Aave, a blockchain financial services company, has launched a new lending platform. Aave Lending is now available to creditors and businesses who want to create a lending system that utilizes crypto-backed loans. Cashare has become the first company to adopt the platform, and Aave had this to say about the partnership:
“Partnering with Cashare is a great first step for Aave Lending, as they’re one of the biggest p2p lending platforms. By integrating with Aave Lending, Cashare’s customers will now be able to use their digital assets as collateral for loans.”
This is not Aave’s first foray into the world of lending: the company previously created ETHLend as a pilot project, which has handled over $15 million worth of loans. Now Aave will “expand that vision into digital asset-backed lending for both businesses and individuals” with its new platform.
Crypto-backed loans let borrowers lock up cryptocurrency and receive fiat currency in return. When the borrower pays back their loan, their cryptocurrency is given back to them. This allows coinholders to liquidate their cryptocurrency without actually selling it.
Such a system can provide many benefits. Blockchain technology keeps operational costs low for the lending platform, which translates into relatively low interest rates for the borrower. The decentralized nature of cryptocurrency also provides freedom from banks and allows services to be offered internationally.
However, there are issues. Cryptocurrency prices are very volatile, and the crypto that a borrower puts up as collateral may decline in value by the time they repay their loan.
This is not just a disadvantage to the borrower, as price volatility can also lead to problems for the lender or the platform. Borrowers may find it more beneficial to not pay back their loan, as HackerNoon explains:
“For investors who are lending on platforms that facilitate crypto-proved loans keeping crypto assets as a deposit, the main risk is seeing the assets’ value depreciate to a point where the borrower is better off defaulting than repaying the loan.”
Whether crypto-backed loans are ultimately viable or not, Aave may become instrumental in increasing the number of platforms that offer crypto-backed loans. This is because Aave Lending is not a lending platform in and of itself: it is software-as-a-service, which allows Aave clients to create their own lending platforms.
However, any company that chooses to use Aave Lending will face plenty of competition. Nexo has become one of the most popular crypto-backed lending markets, and Lendingblock is another prominent peer-based lending platform.
Binance has also jumped on the bandwagon; the exchange has been offering crypto-backed loans since July. Meanwhile, MakerDAO is functioning as a more deregulated lending platform. Only time will tell which service will come out on top.