Borrowers Can Now Use Gold As Collateral In Blockchain Lending
The decentralized lender ETHLend has listed the gold-backed cryptocurrency, the Digix Gold token (DGX), on its platform; enabling borrowers to effectively use gold as collateral for blockchain lending.
The new listing announcement was made earlier today by ETHLend. The Ethereum-based platform facilitates peer-to-peer blockchain lending with loans backed by digital currencies, held in escrow. Loan agreements are made between a lender and a borrower and supported by smart contracts, preventing either party from relapsing on the agreed terms.
ETHLend started accepted collateral in Ether (ETH) but has since expanded its list to include other ERC20 tokens, which run-off the Ethereum blockchain. Although in alpha release, it can still be used to draw-up and start loan agreements. The platform also has its own LEND token which can be used as collateral but with a reduced administration fee.
The ETHlend team said the Digix addition would usher in a new era where real-world assets could be tokenized and traded as financial products on the blockchain.
“Digix is a pioneer in the tokenization of commodities,” said Stani Kulechov, CEO, and founder of ETHLend. “With our support, DGX holders can now pledge their tokens for loans while maintaining exposure to the fluctuating price of gold. We’re broadening our market beyond security and utility-backed tokens, enabling our users to participate in exchanging with tangible materials.”
ETHLend and Digix
Digix claims every one of its DGX tokens is backed by one gram of LBMA-standard gold, held in a vault in Singapore. DGX holders can redeem the gold, but only if they travel to Singapore.
The project says it makes owning gold accessible. This means more can enjoy the benefits of owning an asset with a stable store of value, something Digix said the new listing enabled in the loan market.
“DGX is the ideal collateral on for ETHLend users as the price of the token is conventionally stable,” Shaun Djie, Co-founder and COO of Digix added. “We are excited to partner with ETHLend to provide our users with new ways to digitize and tokenize physical assets.”
It also raises the possibility of other tangible assets being used in blockchain-based loans. Including other precious metals, valuable items or even real-estate.
Other platforms also offer blockchain lending services. Financial regulators in Thailand are currently exploring the possibility of introducing a new corporate ‘bond coin’, minimizing the cost of borrowing for SMEs.
SALT (Secure Automated Lending Technology) allows borrowers to use their digital assets as collateral for loans secured on the network. Rumors began circulating at the end of last month that the platform, which had suffered several setbacks, would be bought out by its European competitor Nexo, but they proved unfounded.
A golden era for blockchain lending?
The margin for error is currently high: lending on the blockchain attempts to address this. Peer-to-peer lending expands the number of potential lenders, who can ultimately decide to who and for what they’ll lend the money. Agreement terms can also be enforced through smart contracts; being auto-fulfilling, they can be used to penalize reneging parties, such as a failure to meet repayment dates.
Conventional lending is expensive. The main institutions, the banks and the building societies, charge fees that can be high and arbitrary, with limited or imperfect assessments of individual cases. ETHLend is currently attempting to integrate credit scores, from its own platform as well as on others, to further incentivize honest borrowers and provide further information for its lenders.
The amount of cryptocurrency needed in collateral has increased in the recent bear market, as the value of ERC20s and Ether falls against fiat currencies. Introducing a digital currency backed by gold will mean the amount pledged can remain level, minimizing the influence of price fluctuations.
ETHLend’s decision to list DGX could turn out to be a ‘golden’ opportunity for blockchain lending.
The author is invested in ETH, which is mentioned in this article.