LND smart contract, and as required adjusts the amount of collateral to reflect any change in value
- Finalization: Borrowers complete repayment of the loan principal which is returned to the lenders, and the collateral is returned to the borrower by the LND smart contract, or in the case of default by the borrower the collateral is distributed to the lenders to over their investment
There are also five stages for Lenders:
- Registration: Lenders create an account and complete identity verification
- Specification: Lenders first complete profiles specifying what they are looking. These include how much they wish to lend, for what duration, desired minimum interest rate, and acceptable collateral. After verifying the principal is available, the lending offer is automatically matched to loan profiles that meet their requirements.
- Initiation: Once borrowers have submitted collateral, lenders place loan principal into the Lendingblock smart contract, at which point the principal is sent to the borrower
- Operation: Lenders receives scheduled interest payments form the LND smart contract
- Finalization: Lenders receive repayment of their principal, or in the case of default by the borrower, the lender receives the collateral to cover their investment
The largest concern for most participants in the credit market is borrowers defaulting on their loans. To address this problem, Lendingblock brings traditional securities-lending concepts like collateralization to the cryptocurrency market.
- The Lendingblock algorithm will only match lenders and borrowers that have similar preferences when it comes to type of collateral. Upon registration, lenders can select to either accept any form of collateral or specify forms of collateral they are willing to accept. Similarly, borrowers specify the type of collateral they are offering as security.
- The type of collateral does not impact the interest rate of the loan. The amount of collateral is determined using a Value-at-Risk model which measures the maximum change in value of an asset in a given period of time using historical data or prices. Users cannot alter the type of collateral during the loan
- Borrowers need to maintain the appropriate level of collateralization over the loan period. Similar to securities lending, when the value of collateral drops below the value of the loaned principal, the borrower will be notified to provide additional collateral to the required level.
- In case borrowers fail to maintain the level of collateralization, a portion of the secured collateral will be converted to the principal, thereby bringing the level of collateralization back to the required level.
- If, on the other hand, the collateral increases in value relative to the value of the principal, the value above the collateral ceiling will be returned to the borrower.
Lendingblock has adopted a legal framework that ensures the safety of cryptocurrency assets. Here are a few legal aspects addressed by the company in their whitepaper:
- Jurisdiction: Enforceability of a cryptocurrency loan and collateral are affected by the jurisdiction where the wallet in which the collateral is held and the insolvency jurisdiction of the borrower. Cryptocurrencies are, however, not recognized as “financial collateral” and therefore would not be subject to the European Financial Collateral Directive—a framework for the receipt and enforcement of financial collateral.
- Legal Documents: Legal documentation of the transaction is signed by one or more lenders and the borrower electronically. Lendingblock uses the same standards for documentation as securities lending, with appropriate adaptations for the cryptocurrency market.
- Dispute Resolution: Lendingblock has developed a dispute resolution mechanism incorporated into the participation contract, a contract between Lendingblock and its platform administrator and users.
The Lendingblock platform consists of two parts:
- An open real-time exchange
- Smart contract-based operational system
Both of the above parts are built upon a hybridized structure, with some elements being decentralized and others being centralized. Lendingblock is based on the Ethereum blockchain and makes use of Ethereum’s distributed public ledger for executing its smart contracts, holding records of loans and principals, and allowing for public verification of past transactions.
Lendingblock describes their ‘Centralized zone’ as a “secure and cloud based infrastructure” meant to connect users with various first-party services including an API, internal microservices, storage of private internal data, gateways to external services, and “SGX based oracles that monitor activity and information from external data sources and distributed ledgers.”
The Lendingblock architecture is built on four core principles which are ranked as follows:
- Security: Users’ interest and their assets must be secured.
- Privacy: Users’ personal information must be protected.
- Transparency: All interactions and transactions on the platform must be visible.
- Scalability: Performance and trust must meet users expectations.
LND is an ERC-20 token that functions as the currency for interest payments by borrowers to lenders.
