Recently, the news that Ant group’s IPO had been delayed due to regulatory issues attracted widespread attention, meanwhile, its founder Jack Ma made a speech, which also caused a very big controversy.
One of his views is that the main idea of the bank credit business is still the pawnshop model. But I don’t think there is anything wrong with the pawnshop model in the credit business. This model has been tested for a long time by human economic activities and has proved to be an effective one. However, there are significant improvements to this model. And the advent of blockchain technology, crypto digital currencies and assets offers an opportunity to improve on this. The DeFi credit mode currently running in the cryptocurrency space is actually an unmanned, auto-running pawnshop mode.
Pawnshops are still common. They are often seen in many places, even in a financially developed country like the United States. Meanwhile, there are still people who take their assets to pawnshops to get funds when they are short of funds. In the credit business of the financial industry, when a borrower needs a loan, he needs to pledge his assets to the lender. Then the lender evaluates the value of the assets pledged and lends the money to the borrower at a discount to that value. If the borrower is unable to complete the loan within the agreed time, the lender sells the pledged assets to avoid losses.
In the operation process of this pawnshop model, there will be many problems in the actual operation process. These include the trustworthiness of the underlying asset, whether the underlying asset is authentic as the borrower says, whether the value of the asset is what the borrower claims, whether the asset has been mortgaged, and so on. In addition, whether the asset value will fluctuate significantly during the mortgage period or during the subsequent sale period; When a mortgage asset is sold, whether it can be sold in time at a predetermined price are all the issues that must be considered by the lender. When any of these problems go wrong, lenders are likely to be unable to cover their own risks, potentially leading to large losses. So even in everyday pawnshop-based credit, the risk is still very high.
Outside the pawnshop business model, the credit model based entirely on the borrower’s credit and without collateral required cannot be systematically promoted in all application scenarios.
However, with the advent of blockchain technology, cryptocurrency and crypto digital assets, this pawnshop credit model can be systematically deployed on a global scale. The credit DeFi model currently in operation is based on that model, which forms a loan relationship between the borrower and the lender and guarantees the interest of the lender.
In simple terms, the DeFi pattern forms a lending relationship between a borrower and a lender by means of smart contracts. The borrower has to pledge a digital asset that is accepted by the lender. The lender then lends a particular digital currency to the borrower on the terms of the loan specified in the smart contracts.
Under normal circumstances, the borrower returns the interest and principal to the lender through a smart contract under pre-agreed conditions. When the smart contract determines that the principal and interest have been paid off in full, it automatically releases the pledge and automatically returns the digital assets to the borrower. If the borrower fails to repay the principal and interest on previously agreed terms, the smart contract automatically sells the pledged digital asset and returns the proceeds to the lender.
Such a digital asset lending process based on the pawnshop model does not require any human involvement, is completely executed automatically on the blockchain. But it ensures that the credit process goes smoothly and the lender doesn’t lose money on the assets.
In addition, in such a credit DeFi model, lenders and borrowers do not need to know each other at all. The smooth completion of the credit process is guaranteed by the pledged digital assets and smart contracts. Therefore, such a credit process is highly scalable and can be completed between any two traders on a global scale.
Compared with the current credit process, the digital financial credit process on the blockchain has the following advantages.
l Blockchain technology ensures the uniqueness of digital assets. Its ownership is tied only to the wallet address of the digital asset.
l Digital assets can be transacted across the web, and their value is determined by the market. Therefore, the authenticity of its ownership and value is guaranteed.
l The operation of digital assets can only be done through smart contracts, so there is no possibility of duplicate mortgages.
l If the lender needs to dispose of the pledged assets, there is sufficient liquidity in the market to ensure that the pledged digital assets can be sold in a timely manner.
These features of digital assets have obvious advantages over the current credit operation process. Crucially, because the information is open and transparent on-chain and the credit process is automated through smart contracts, the lending process is in effect an unmanned pawnshop. In such a process, the application of new technologies and mainstream credit forms a perfect combination.
Of course, the current DeFi mode of operation is still in the field of cryptocurrency, and there is no direct application based on fiat and real assets. But at this stage of development, tokenization of money and assets is emerging.
In the U.S. market, for example, there are already compliant, dollar-based digital stable coins such as USDC, PAX, and GUSD. In the US market, physical assets and equity are emerging in digital form. One area of development is the digitization of real estate.
The trend, though slow, is clear. On the basis of the blockchain support, according to the pawnshop business model, using DeFi mode, based on digital assets for digital currency lending, must be the main lending model in the future.
Article from Gu Yanxi, Founder of Liyan Consulting
Translated by Yang(Mengyan Finance)