The Market Ear

Sanford Bernstein has a decent write-up on crypto lending, basically concluding that it takes all the bad stuff from traditional lending and then makes it slightly worse.....Bernstein: "The big crypto leverage blowout happened because of off-chain lending. Off-chain lending is somewhat like pawn broking. You go to a physical pawn broker, offer gold as collateral. The lender evaluates the gold for its authenticity & value, offers you a loan amount at a certain loan-tovalue (LTV). In crypto, you offer your Bitcoin to a Crypto prime broker, who offers you a loan on certain LTV. Except, lender has to build in more cushion for Bitcoin's volatility and Bitcoin's authenticity is on the blockchain. However, there are a few things that can go wrong - 1. You can offer an aggressive LTV, not accounting for volatility. 2. You can build in some subjectivity, and say this borrower has a great balance sheet, and they have 1M followers on Twitter, so I might allow them to borrow more than the collateral. Thus, off-chain crypto lending is not very different from traditional lending, the lender has credit criteria and they apply judgement. And the judgement can be wrong and the risk filters are not built for extraordinary circumstances, which happen all too often in crypto frontier tech. Thus, crypto takes all the bad stuff from traditional lending and then makes it slightly worse" (Sanford Bernstein)