The lending problem

[paxmao]

A simple question to the forum - I hope that people can provide sensible answers, since it would be way too easy to preach rather than to reason.

It has been mentioned many times in the forum that banks can be killed by bitcoin and that crypto is a threat for central banks, etc... One of the reasons that make me doubt about that possibility is the worldwide need of having a strong lending and borrowing system. I think that currently DeFi does not offer a realistic solution and that lending eventually has to rely on an intermediary. That, in some way or under a different name, is a bank.

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

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[20kevin20]

I'm not the best guy when it comes to knowledge about lending and stuff, but I am quite sure that the "BTC is a threat to central banks" argument has been mostly based so far on the fact that Bitcoin lets you work with finance without discriminating you and that it provides a store of value no fiat in the world ever has.

Bitcoin will probably never fully replace banks, but it did, does and will affect them severely as time goes on unless banks move faster with their CBDCs. And considering we've first had just a tech geek's currency that now turned into one of the biggest store of value in history, a proper blockchain-based lending system might not be that far-fetched after all.

[jackg]

A decentralised system might be a more indiscriminate one.

If we assume the past of what happened, people owned land/property and it was let to them or sold via a mortgage. A lender might know you, ask someone who does to provide a reference or rely on you having a good character (eg having a job and being fairly smartly/cleanly dressed) before lending to you. This is still what happens in a lot of jobs these days where someone on a team assesses applicants to see how well they get on with them.

Currently a lot of systems just use computers to work out whether they can lend to someone and it causes a lot of imbalance - I think this happened to an extent that countries have started passing laws against algorithms making the final decisions on you though. I don't think going back to how things were is necessarily a good idea but it may emerge as a competitor of the current system. I highly doubt you can expect a fully digital contract to be allowed for the value of something like a house, but a witnessed physical contract (referenced and stored online) might still be effective.

[VictorProsh]

A simple question to the forum - I hope that people can provide sensible answers, since it would be way too easy to preach rather than to reason.

It has been mentioned many times in the forum that banks can be killed by bitcoin and that crypto is a threat for central banks, etc... One of the reasons that make me doubt about that possibility is the worldwide need of having a strong lending and borrowing system. I think that currently DeFi does not offer a realistic solution and that lending eventually has to rely on an intermediary. That, in some way or under a different name, is a bank.

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

You are right to doubt that the crypto currency will not kill banks. Banks will work with cryptocurrency and lend against its collateral when it becomes profitable and safe. In the next branch, I'm just leading this topic.

https://bitcointalk.org/index.php?topic=5344645.0

[Findingnemo]

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

Lending, this is never going to be completely decentralized and bitcoin is not actually created to kill the central banks nor to bring the decentralized lending system it is just to eliminate the third party to send your own money to someone so concept of lending is not actually under the bitcoin.

But due to the evolution lot of projects are coming up with different ideas and one of them is DeFi which created hyped but didn't made any changes in the real world usage.

[VictorProsh]

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

Lending, this is never going to be completely decentralized and bitcoin is not actually created to kill the central banks nor to bring the decentralized lending system it is just to eliminate the third party to send your own money to someone so concept of lending is not actually under the bitcoin.

But due to the evolution lot of projects are coming up with different ideas and one of them is DeFi which created hyped but didn't made any changes in the real world usage.

You are right, DeFi is a dead-end direction that copies the existing monetary system. But you are wrong when you say: "Lending will never be completely decentralized," it will be very soon and without a third party.

[fiulpro]

A simple question to the forum - I hope that people can provide sensible answers, since it would be way too easy to preach rather than to reason.

It has been mentioned many times in the forum that banks can be killed by bitcoin and that crypto is a threat for central banks, etc... One of the reasons that make me doubt about that possibility is the worldwide need of having a strong lending and borrowing system. I think that currently DeFi does not offer a realistic solution and that lending eventually has to rely on an intermediary. That, in some way or under a different name, is a bank.

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

Addressing the question regarding: Lending
The reason we do need third parties are because of the lack of *trust*, which is honestly right, you cannot just expect people to give the money back if they are not monitored and that is the whole point of the administration.
We can for sure come up with something where there can be organized documents being generated by both parties and where they would have to submit their real passport or something. That can only be accessible to two of them and if they do choose to not give money then it should be acceptable by the government as well.

[Wexnident]

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

I don't think it's possible? The most plausible reason I actually agree with crypto replacing banks is because of its decentralized and transparent nature, which forces everyone to actually be their own bank, which I disagree btw, it'd be coexistent at most, since if people are looking for a decentralized option, there would also be people who would look for a more convenient method, of which centralized is probably the better option than decentralized. I don't think it'd be possible for a lending system to be fully decentralized, unless there's a breakthrough in the way the lending system works.

