Lendingblock is a platform that allows for fully collateralized cross-blockchain lending of cryptoassets, starting with Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Ripple, with more digital assets to follow. The platform allows cryptoasset holders to earn interest by lending these assets to borrowers, facilitated through a combination of smart contracts and manually controlled wallets. Borrowers, who are required to put up other cryptoassets as collateral, can use cryptoassets for taking short positions and supporting market making activities without having to buy the cryptoassets outright, while providing cryptoassets holders a source of additional income.
What is the project?
Lendingblock applies the concept of securities lending to cryptoassets. Traditional securities lending allows owners of stocks or bonds to generate additional income from otherwise dormant securities. Borrowers, typically large financial institutions like broker-dealers, investments banks, or hedge funds, use borrowed securities to implement a short selling trading strategy or avoid settlement failure. A third-party lending agent facilitates securities lending by coordinating the transaction between the borrower and lender, earning a fee for their services. Overall, traditional securities lending can theoretically increase market efficiency and liquidity.
Lendingblock is targeting the lending of currency-like cryptoassets, such as Bitcoin, Ethereum, and Litecoin. Unlike platforms like tZero, they are not trying to facilitate traditional securities lending with blockchain-based software. By enabling cryptoasset lending, Lendingblock will provide cryptoasset holders the ability to earn incremental interest income from their assets. Borrowers offer other cryptoassets as pledged collateral and make interest payments that are remitted to the lender(s). Lendingblock will earn revenue from transaction fees, which are a yet-to-be-disclosed percentage of the loan principal’s value.
How does the platform work?
Lendingblock claims they will be the first institutionally-focused cross-blockchain cryptoasset lending platform. Lendingblock will act as the security trustee for the transaction, which includes creating and managing wallets on whatever blockchains are required for the collateral and principal. Lendingblock is not introducing a new protocol to support these lending arrangements but rather will act as a trusted intermediary.
Their platform uses a Value-at-risk model based on historical data to determine the amount of collateral required for each principal / collateral pair, as well as collateral floors and ceilings. The fiat value of collateralization will be continually monitored and the borrower will be notified that additional collateral is required should the level drop below the initial collateral floor set at time of borrowing. A borrower failing to provide additional collateral at that point will see a portion of the collateral converted to principal in order to bring the level of collateralization up to the required amount. Conversely, if the level of collateralization rises above the collateral ceiling, excess collateral will be made available to the borrower. In the event of default, Lendingblock will execute any liquidation at the best price after getting quotes from multiple exchanges and over-the-counter market makers.
After the Lendingblock platform receives a borrowing request, the platform algorithmically matches the request to existing lending offers and creates a lending agreement initiation smart contract. Among other contractual elements, this smart contract specifies: the type and amount of the loan principal and collateral, collateral floor and ceiling boundaries, duration, effective interest rate, payment schedule, principal contribution and individual rate for each lender, loan default conditions, as well as a hash of the underlying legal contract. A separate lending agreement maintenance smart contract will be responsible for managing receipt and distribution of interest payments, managing collateral levels, repaying principal, releasing collateral, and, in the event of default by the borrower, liquidating the collateral and distributing the proceeds proportionally to the lenders.
Not all aspects of each lending agreement will be controlled by smart contracts. There will be mechanisms in place allowing Lendingblock to trigger a “manual override” in the event a borrower defaults in a way not captured by the smart contract, (i.e. a party failed to act in “good faith”), or in the event a specific regulation were to change while the loan is outstanding. Though their dispute resolution mechanism is not yet finalized, Lendigblock’s whitepaper proposes giving Lendingblock or a third-party “arbitrator with blockchain expertise” the power to determine disputes between participants.
Who will use the platform?
Lendingblock will need to attract both borrowers and lenders to their platform. Lendingblock suggests several distinct use cases are likely to attract borrowers:
- Short selling and hedging: Shorting cryptoassets is currently possible through numerous exchanges1, but Lendingblock argues that its service could be used outside of exchanges or could potentially integrate with exchanges as a service. Short selling is the primary use of securities lending today, although the requirement that a short position be backed by borrowed shares is a regulatory requirement that does not yet exist in cryptofinance, making the comparison to traditional securities lending imperfect. Nonetheless, regulation could introduce this requirement. There is plenty of interest in shorting crypto for hedging or for speculation, though Lendingblock’s initial restriction to BTC, BCH, ETH, LTC, and XRP seems to limit the scope of activities. Many entities wanting to short or hedge crypto today want to do so against a more stable or at least less correlated asset, such as fiat.
