Crypto Loans – The Future of Banks?

To exemplify this, let's take MakerDao, which is a protocol that associates loans with the issuance of a Stablecoin.

Through MakerDao, you can deposit an asset (token), and based on that deposit, acquire a loan in dollars. For this, it uses the infrastructure of the Ethereum Blockchain, and for each deposited token, there is a predefined rule regarding how much you can borrow. It initially accepted deposits only in native Ethereum tokens (Ether), but soon expanded to accept various other tokens as deposits.

To be correct in concepts, what you receive when you deposit your tokens with the MakerDao protocol is the 'right to mint' (create) DAIs equivalent to the value you deposited. DAI is a Stablecoin that seeks a 1:1 parity with the US dollar through a collateralization model.

The collateralization model refers to the use of an asset as collateral to obtain a loan or credit. Think of it like when you pawn a valuable item at a pawn shop: you hand over the item (the collateral) and in return, you receive money. If you pay back the loan, you get your item back. If you don't pay, the pawn shop can sell your item to recover the money. In the financial world, assets used as collateral can be properties, stocks, bonds, among others.

In practical terms, for MakerDao, you deposit ETH (or other accepted cryptos/tokens) on the platform equivalent to 150 dollars, for example, and based on that you can withdraw 100 DAIs that are issued.

As this collateral drops in price, either you deposit more to maintain the 50% extra value, or the system uses it to 'burn' (destroy) the DAIs and returns what is left to you. Among all this, there is a stability fee paid by those who 'take' the DAIs, which keeps the price of DAI always close to 1:1 with the dollar.

For example, if this fee is high, you are incentivized to increase the amount of DAIs in circulation, which would cause its price relative to the dollar to fall and return to a level close to 1:1. All of this is done in a distributed and completely transparent way.

Looking a little less at the technicality, what MakerDao allows is that with the deposit of collateral we have access to liquidity. For numerous reasons, we may not want or be able to sell a given token, but we need liquidity, so we go ahead and deposit the token, create DAI and, automatically, we have a token accepted across the entire DeFi environment, which will maintain the 1:1 parity with the dollar. For now, let's assume that DAI has this 1:1 parity; later we will discuss the types of Stablecoins, their risks, and incentives.

When analyzing the operation of MakerDao, it is almost automatic to draw parallels with the traditional financial market, right? The most obvious comparison is with mortgage loans, where we offer our house as collateral to obtain a loan and pay the seller. But what are the differences between these two systems? Here are a few that I identify:

1. Transparency and impersonality: Traditional bank loans are neither transparent nor impersonal. The rate and amount that someone can obtain vary considerably. For example, for every hundred units of asset deposited, such as the value of a property, one person may be entitled to a loan of eighty, while another can only get sixty. The rates also vary. In MakerDao, this discrepancy does not exist. The value of the collateral is defined by asset. Information about the cost and the collateral percentage for each deposited token is public, as well as all transactions carried out, thanks to the transparency of Blockchain.

2. Comparison of offers: In the traditional system, it is not easy to determine which bank will offer the best percentage and rate. The solution is to consult several banks, sending documentation to all, a time-consuming and laborious process.

3. Impersonality in approval: In some cases, even if someone deposits one hundred units and wants a loan of only twenty, the bank may refuse. In MakerDao, since the loan is made to a public key, it is not necessary to know who is behind the transaction, as the rules are predefined and executed automatically.

4. Bureaucracy: The traditional banking process requires a prior relationship, account opening, document analysis, among others, making it bureaucratic, slow, and consequently expensive. In MakerDao, after depositing the collateral, the user is already entitled to withdraw the DAIs as per the established percentages.

5. Globality: The traditional process varies according to the location of the loan. For example, the rules for a Brazilian citizen seeking a loan in Brazil differ from those applied in Germany or the United States. Public blockchains, like Ethereum, operate globally, without this geographical distinction.

MakerDao offers us the ability to deposit a digital asset (token) and, in return, obtain another, according to a predetermined ratio.

Now, imagine if in the future, that deposited digital asset were a token representing a property? And if instead of generating DAI, we produced a government-supervised token equivalent to traditional currencies (CBDCs)?

If this idea really takes off, and looking at the growing wave of asset tokenization, it seems that we may be on the brink of seeing an explosion in collateral-based loans. These would be processed quickly, conveniently, and transparently, eliminating the need for multiple intermediaries and the costs associated with traditional mortgage loans.

I chose to start with the most complex aspect so that you can grasp the transformative potential of DeFi.

In the case of MakerDao, we have more than just a protocol that facilitates loans. In fact, it is a protocol that, to enable loans, issues a token that seeks parity with the dollar.

There are simpler examples of loans using tokens as collateral, carried out through platforms like Aave or Compound. In these, you simply deposit a token into one of their 'pools', with the right to withdraw another, following rules and percentages established by the protocol. It is worth highlighting that in early 2022, Aave launched Aave Arc, a 'fork' of Aave aimed at the institutional market, addressing issues such as KYC (Know Your Customer), showing that the convergence between these DeFi functionalities and the traditional financial market is underway.

Although collateralized loans – or rather, over-collateralized loans, where the value given as collateral exceeds the value of the loan – are a consolidated reality in DeFi, we still face challenges to enable uncollateralized loans in this environment. The main barrier here is the anonymity of wallets.

Without knowing who is behind them, how can we trust that the money will be returned? How can we ensure that the borrowed token will return with the agreed interest?

The solution to this impasse seems to lie in addressing the identity issue. The concept of Soulbound Token emerges in this sense, as does the Worldcoin initiative, which is backed by Sam Altman, CEO of OpenAI – the company behind ChatGPT.