[bitterguy28]

I see no problem if there is always collateral in every borrowed funds? but the problem is the assessment of value f each collateral and also the decentralization and anonymity .

because banks will never let go of this meaning we will live forever in banking system if this problem cannot be resolved properly, unless we will use centralized exchange in which also not loved by many here.

[VictorProsh]

I see no problem if there is always collateral in every borrowed funds? but the problem is the assessment of value f each collateral and also the decentralization and anonymity .

because banks will never let go of this meaning we will live forever in banking system if this problem cannot be resolved properly, unless we will use centralized exchange in which also not loved by many here.

Absolutely, it is true, any loan must have a collateral and this excludes a third party and banks will inevitably come to a cryptocurrency in which all transactions are transparent.

[TheUltraElite]

I think that currently DeFi does not offer a realistic solution and that lending eventually has to rely on an intermediary. That, in some way or under a different name, is a bank.

DeFi Lending pools do exist and privately run p2p lenders also exist. Of course we have our own Lending section in this forum to use as prototype example of how lending can be done in the context of cryptocurrency.

However, the fact still remains for collateral and trust. These things are lacking in crypto. Collateral specially valid ones are limited in crypto while in fiat markets, a lot more options are there.

Trust is highly lacking in this sector too added to it the anonymity or pseudoanonimity provided by crypto makes lenders even more careful about lending out their precious coins.

My take on this is that banks cannot replace crypto and neither can crypto replace banks - they are meant to work together and that is what most institutional banks are trying to do with their own take on blockchain development.

[VictorProsh]

I think that currently DeFi does not offer a realistic solution and that lending eventually has to rely on an intermediary. That, in some way or under a different name, is a bank.

DeFi Lending pools do exist and privately run p2p lenders also exist. Of course we have our own Lending section in this forum to use as prototype example of how lending can be done in the context of cryptocurrency.

However, the fact still remains for collateral and trust. These things are lacking in crypto. Collateral specially valid ones are limited in crypto while in fiat markets, a lot more options are there.

Trust is highly lacking in this sector too added to it the anonymity or pseudoanonimity provided by crypto makes lenders even more careful about lending out their precious coins.

My take on this is that banks cannot replace crypto and neither can crypto replace banks - they are meant to work together and that is what most institutional banks are trying to do with their own take on blockchain development.

And what are the limits of collateral in cryptocurrency, how do they differ from Fiat?

[Jawhead999]

I see no problem if there is always collateral in every borrowed funds? but the problem is the assessment of value f each collateral and also the decentralization and anonymity .

That's what OP mean isn't?
All of the lending platform exist until now is they holding the collateral itself (e.g. Blockfi) or even those self pro claimed decentralized finance is also centralized, you can see how their lending work that need a third party of DEFI platform [1] don't forget too about DEFI Hacks history [2]

The truly decentralized lending is possible to create with peer to peer mechanism, the borrower send the collateral to lender and the lender send the money to borrower. But, it will face some problem of collateral scam (a scammer which selling the collateral to earn profit), which party is sending first, lack of liquidity, etc. There's also a problem if the borrower want to get quick loan, he need to provide specific collateral (e.g. Bitcoin or top 3 altcoins) if he only have precious metal he need to wait few days until his collateral delivered. Escrow will only solve the collateral scammer, but the liquidity and shipping times still a problem which almost impossible to become worldwide lending.

[1] https://medium.com/@blockchain_simplified/defi-based-crypto-loans-explained-85e40cd485c9
[2] https://bitcointalk.org/index.php?topic=5267124.0

[The Sceptical Chymist]

OP, I'm also not that familiar with DeFi, but I know how lending works and know what a pain in the ass it is when you're combining crypto and lending.  The way I see it is that you ultimately need a way to either force the borrower to repay the loan or put up sufficient collateral in the event that they don't.  I'm pretty sure DeFi hasn't found a solution to the repayment solution, but if it's come up with a way to deal with collateral (without a 3rd party handling it), then I'd say the problem is solved--but I'm pretty sure that isn't the case.

Think about all the mob movies you've seen where a debtor gets his legs broken when he's late on a gambling loan.  That's how tough it is to get someone who can't or won't pay you back (because mobs work--or used to work--that way), and in those cases the identity of the borrower is known.  With crypto and the inherent anonymity, it makes the problem much more difficult, and I seriously doubt there's going to be a way to lend funds efficiently without having a 3rd party involved and still allowing people to maintain their anonymity.

I'd also be interested to know if any of these problems have been solved by DeFi or any other system.