- Avoiding settlement failure: If a market maker cannot meet a settlement obligation, they could borrow an asset to do so. In this scenario, if the market maker’s purchaser requires delivery of the cryptoasset and the market maker does not have enough on hand to fill the order, they could use the Lendingblock platform to fill the order using a different available cryptoasset as collateral. Doing so would not impact the market, which could be significant benefit in the case of large orders. In practice, a large institutional player would likely have internal controls in place to prevent this scenario, though many smaller or newer funds may not have such protective procedures.
- Access to crypto for asset-specific purchasing: A long-term Bitcoin holder who wants Ether to make a short term investment–perhaps for an ICO–but who does not want to sell their Bitcoin to do so could use Lendingblock to facilitate the transaction. With many tokens conducting presales and accepting funds off-chain or through multiple currencies, it is unclear how long this will remain a challenge in the industry, though there are potential use cases in other tokens needed to access specific services. One could borrow GNT to use the Golem network while never having actual exposure to GNT, though this would require Lendingblock to expandin the list of supported assets. Lendingblock has indicated they plan on expanding the range of assets available for borrowing and lending, but they have not indicated planned support for any specific utility tokens.
The proposition for lenders–the supply side of the market–is more clear. On the industry’s retail side, long-term holding of cryptoassets has been embraced to the point of becoming its own meme. The tax implications of selling crypto in certain jurisdictions also means people who are long-term holders are reluctant to sell, even if they would like to use the value their crypto holds. These factors help explain the emergence of many other crypto-lending platforms that both offer competition and could help encourage the practice of lending out crypto. These are discussed in greater depth below.
Due to the global nature of cryptofinancial markets, Lendingblock will have to ensure its platform conforms to a given jurisdiction’s regulations before local lenders or borrowers are allowed to participate. It has not yet been settled which jurisdiction’s law will govern a Lendingblock loan in the event of a borrower’s insolvency. The location of Lendingblock, the “location” of the wallet holding the collateral, and the insolvency jurisdiction of the borrower may all be implicated – it is of vital importance that Lendingblock clarifies these matters before the platform launches. Lendingblock’s management acknowledged the importance of this complex multijurisdictional regulatory compliance work, noting that many details remain to be completed.
What is the token being sold?
The LND token will be the sole medium of payment for Lendingblock platform fees in addition to interest payments by borrowers to lenders. Borrowers can pre-purchase all the LND necessary for covering interest payments at the start of the loan, allowing borrowers to lock in the cost of their interest payments. Lenders will receive interest payments in the form of LND, which they can use to pay interest and fees on their own future loans or sell in secondary markets. In theory, demand for LND should be a reflection of usage of the Lendingblock platform through the requirement to pay fees and interest.
What is the project and technology status?
Though the full platform is incomplete, Lendingblock is internally testing an alpha version and have made a demo version of the user interface publicly available. Lendingblock plans on using funds raised through the ICO to grow the technical team and continue to build out the platform. While Lendingblock has not put forth a detailed project roadmap, they expect to launch the platform in Q3 2018 with initial support for Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Ripple.
Who is the team behind the project?
Lendingblock was co-founded by finance industry veteran Steve Swain and Linda Wang, a Cambridge and University College London graduate with computer science and finance experience. After a long career within financial institutions like Lehman Brothers, Credit Suisse, Macquarie Group and UBS, Steve moved on to consulting at PWC and Deloitte. Steve became an advisor to Lendr, a no longer active platform, which Linda founded to automate mortgage advice to consumers.
The rest of the team is made up of blockchain engineers and finance professionals. Blockchain development will be supported by Julien Klepatch and Qing Xian Lee. While they are still trying to grow the team, the core they have assembled have collective experience in finance, fintech, and blockchain technology.
Prospects and Challenges for Lendingblock
For lenders considering Lendingblock, the questions will be whether more lucrative places to loan cryptoassets exist and to what extent can Lendingblock provide a seamless, secure experience with competitive rates. Although Lendingblock is seemingly the first to offer cross-blockchain collateralized lending, there are several platforms offering somewhat comparable services. There are several lending platforms that offer fiat loans backed by cryptoassets, including Sweetbridge, SALT, Coinloan, Lendo, Unchained Capital and Celcius. ETHLend is another lending platform enabling users to borrow ETH using ERC-20 tokens as collateral. Additionally, both Bitfinex and Poloniex offer margin lending where lenders can loan out various cryptoassets to margin traders on their platforms.
Given the competitive landscape of the crypto lending market, Lendingblock’s business model will face substantial challenges. Much as we noted in reference to Sweetbridge, the range of income generating opportunities available to potential lenders may require minimum fees to lenders to entice them to loan assets on the Lendingblock platform. Whether these fees, plus commissions retained by Lendingblock, will allow for rates compelling to potential borrowers will be a core determinant of Lendingblock’s fate.
