Boom or Bust? The Wild World of Crypto Lending
2020-09-01
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1It sounds like a bet you cannot lose.
2You lend money to a borrower who provides collateral of higher value than the loan, and then you earn interest of about 20 percent.
3What could possibly go wrong?
4That is the idea behind "DeFi," or decentralized finance.
5These are cryptocurrency platforms that let one person, a lender, deal directly with another, a borrower, without involving banks.
6DeFi has grown a lot during the COVID-19 health crisis.
7Loans on such platforms have risen more than 600 percent since March to $3.7 billion, says DeFi Pulse, an industry website.
8It says investors are seeking higher returns since central banks have cut interest rates to support economies hurt by the COVID-19 coronavirus.
9The DeFi platforms operate on free code services.
10They use information systems that process interest rates in real-time based on supply and demand.
11Some industry experts say the ease and effectiveness of these platforms are the future of borrowing and lending.
12But others warn that DeFi operations carry high risks.
13Lawyers and observers say the websites can have weak security that leaves them open to computer system problems and attacks.
14They also say most platforms are untested and operate without any governmental supervision.
15As a result, they offer few if any legal protections to users.
16In 2017, investors put billions of dollars into ICOs, or initial coin offerings, a way to buy cryptocurrency.
17Many crypto companies raised money by making new "virtual" coins.
18But most of the companies failed to get enough investors and those that did invest lost a lot of money.
19"These are experiments in finance," said Preston Byrne of the law office Anderson Kill in New York.
20He added that most of the projects are not truly legal, but may become legal in the future.
21However, DeFi continues to grow in popularity.
22Seven years ago, Brice Berdah made plans to retire in his mid-30s through traditional investment methods.
23He knew he would need to save 1.7 million euros.
24"My plan was to make 5 percent on my capital," he said.
25But low interest rates do not permit such a rate of return.
26"By 27, I had only saved only about 0.5 percent of the required amount," said Berdah.
27He works at a new company that makes online storage centers for digital coins.
28"It was an obvious failure."
29To restore his dream Berdah has turned to DeFi.
30He has changed his retirement plans again.
31Berdah has bet 90 percent of his money on DeFi.
32"Returns are about 20-25 percent over the last six months ... and I'm on track just now," he said.
33DeFi is rooted in an industry hostile to traditional financing.
34But some of DeFi's aims, like lower business costs, have caught the attention of traditional financing companies.
35For their part, major banks are looking at how the new technologies can be used with traditional finance processes.
36Goldman Sachs, for example, appointed a new chief of digital assets to look at how it can exist on blockchain technology, a spokesman said earlier this year.
37There is "an actual value" on what is being built on these websites, said Maya Zehavi.
38She is a blockchain expert and board member of an Israeli blockchain industry group.
39Most DeFi platforms are based on the ethereum blockchain.
40It is the second largest cryptocurrency after bitcoin.
41Loans are recorded, the money is released and controlled by contracts.
42Borrowers must often sign collateral, also in cryptocurrency, usually worth more than the loans they take out.
43DeFi is not for those easily frightened.
44One such borrower is Antoine Mouran, a computer science student at university in Lausanne, Switzerland.
45"My portfolio is a couple of thousand dollars," the 18-year-old told Reuters news agency.
46She added "I trade for fun, to discover new technologies, such as decentralized finance."
47I'm Susan Shand.
1It sounds like a bet you cannot lose. You lend money to a borrower who provides collateral of higher value than the loan, and then you earn interest of about 20 percent. What could possibly go wrong? 2That is the idea behind "DeFi," or decentralized finance. These are cryptocurrency platforms that let one person, a lender, deal directly with another, a borrower, without involving banks. 3DeFi has grown a lot during the COVID-19 health crisis. 4Loans on such platforms have risen more than 600 percent since March to $3.7 billion, says DeFi Pulse, an industry website. It says investors are seeking higher returns since central banks have cut interest rates to support economies hurt by the COVID-19 coronavirus. 5The DeFi platforms operate on free code services. They use information systems that process interest rates in real-time based on supply and demand. Some industry experts say the ease and effectiveness of these platforms are the future of borrowing and lending. 6But others warn that DeFi operations carry high risks. 7Lawyers and observers say the websites can have weak security that leaves them open to computer system problems and attacks. They also say most platforms are untested and operate without any governmental supervision. As a result, they offer few if any legal protections to users. 8In 2017, investors put billions of dollars into ICOs, or initial coin offerings, a way to buy cryptocurrency. Many crypto companies raised money by making new "virtual" coins. But most of the companies failed to get enough investors and those that did invest lost a lot of money. 9"These are experiments in finance," said Preston Byrne of the law office Anderson Kill in New York. He added that most of the projects are not truly legal, but may become legal in the future. 10However, DeFi continues to grow in popularity. 11Seven years ago, Brice Berdah made plans to retire in his mid-30s through traditional investment methods. He knew he would need to save 1.7 million euros. 12"My plan was to make 5 percent on my capital," he said. 13But low interest rates do not permit such a rate of return. 14"By 27, I had only saved only about 0.5 percent of the required amount," said Berdah. He works at a new company that makes online storage centers for digital coins. "It was an obvious failure." 15To restore his dream Berdah has turned to DeFi. He has changed his retirement plans again. 16Berdah has bet 90 percent of his money on DeFi. "Returns are about 20-25 percent over the last six months ... and I'm on track just now," he said. 17DeFi is rooted in an industry hostile to traditional financing. But some of DeFi's aims, like lower business costs, have caught the attention of traditional financing companies. 18For their part, major banks are looking at how the new technologies can be used with traditional finance processes. Goldman Sachs, for example, appointed a new chief of digital assets to look at how it can exist on blockchain technology, a spokesman said earlier this year. 19There is "an actual value" on what is being built on these websites, said Maya Zehavi. She is a blockchain expert and board member of an Israeli blockchain industry group. 20Most DeFi platforms are based on the ethereum blockchain. It is the second largest cryptocurrency after bitcoin. 21Loans are recorded, the money is released and controlled by contracts. Borrowers must often sign collateral, also in cryptocurrency, usually worth more than the loans they take out. 22DeFi is not for those easily frightened. 23One such borrower is Antoine Mouran, a computer science student at university in Lausanne, Switzerland. 24"My portfolio is a couple of thousand dollars," the 18-year-old told Reuters news agency. She added "I trade for fun, to discover new technologies, such as decentralized finance." 25I'm Susan Shand. 26The Reuters News Agency reported this story. Susan Shand adapted it for Learning English. George Grow was the editor. 27collateral - n. the security for a loan 28cryptocurrency - n. money that exists only on the internet 29platform - n. a website, twitter or another specific site on the internet 30code - n. the organization of the information of ones and zeroes that make up the software that controls the development of websites and other content 31virtual - adj. not real, existing on the internet only 32capital - n. the money one has to invest 33digital - n. made up of ones and zeroes on the internet 34blockchain - n. a technology that protects money by combining thousands of websites 35ethereum - adj. a specific type of cryptocurrency 36portfolio - n. the list of places where one invests one's money