Dharma have recently launched to the public, offering cryptocurrency loans fulfilled via smart contracts
On Monday 8th April, Dharma announced their official launch for public use. The lending startup company offers blockchain cryptocurrency loans that are fulfilled automatically by using smart contracts. Dharma is not the first blockchain loan company, but they aim to stand out from the crowd by offering fixed rates of returns on cryptocurrency lending.
The cryptocurrency loans company is backed by exchange CoinBase. Dharma has already held their pilot scheme, which reached 2,500 users and, according to third-party site Dharmalytics, $1.16 million in principle was borrowed over 1,572 loans.
How Does It Work?
For anyone who is not familiar with blockchain jargon, the exact nature of Dharma may remain elusive. The company basically matches buyers and lenders across a peer-to-peer network, similar in ways to a Lending Club. The terms of the loan are conducted on smart contracts.
At the moment, all Dharma loans are available on a fixed interest rate, over a fixed term of 28-days, though the company plans to add more options for flexibility (such as three and six-month loans). Dharma asks borrowers to put up 150% of the value of the loan as collateral. Once agreed, the user can borrow ETH or DAI, and can receive the loan in less than 30 seconds.
The structure of Dharma loans is quite familiar to typical short term loan structures compared to other companies, such as BlockFi, who offer cryptocurrency lending with fiat returns, or Compound, who offer cryptocurrency lending and borrowing with ever-shifting rates in line with live demand. Short terms loans offer different policies, with approval based on earnings and ability to repay. Dharma loans demand collateral for security.
This does add a certain amount of security for the lender, but also a known risk for the borrower. If the value of the collateral drops below 125% of the loan, the smart contract will begin to liquefy the assets, and the lender could face losing assets or making a margin call.
Potential Drawbacks of Blockchain Loans
This presents one of the largest potential drawbacks of Dharma loans. The volatility of the currency means that the borrower cannot be sure that their collateral will remain at a value above the 125% mark. If the market swings out of their favour, they could face liquidation of their assets. This is the risk that they take, but market stability would make this more predictable.
Dharma also lacks borrowers at the moment. This is normal for this stage of the industry. There is a greater demand for the lending of cryptocurrency than there is for borrowing. Borrowers are matched quickly with the relatively large pool of lenders, though in the long term the company will need more. At the moment, lenders earn a 4% rate on ETH and 5.5% on DAI. Borrowers only pay 2%, meaning lending is subsidised.
Blockchain loans could become the next step in financial services, or at least provide an alternative option for those who need it. For now, traditional loans still rule, but Dharma has taken a step to create a worthy P-2-P lending industry for cryptocurrency.
This article was submitted by MB Peco Medija
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