For institutions seeking access to cryptoassets, Genesis Global Capital offers loans of large quantities of various digital currencies over fixed terms, backed by USD, as well as an over-the-counter short selling service. Additionally, both CME and CBOE offer cash-settled Bitcoin futures, allowing traders and financial institutions exposure to Bitcoin without having to own or borrow it.
While Lendingblock may have a first mover advantage in this specific niche of crypto lending, the number of institutions actually needing this specific crypto-to-crypto borrowing is not immediately obvious. If Lendingblock expands to include fiat, or include a stablecoin the market treats as fiat, the demand for the service becomes much more clear. In addition, if Lendingblock expands to include a broader range of tokens, traders could use Lendingblock to hedge positions in volatile or riskier assets with BTC or ETH. Finally, a borrower could potentially take a large BTC position and use it to collateralize loans for other crypto, meanwhile hedging their BTC position through the fiat-crypto vehicles mentioned above, though the complexity of this likely means a more integrated platform would ultimately offer such a service.
Regulatory issues present another set of challenges for the platform’s success. Lendingblock will have to ensure regulatory compliance in every jurisdiction where they plan on operating. Additionally, they must resolve the issue of which jurisdiction’s law will apply in the event of borrower default. While Lendingblock’s management has rightly put a large focus in this area, many of these issues remain unsolved. Convincing resolution to these issues will be central to Lendingblock’s efforts to attract institutions to their platform.
Relative to its own growth projections, Lendingblock’s whitepaper states that in 2017, $2 trillion worth of securities were loaned in fixed income and equity capital markets, generating $4 billion of revenue. In attempting to project their operating revenue three years out, Lendingblock modelled various scenarios of growth in lendable cryptoassets, adoption of crypto financing services, levels of transaction fees, as well as their market share of the cryptofinancing market. Based on a starting point of $500 billion, which represented the entire cryptoasset market capitalization at the end of 2017, they arrived at three different projections they label pessimistic, realistic, and optimistic. They projected revenue in excess of $27 million under pessimistic assumptions, $379 million under realistic assumptions, and $5 billion under optimistic assumptions. There are a number of reasons to be critical of these assumptions, or even the premise that lending rates, volumes, and fees from traditional securities markets represent meaningful comparative cases upon which to model growth assumptions for Lendingblock. However, given that the LND token functions merely as a payment token on the platform and does not have any claim to revenue or income of the platform, the token’s dynamics are not certain to track activity of the platform regardless of whatever volume or success it may find.
Despite the plethora of borrowing and lending services, Lendingblock’s platform stands out as a unique offering in the marketplace. Demand for infrastructure that supports short positions should increase as more sophisticated players enter the market and want to either hedge or speculate. Collateralizing crypto loans peer-to-peer could efficiently support cryptoasset borrowing, though it may not be the simplest way to get an insurance policy against platform settlement failure on short positions.
Nonetheless, if exchanges and other platforms demand this service, do not want to build it themselves, and prefer a more centralized solution that could be more in compliance with regulation, Lendingblock could be the leading service provider. If they can integrate a stablecoin or fiat into their platform, or support a broader array of riskier assets, they could be even better positioned.
Token and Sale Details
The token sale will be conducted in two phases; a pre-sale and the main sale. At time of writing, the pre-sale is scheduled to begin April 7, 2018 and run until April 14, 2018, and the main sale is scheduled to begin April 15, 2018 and runs until April 22, 2018. There is a soft cap of $5m and a hard cap of $10m for the pre and main sale combined. 450m LND will be allocated during the pre-sale and 100m LND will be offered during the main sale. Any unsold LND will be burned.
Residents and citizens of the U.S., Switzerland, and China are not permitted to participate in the token sale. Token sale participants must first complete the KYC process.
Apart from the sale, 150m LND will be retained for a strategic grown and investment fund, 200m LND will be distributed to founders and the team with a two year vesting period, and 50m LND will be distributed to advisors and supporters, not subject to any vesting period.
There was a private sale that concluded on January 26, 2018, during which 50m LND were sold for $500,000, implying a network valuation of $10m.
|Role of token||Payment/Access|
|Token supply||1 billion LND|
|Distributed in ICO||Maximum of 600 million LND|
|Emission Rate:||No further token issuance is planned|
1 Shorting is possible via margin trading on Bitfinex, and Poloniex, among others. Exchanges enforce collateralization requirements. On these exchanges, users can loan out their crypto to traders looking for margin trading (borrowed funds cannot leave the exchange).