How blockchain tech is making an impact in a challenging credit market
Surging interest rates and a challenging economic climate are making it difficult for individuals and businesses to access credit. In emerging markets with a high proportion of unbanked people, such issues are nothing new.
Consumers who lack accounts with a financial institution often struggle to apply for loans at competitive rates — primarily because they lack a credit rating. As a result, wary lenders increase the cost of borrowing to applicants perceived as risky.
It’s a vicious cycle — a chicken-and-egg situation. You need a reputation to access credit, but how can you build an application without a lender taking a chance on you?
Other pain points exist as well. Even self-employed entrepreneurs with access to a bank account can struggle to borrow funds — all because their income may fluctuate from month to month. In some countries, the application process can be arduous, with complicated forms, slow decisions and funds that take days to clear.
Blockchain technology has long been touted as the silver bullet that could change the status quo. It can connect borrowers with lenders, matching both parties based on the terms offered. Transaction details can also be stored and encrypted on an immutable ledger. Now, anyone with a crypto wallet has the opportunity to cultivate a reputation as a responsible consumer, with unprecedented levels of transparency making auditing a breeze.
However, there are hurdles to overcome if blockchain-based lending is to achieve mainstream status. For one, DeFi protocols often require loans to be overcollateralized. This means that borrowing 500 DAI could require putting up $750 of collateral in a different cryptocurrency. While this is an understandable side effect when it comes to volatile
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