Bloom Spotlight: Decentralized Lending (District0x + Bloom)
We are thrilled to announce our partnership with District0x to create a fully decentralized lending marketplace, the Bloom Lending District.
The Bloom Lending District will offer a standardized, transparent, peer-to-peer method for requesting and funding loans. Similar to LocalBitcoins or AirBnB, the Lending District will allow anyone with access to the internet to lend and borrow funds free of central influence.
This marketplace will not require access to the traditional financial system. There will be no middlemen, no fees, no cross border limitations, and no constraints.
Lending can happen in any cryptocurrency, including StableCoins pegged to fiat assets (such as MakerDAO’s Dai.)
Who Does This Serve?
The marketplace is a two sided marketplace, allowing both funders and borrowers to participate in a fair ecosystem.
Borrowers:
Many creditworthy borrowers are often denied access to well deserved loans. For example, cryptocurrency assets are not factored into a traditional credit score. An individual with a large amount of crypto assets would may fail to secure even a small loan in traditional markets.
45 Million Americans are not scored by FICO, which is checked on over 90% of US loans. In many international markets, borrowing is restricted to a small handful of indivuduals.
In 2009, the CARD act placed restrictions on credit card access for borrowers under the age of 21, reducing the rate of credit card ownership by millennials. Many of these individuals are not able to access traditional credit as they have never opened up a credit card.
These gaps in the market leave the opportunity open.
Lenders:
Traditionally, earning interest off of consumer credit was reserved for banks and large institutions. Peer-to-peer lending allows you can gain access to an asset class that large banks have funded for years.
Virtually anyone can be a lender. The Lending District will not be restricted to banks and institutions. While large funds will be able to participate in lending, so will individuals looking to diversify their portfolio by gaining access to consumer credit loans.
Why Peer-to-Peer? Why Decentralized?
In markets with political instability and markets where access to bank funding is weak, dangerous predatory lending thrives. As borrowers have few alternatives, a four month loan may cost triple the amount borrowed. A delay in payment will often result in threats, attacks and robbery for victims.
Even when it’s available, centralized lending can grow to extreme levels due to political constraints. For example, HSBC Indonesia charges 41.75% APR on credit cards. Interest rates from Metrobank in Philippines exceed 50% APR. These rates may seem palatable compared to loan sharks, however in these nations, it’s virtually impossible to gain access to credit. In the Philippines only 3% of the population owns a credit card.
When responsible loans with reasonable interest rates are used for wealth growing causes by creditworthy individuals, the payback rate can be exceptionally high, even measured against more developed capital markets.
The Lending District Isn’t Just for Developing Nations
What is a good interest rate for me? While this is a common question, getting an answer is virtually impossible. The annual percentage rates that lenders charge can range from about 6% to 36%.
This discrepancy leaves the door open for optimization.
How Does Bloom Fit In?
One of the distinguishing features of the Bloom Protocol is the ability for anyone, anywhere to generate a globally accessible identity and credit score. Bloom can generate these ID’s and scores even for people without access to traditional lending products or banks.
Bloom envisions a world where anyone can access credit, regardless of access to banks, ATM’s, storefronts, identity systems, or credit history.
Just as LocalBitcoins offers a service for over-the-counter exchange of Bitcoin, the District0x Lending District will offer over-the-counter peer to peer loans.
Centralized vs Decentralized Lending
Centralized lending companies (banks) offer a number of benefits and drawbacks.
It’s very easy for a central company to access a large amount capital. This is needed for products like mortgage or a large business loan. Centralized lenders have a commercial incentive to scale, meaning they invest in growing their reach within their market. They have an ability to take long positions and hold loans for an extended period.
Despite these obvious benefits, centralization also comes with a number of drawbacks.
- Centralized providers typically require access to a bank account.
- They generally cannot lend across borders.
- Interest rates are set by a central body, creating an opaque market backing unsophisticated borrowers into financial traps.
- Many central lenders require an in-person presence.
The partnership with District0x aims to fix this.
Decentralized lending on the Bloom Lending District will be able to work across borders, interest rates are not set by a central body, it will not require an in-person presence, no bank account will be needed.
Decentralization is critical to advance lending: As large monopolies, governments, banks, and nations frequently interfere in the lending process, offering a peer-to-peer solution opens up the market for millions of people around the world who cannot currently access credit. This marketplace will allow anyone to diversify their portfolio, choose their risk tolerance, and earn off of a fair balanced ecosystem.
What is District0x?
District0x is a network of decentralized marketplaces. Projects like Bloom can create, operate, and govern. Powered by Ethereum, Aragon, and IPFS. We share a similar stack in Bloom as Bloom is also developed on Ethereum, Aragon and IPFS.
This lending district would serve as a peer-to-peer driven marketplace for lending.
The Bloom Lending District will have the following core features:
- Users will be able to submit an application for a loan.
- Loan applications will require basic parameters such as a funding amount, use of funds, payback timeline and interest rate requested.
- Bloom will provide publicly visible core metrics about the borrowing history, identity, credit worthiness and risk associated with this individual.
An analogy could be made to LocalBitcoins.
The district0x based lending district would allow anyone in the world to post a request for a loan and peers to review Bloom’s information about the loan without having to go through a financial institution.
Bloom will enable lenders to lend confidently with KYC, identity verification, risk assessment, and creditworthiness assessment.
Next Steps:
Bloom has submitted a District0x Proposal and is actively in development discussions with the District0x team on the process.
Joe Urgo, co-founder of District0x is a close advisor and friend to the Bloom project. In order to fulfill the vision of this post, we will continue to advance BloomID, BloomIQ and BloomScore according to our roadmap.
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