Loans as the Engine of Development and Their Inner Workings

Few things in the world are hated as much as loans are. But without loansharks, mortgages, and credit, the economy is devoid of development prospects.

Living within your means is great advice when it comes to individual spending. But on the scale of the global economy, lending is a vital phenomenon. Loans, much like lubricants, allow the gears of our economy to spin faster. 

To understand why lending is so necessary for modern society, let’s take a look at how loans work.

Looking at Loans in Layman’s Terms

In a very watered-down way, loans are borrowed money, for the use of which, the one who took them pays the one from whom they were taken. For example, you could borrow $1,000 from a neighbor, and then return $1,050, with 0.05% interest. However, it’s much easier to take money from a bank, which acts as a kind of intermediary between those who have excess money and those who are in need of it. The bank accepts money for safekeeping from the former and lends it to the latter. According to this scheme, the risk that the borrower will not be able to repay the loan fall on the shoulders of the bank. For taking on this risk, the bank profits on the interest of payments. 

The level of the loan’s interest rate may vary from bank to bank and will depend on the term of the loan, the reliability of the borrower, the purposes for which he or she takes the loan, and so on. Thus, the rate on consumer loans (for example, for the purchase of household goods or services) is traditionally higher than the rate for a mortgage issued for the purchase of a house.

The benchmark for the interest rate is the so-called key rate, which is determined by the central bank of the country – the main regulator of monetary policy in a particular state.

Central banks are responsible for issuing money – roughly speaking, they decide how much money needs to be printed to keep the state’s economy running smoothly. Only then can this money enter the financial system. 

The funds that commercial banks receive from the Central Bank are not given to them for free. As borrowers, they are also obliged to pay. This is the base rate — the minimum interest at which commercial banks borrow from the central bank.

The Tasks of Lending

Lending is a convenient tool for both ordinary consumers and businesses. The simplicity and convenience of consumer loans and mortgages don’t require explanations; you can buy a desired or required product right now and use it, gradually paying back its cost to the bank plus interest. Without loans, most entrepreneurs wouldn’t be able to get their feet off the ground, because initial capital is needed to start any endeavor. For instance, when purchasing equipment, renting production sites, ordering components, and hiring workers. Indeed, it was thanks to loans that companies such as Uber, Airbnb, Amazon, and others were able to appear in the world, whose business models were aimed at rapid expansion in the early years, without the generation of profits. 

With the help of loans, central banks exercise control over the country’s economy – either by restraining inflation or through the prevention of deflation. For example, when there’s a high inflation rate, that is, there is an imbalance between the money in circulation and the number of goods, central banks raise the base rates, making loans less affordable. This slows down consumer activity, and the rate of inflation is decreasing. Regulators act in a similar way during deflationary periods; when consumer activity is low, sales volumes decrease, and businesses receive less revenue. To stimulate consumer activity, the Central Bank reduces the base rate, making loans more affordable, feeding aggregate demand in the process.

Inflation and the Unavailability of Loans

At the moment, the world has entered a period of increased inflation. Consumer prices in the world’s largest economy, the United States, are growing at a rapid pace – more than 7% year on year. This was preceded by a period of active injection of money into the economy throughout the pandemic. Then, in 2020-2021, a program of economic incentives was launched in the United States; the regulator turned on the ‘printing press’, so to speak, to print more money and feed it into circulation, preventing a sharp drop in consumer activity. Such steps, which are often taken in stressful situations, inevitably lead to an increase in inflation. 

In 2022, the US Federal Reserve plans at least three increases in the base rate, which means that loans will become more expensive for borrowers. Of course, this will slow down the growth of consumer prices. But there is a downside to such a solution – loans will become more inaccessible and more expensive, which will slow down the creation of new businesses. A similar situation can be observed in other countries, such as Great Britain, Germany, and China. Aggravating the situation is the fact that the world economy has not yet recovered from the effects of the Covid-19 pandemic.