For example a borrower who has a loan of BTC secured by ETH collateral will pay fees in LND. Lenders will be paid LND proportionally. Lenders then use this earned LND to pay interest on their own loans or sell the LND in a secondary market to other borrowers.
The use of the LND token simplifies the payment and receipt of interest incurred by crypto-loans and reduces the cost of exchange fees. Smart contracts govern the technical requirements of a loan such as collateral management, interest payment and repayment which consequently reduces complexity, risk and expense.
- Decentralized cryptocurrency lending platform: The platform replicates securities lending and its fundamental principles that have been verified to the cryptocurrency world. Lendingblock allows lenders to earn a return on their digital assets without sacrificing the benefits of ownership. Users can borrow and lend any type of cryptocurrencies.
- Cross-blockchain transactions: Compared to other exchanges, Lendingblock allows cross-blockchain transactions among different pairs of cryptocurrencies. It uses the LND token as a common currency for interest payments. Lendingblock is also integrating different wallets that help transfer value faster.
- Runs on the Ethereum network: The Ethereum network is well-known and secure. Smart contracts contain the terms of the lending agreements and automatically ensure users rights are protected.
- Convenient, fast, and scalable: Lendingblock is available on both desktop and mobile, opening the platform up to a wide range of participants, from individuals to investment funds. Users will be able to complete a loan in minutes. Institutional and professional traders can access the Lendingblock API’s tools which contain public data on loan order books, rate tables across different currencies and user account information.
- Risk of borrower defaults: This is similar to the risk of margin calls in securities lending. It happens when borrowers fail to return borrowed digital assets upon request. The collateral is seized or sold and then the proceeds are distributed to lenders proportionally. However, this may at times return less to the borrower than the loaned digital assets.
- Market volatility for collateral: If the value of the collateralized assets drops below the value of loaned assets, borrowers will be notified to add further collateral. This poses a risk to borrowers who fail to do so and lose their collateral. Likewise for lenders, fluctuations in the market can lead to suboptimal returns through rebalancing of the collateral.
- Cryptocurrency is not considered financial collateral: Even though cryptocurrencies pass the “property” test, cryptocurrencies are not yet considered as legal financial collateral by European Financial Collateral Directive.
- Geographical exclusion: According to the Lendingblock whitepaper, participants from the USA and China cannot yet participate in Lendingblock.
Users need to enter an onboarding process in order to become a participant on Lendingblock.
- Individuals and entities have to visit the registration website and complete a registration form that contains basic information including: Email, telegram name, ETH address in which the funds will be sent from, terms and declaration. There are different requirements for different types of participants
- For entities, any beneficial owners, directors, or shareholders with at least 10-percent ownership will be required to go through an individual onboarding process.
- A User ID and PassFort (Lendingblock’s KYC partner) link will be generated. Users then have to visit PassFort to submit further information and save their User ID.
- Users check their registration status on the website by entering their ETH address and User ID
LND Token Value:
The LND token’s value is governed primarily be the demand for the token. 1,000,000 LND will be issued over the course of Lendingblock token sale period. 60 percent of the total LND supply will be available for purchase in three separate sales including private sale, pre-sale and public sale.
Since the LND token is a ERC-20 token, you can store the LND Token in any wallet you would use to store your ETH tokens.
- Cryptocurrency Exchange: Not recommended. You do not have full control over the wallet
- Web Wallet: MyEtherWallet is a fast and easy to set up. You also have full control over your wallet
- Mist: A very secure way to hold your coins. Does take time to set up and can take up a lot of hard drive space
- Hardware Wallet: A few examples include TREZOR, Ledger, and KeepKey. Your private keys are stored completely offline and are not vulnerable to theft or other malware.
The need for margin lending will continue to grow as the cryptocurrency market matures. Lendingblock is creating the financial infrastructure for lending in the cryptocurrency world, allowing users to transfer value using the blockchain network. Given the success of Lendingblock’s pre-sale stage, it is reasonable to think that the cryptocurrency lending market will grow with time, potentially generating an annual revenue of $300 million within three years.