[VictorProsh]

OP, I'm also not that familiar with DeFi, but I know how lending works and know what a pain in the ass it is when you're combining crypto and lending.  The way I see it is that you ultimately need a way to either force the borrower to repay the loan or put up sufficient collateral in the event that they don't.  I'm pretty sure DeFi hasn't found a solution to the repayment solution, but if it's come up with a way to deal with collateral (without a 3rd party handling it), then I'd say the problem is solved--but I'm pretty sure that isn't the case.

Think about all the mob movies you've seen where a debtor gets his legs broken when he's late on a gambling loan.  That's how tough it is to get someone who can't or won't pay you back (because mobs work--or used to work--that way), and in those cases the identity of the borrower is known.  With crypto and the inherent anonymity, it makes the problem much more difficult, and I seriously doubt there's going to be a way to lend funds efficiently without having a 3rd party involved and still allowing people to maintain their anonymity.

I'd also be interested to know if any of these problems have been solved by DeFi or any other system.

No, the problem of lending is not solved in DeFi, unlike it, I have found a way to lend if you carefully get acquainted with my project, you will see that this is possible.
http://prosh.info/smart_eng.html
https://bitcointalk.org/index.php?topic=5264440.0

[NeuroticFish]

One of the reasons that make me doubt about that possibility is the worldwide need of having a strong lending and borrowing system.

While crypto is a great alternative to banks for quick worldwide money transfer, there are plenty of fields the banks still stand solid.


A centralized institution can very easily lend Bitcoin and ask back the same amount of bitcoin plus interest if that institution already has actives/investment in bitcoin. When Bitcoin will become reserve asset for banks, it wouldn't be that strange to have banks lend bitcoin. It's just money after all. Of course, they'll still prefer fiat since with fiat they can do fractional reserve banking.
An exchange has now reserves for that and could start [now] lending, but probably the paperwork involved makes it less compelling as a business, especially as the trade fees are quite a good income already.

But the question to start with may be different. Would you borrow bitcoin, which has a good chance to rise and make you pay back much more, or you'll just borrow fiat, which is inflationary hence it will be much easier to pay it back? Should we really bother thinking that deep into large scale lending in bitcoin?

[Reid]

Sounds like it will always end up with how much "trust" is and the banking industry can provide that with money already in their hands that can be paid slowly to the lender.
Third parties, this is why interest is growing when there is more than that.
But I do believe cryptocurrencies cannot overtake that industry. It's just the combined power that will make it better.
Both have their strengths in different services and if only banks will try to adopt it. Humans will still be in control and cryptocurrencies are just tools that need to be used.

[davis196]

I think that most of the Bitcoin/cryptocurrency supporters are coming from the assumption that "banks are bad by default",which isn't always the case.Some banks provide better customer service than others.
Nobody said that Bitcoin is going to replace the banking system,in terms of lending and borrowing.
Bitcoin is supposed to replace the banking system is terms of where to store your money and how to be more financially independent.
Buying and HODLing BTC is way more profitable than having a bank deposit.
The second idea is that Bitcoin is better than central banks,because no human or entity is controlling the supply of Bitcoins.I agree with that statement,but that doesn't mean that Bitcoin is ever going to replace central banks.

[Betwrong]

I think that currently DeFi does not offer a realistic solution and that lending eventually has to rely on an intermediary. That, in some way or under a different name, is a bank.

DeFi Lending pools do exist and privately run p2p lenders also exist. Of course we have our own Lending section in this forum to use as prototype example of how lending can be done in the context of cryptocurrency.

However, the fact still remains for collateral and trust. These things are lacking in crypto. Collateral specially valid ones are limited in crypto while in fiat markets, a lot more options are there.

Trust is highly lacking in this sector too added to it the anonymity or pseudoanonimity provided by crypto makes lenders even more careful about lending out their precious coins.

My take on this is that banks cannot replace crypto and neither can crypto replace banks - they are meant to work together and that is what most institutional banks are trying to do with their own take on blockchain development.

I absolutely agree with this and I don't think Bitcoin can replace banks in the foreseeable future. Why I'm not saying "ever" is because maybe a completely new economic system will be invented in the future, and in that system maybe Bitcoin will replace banks, but with the current system we can't live without banks, and I personally can't imagine this new system yet.

[hatshepsut93]

How is this problem addressed currently and how could it be solved at large scale without a "bank" of shorts?

There is no problem because human society will always operate on trust and server/client relationship. You can't turn everything into a decentralized network and doing so is often counterproductive. Bitcoin works by having every node store all transactions ever made, so its capacity is very limited. Torrenting networks suffer from the problem where rarely-accessed files can't be downloaded until someone who has them decides to seed them. Point is, decentralized is not automatically better.

The idea that everything should be decentralized is just a hype created by crypto bros who sell shitcoins and "blockchain technology".