Crypto Lending as a Solution

One of the tools designed to maintain the availability of loans and at the same time ensure a high level of income on deposits is crypto lending. This is a new method that has appeared in recent years thanks to an increased prevalence in cryptocurrencies. 

Crypto lending can be schematically represented in the following way – owners of crypto assets, for example, bitcoin, place their coins on smart contracts and receive income for depositing them, while other users take coins on credit, paying the loan back with added interest. What sets this apart from bank deposits is the absence of intermediaries, such as banks, financial organizations, and regulators, such as the Central Bank.

Let’s take a closer look at the differences between crypto loans and traditional bank loans in order to understand why this direction has been developing rapidly in the last two years:

All operations are carried out through the interface of a special platform, which, unlike banks, is not a participant in the lending process, but simply provides a technical opportunity to perform operations. Control over assets, even after they are placed on a smart contract, remains in the hands of their owner. 

Crypto Lending – Step-by-Step Instructions

Let’s take a look at how crypto lending works. As an example, we chose BaksDAO; it has a simple and user-friendly interface with a functionality that fully meets all the needs of both beginners and professionals. 

To get a loan secured by cryptocurrency, the user must:

•     Register an account on the BaksDAO platform;
•      Connect a crypto wallet, for example, MetaMask;
•         Deposit cryptocurrency with the BaksDAO interest accrual function. The system supports VTB, ETH, BNB, WBNB, BAKS, and USDT. The platform locks the user’s cryptocurrency on a smart contract;
• Get a loan at 11% via the BaksDAO in BAKS stablecoins, the exchange rate of which is pegged to the US dollar in a ratio of 1:1;
• In addition to the 11%, the borrower pays a one-time commission fee of 1.5% of the loan amount. These funds are used to pay for the deployment of smart contracts in the blockchain network and the work of the platform’s technical support team. 

The amount of the loan depends on the collateral coin: the more stable the cryptocurrency, the higher the loan amount may be. For example, if a user provides $1,000 in bitcoins or Ethereum as collateral, then he will be able to receive $650 in BAKS stablecoins, or 65% of the amount of the collateral. 

Loans are issued in perpetuity, and unlike bank loans, they can be repaid at any time – in a day, in a month, or in 10 years, all without penalties for premature closure.

As soon as the borrower returns the loan in full, his coins are immediately unlocked in the smart contract. If the coins placed in the smart contract as collateral become cheaper, and the loan-to-collateral ratio exceeds the acceptable level, then the borrower receives a notification – either to increase the collateral or to reduce the loan amount.

The Future of Crypto Lending

Why hasn’t crypto lending become a mass phenomenon yet? There are several reasons for this. The main ones still relate to the widespread unfamiliarity of a variety of consumers with cryptocurrencies and the lack of convenient, truly user-friendly applications for crypto loans on the market. 

Users justifiably fear for the safety of their funds deposited as collateral. After all, no bank guarantees apply to such instruments. This is, indeed, a two-sided token; it doesn’t just place the control in the hands of the consumer but also relocates the responsibility accordingly.

Therefore, for a long time, crypto lending was only available to a small ground of investors, already familiar with cryptocurrencies. 

But in the last year, developers have managed to make a breakthrough in this area and create tools available even to inexperienced crypto investors. Such platforms, which provide access to crypto-lending services, have not only become more convenient and easier to use but have also significantly strengthened their security systems. Thus, the BaksDAO platform, using the example of which we examined the lending mechanism, has passed an independent technical audit, which has confirmed its reliability with a high level of cybersecurity in place.  

Loans are necessary to maintain the pace of economic growth, and crypto lending, made possible by the launch of platforms such as BaksDAO, can help maintain the availability of loans even in conditions of high inflation and increased interest rates.

Disclaimer: This is a sponsored press release, and is for informational purposes only. It does not reflect the views of Crypto Daily, nor is it intended to be used as legal, tax, investment, or financial advice