Blockchain technology is still relatively new but we have seen increased adoption of the P2P ledger system from the financial sector. The technology is already being used in currency exchange, money transfer, creating financial securities and inventory management by retailers.
One area that has surprisingly lagged behind in blockchain adoption is the mortgage lending and servicing businesses. Blockchain, and smart contracts, in particular, offer major efficiency in how we create, transfer and record property titles and deeds. Yet most lenders have been slow to take the technology on board.
Negative Perception Due To Cryptocurrencies
One reason for a lot of mistrust about the blockchain technology is its association with Bitcoin and other cryptocurrencies. These currencies are notoriously volatile and prices fluctuate by thousands of dollars in a matter of days.
This has given an impression that everything associated with Bitcoin, such as the blockchain technology, must also be equally volatile and unstable. The lending and mortgage industry rely on a certain measure of stability. If property prices fluctuated the way that cryptocurrencies did, no one would bother investing or taking the risks in it.
Lending Platforms Underway
So far, there have not been too many efforts to set up lending businesses using the blockchain technology. This is mainly because of the volatility issues surrounding the market. For instance, authorities in Texas issued a cease and desist order against a cryptocurrency lending firm last month that had promised huge return for their investors.
However, that is likely to change as lenders and technical experts start to see the high potential of digital loans as the technology begins to gather wider recognition.
Digital Collateral Loans
New alternative lending startups are being designed that allow crypto investors to acquire loans backed by their digital assets as collateral.
One such platform, gaining recognition, is Lendingblocks. Designed to run on the blockchain technology, the Lendingblocks infrastructure lets investors earn a return on their digital assets without losing the ownership of these assets. Once the loan has been repaid, the collateral is forwarded to the borrowers and repayments are transferred to the lender.
Understanding the Blockchain Lending Process
Developers believe that blockchain based lending can be executed through smart contracts. Smart contracts work on the model similar to any other computer program’s if-then code.
The contract’s code and terms are written at the initial stage. Both parties can agree that once a condition has been met, the contract progresses to the next corresponding clause. The parties can also decide how to resolve issues or what happens when conditions are not meant, such as delayed repayments of the loan.
Once a smart contract has been set in place, it executes automatically and neither party can change or manipulate the underlying conditions unless it has been expressly written in the code. Cancellation or renewal of the contract can also be built in at the initial stage.
One example of a contract condition could be the payment of installments or transfer of the collateral from one party to another.
Advantages of Lending Through Smart Contracts
Lending banks and financial institutes have several ways to create value through smart contracts. First, the system adds complete transparency and audit ability. A blockchain platform is based on the openly accessible digital ledger. The lender and borrower can access the record anytime to check the history of transactions.
The blockchain also makes the process of loan generation faster. It allows access to third parties to verify data regarding the borrower.
One particular benefit to lenders is liquidity. Smart contracts can be made transferable on the lending platform. This will allow the original lender to sell their smart contract and free up funds while allowing other lenders a ready market for investments.
Blockchain is in early stage and lending platforms are still in development. Some of the first systems we have seen in place show promise. We can be hopeful that as more lenders begin to seriously consider a move towards blockchain we will see much more efficient and digitized lending platforms in place.
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