A world where any eBay shop can within 5 minutes receive $800 in their bank account as a loan from 30 random people on the internet. No transfer fees and instantaneous funds transfer. A world where if the shop does not pay back the loan their warehouse locks stop opening for them and their cell phone stops working. This can be achieved with Bitcoin lending using Ethereum smart contracts combined with the internet of things. This may be reality within 2 years.
Bitbond is a Peer-to-Peer lender for Small and Medium Businesses (SMBs). They have originated to date $360,000 in 1100 loans at 20–23% per annum interest. By average 30 people from the US or Western Europe finance each loan . The borrowers are SMBs from all over the world, from Philippines to Brazil, via India and including US and Western Europe. Nearly all their loans are denominated in USD. Bitbond does the underwriting and fixes the loan interest. As a result, the yields end up in the 6–8% range. Subsequently, they are improving fast as Bitbond gathers more data and their systems improve.
What made it possible
2 things made this system possible:
- Usage of bitcoin (BTC) as a remittance method.
- Usage of their in-house developed underwriting taking as input the cash flow of eBay , Amazon, Paypal and other similar accounts.
Without Bitcoin this business would not be possible. The average wire flat fee is at least 5 EURO and funding $800 from 30 lenders would cost $150 just in monthly transfer fees. The large majority of Bitbond’s customers have never used Bitcoin. It is their 1st contact with this remittance solution.
This allows people with Bitcoin to earn yields of 6–8% on their money. Bitcoin is just a tool in this case. The large majority of lenders and borrowers start in their local currency. Afterwards, they convert to Bitcoin for about 0.2–0.3% in fees. They use Kraken , Gatecoin or other similar exchanges.
Then the borrower has the choice of spending the money in Bitcoin with one of the 100,000 online eCommerce merchants who accept Bitcoin. The other way is to translate it back into local currency at the same exchange for the same fee. That reduces yield or increases cost by 0.3%. However this cost is insignificant in comparison to credit card fees or other money transfer solutions fees. Through this process neither the lender nor the borrower, by using a USD denominated loan, have any significant exposure to the BTC exchange rates. They are notoriously volatile. The only exposure they have is for a few minutes until they operate the exchange.
While this is just the present the future is quite interesting.
The future of smart contracts
Many may be aware of the internet of things: everyday objects are going to be controlled and accessible via the internet. Kickstarter campaigns have already taken place for Smartphone controlled door locks, lights… Nest is already a very successful company. For example, it allows you to control your home heating system with your Smart phone. Now imagine you do not pay your gas bill. Will the gas company be able to turn off your Nest so that you can’t heat your house anymore? Obviously rules and regulations are needed in this space as within many other places.
Fewer readers may be familiar with Ethereum and smart contracts. According to Wikipedia “Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause.” In other words, like for Bitcoin, a smart contract allows, for example, to automatically debit monthly your wallet for your Bitcoin loan payments. One popular implementation of smart contracts is with a new technology that appears to be more efficient then Bitcoin called Ethereum.
Bitbond is already looking into using Ethereum smart contracts. Therefore, their technology is more efficient, faster and more scalable then the traditional Bitcoin blockchain.
Now imagine combining these 2 innovations: the Internet of Things ( IoT) and Smart contract (or blockchain contracts). So, consequently, this may allow lenders to offer collaterized Bitcoin loans with automatic collections. And it will all be in the (smart) contract !
What is needed next? Probably more regulation. However, Bitcoin and taxation of Bitcoin transactions show that regulation of self-organized networks of anonymous computers may be challenging.
Author : George Alex Popescu