What Is SALT Blockchain-Based Lending?
Secured Automated Lending Technology (SALT) is an abbreviation for Secured Automated Lending Technology. SALT lending is a platform that allows participants to get a loan by using a digital asset or cryptocurrency as collateral. SALT Blockchain Inc. was created in 2016 by a group of Bitcoin enthusiasts with the goal of providing crypto-backed financing and flexibility to investors who own digital assets.
Cryptocurrencies are traded over a blockchain network, which is a shared ledger or database that records all transactions. SALT blockchain-based lending allows investors to obtain cash without selling their cryptocurrency holdings. Investors have the option of borrowing a percentage of the entire amount held as collateral.
However, the borrower faces risks since bitcoin values might change dramatically. If the value of the digital asset used as collateral falls, the borrower may be required to repay a part of the loan or deposit new crypto assets to secure the loan.
- SALT, or Secured Automated Lending Technology, offers borrowers with loans using cryptocurrencies as collateral.
- SALT lending makes personal and commercial loans available to users who put up blockchainassets as collateral.
- Borrowers may keep control of their blockchain assets while receiving access to cash via SALT loans.
- However, if the cryptocurrency’s price falls, the loan-to-value (LTV)threshold may be breached, resulting in a Collateral Maintenance Call.
- The loan lengths vary from three to twelve months, and the interest rate on all SALT loans is presently 9.99%.
How SALT Blockchain-Based Lending Works
SALT lending makes personal and commercial loans available to users who put up blockchainassets as collateral. Users join the SALT lending network by buying the platform’s cryptocurrency, the SALT token. When a person joins, they may borrow money from a large network of lenders. SALT’s minimum loan size is $5,000, which may be utilized for any purpose, such as debt consolidation or automobile purchase.
SALT is based on the ERC-20 smart contract protocol. Smart contracts are contracts that, in addition to specifying the parameters of the agreement, use cryptographic code to enforce and execute on the terms of the loan agreement. ERC-20 is a standard that all Ethereum token contracts must follow in order to support token exchange.
Borrowers may only utilize cryptocurrency based on blockchain as collateral. In other words, the borrower’s crypto must be registered on a public, permissioned blockchain. The following digital assets may be used as collateral for SALT loans:
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Ether (ETH)
- Litecoin (LTC)
- TruUSD (TUSD)
- USD Coin (USDC)
- Paxos Standard Token (PAX)
- PAX Gold (PXG)
Following loan approval, the borrower transfers collateral to the SALT collateral wallet. In exchange, the loan proceeds are deposited into the borrower’s bank account. The borrower retains ownership of the digital assets held as collateral, which means that any price fluctuations in the assets belong to the borrower.
Throughout the loan’s life, the borrower must make regular, monthly payments to the lender, and after the loan is repaid—a process known as loan completion—the borrower’s collateral is made available for withdrawal.
Requirements for SALT Loan Approval
Because the loan is secured by assets, the lender is not at danger because the crypto assets may be liquidated if the borrower fails to repay the debt—a process known as default. As a consequence, no credit check of the borrower’s credit history is performed.
Furthermore, the loan is not approved based on the borrower’s credit score, which is a numerical indication of a person’s capacity to repay debts on time and in full. Typically, typical bank loans would include pay stubs to demonstrate a source of income as well as a credit check, including a minimum credit score.
SALT loan eligibility is mostly determined by the value of the borrower’s blockchain assets. SALT, on the other hand, verifies each borrower in accordance with Anti Money Laundering (AML) and Know Your Customer (KYC) standards. SALT authorizes the loan enquiry to proceed after a member has been determined to be eligible.
SALT’s Loan-to-Value Ratios
Because the collateral used to secure the loan is a cryptocurrency, the total value of the digital assets may vary as the cryptocurrency’s market price fluctuates over time. In other words, the collateral’s value might fluctuate based on the underlying cryptocurrency’s price.
If the cryptocurrency’s value increases, the borrower may add the higher value of their collateral asset to the loan principle to acquire extra monies from the lender. The borrower may alternatively do nothing and utilize the extra money from the rising worth of the digital assets to pay off the debt gradually.
If the price of the cryptocurrency falls sufficiently, the loan-to-value (LTV) level may be breached, resulting in a Collateral Maintenance Call, which is akin to a margin call. When the lender demands extra cash to be held as collateral to secure the loan, this is referred to as a margin call.
How a Loan-to-Value Ratio Is Calculated
LTV is determined by dividing the loan principal amount by the current US dollar value of the digital currency in the SALT wallet. The initial loan-to-value ratio is determined by the parameters of the first loan arrangement. If a $100,000 loan is secured by $155,000 in bitcoins, the first loan-to-value ratio is 65% ($100,000 / $155,000 =.65). In other words, the loan amount is equivalent to 65% of the value of the bitcoin assets used as security.
As the borrower pays down the loan, the original loan-to-value ratio decreases. However, if the price of bitcoin falls dramatically, the loan-to-value ratio would rise. For example, if the entire value of the collateral fell to $110,000 as a result of a decline in bitcoin, the loan-to-value ratio would rise to 90%.
The borrower would be required to offer more security by depositing an extra quantity of bitcoin or making a payment to lower the existing loan sum. The loan-to-value ratio is managed by a smart contract, which calculates and updates the ratio autonomously during the loan’s life based on changes in the price of the digital asset held as collateral and the borrower’s different payments.
SALT Loan-to-Value Ratios
As of May 2022, the following loan-to-value ratios would result in a margin call on a SALT loan:
- LTV: 75% LTV: 1st LTV alert
- LTV: 83.3% Margin Call for up to 48 hours LTV:
- Stabilization alert: 88% LTV
- LTV: 90.91% LTV stands for Automatic Stabilization.
If the value of the digital asset held as collateral falls below a certain threshold and the loan-to-value ratio hits 90.91%, SALT turns the whole crypto portfolio into a stable currency backed by US dollars, a process known as automatic stabilization. Once the loan-to-value ratio has been decreased to 83.33% or below by making a payment or depositing extra collateral, the borrower may re-enter the market by changing the stable coin back into their original digital currency.
During market downturns, the stabilizing procedure helps to safeguard the value of bitcoin assets held as collateral. Stabilization also gives the borrower time to determine whether they want to return to the market and buy the original digital asset.
Loan Terms, Interest, and Fees
The loan length may vary from three to twelve months, and SALT does not charge an origination fee when the loan is set up. Borrowers are paid interest on the loan, just as they would on any other loan, and the current rate levied across all loan periods is 9.99%. In addition, if stabilization is triggered, SALT may levy a fee of up to 5% of the entire value of the digital assets for conversion.
However, rates and conditions are subject to change and might vary depending on a number of criteria such as loan amount, qualifications, and collateral. Furthermore, no interest is paid on deposited monies kept as collateral.
Benefits of SALT Loans
A SALT borrower is someone who expects the value of their digital assets used as collateral will rise or stay constant over time. Borrowers may keep control of their blockchain assets while receiving access to cash via SALT loans.
If a borrower intends to keep their digital asset for an extended period of time, or if the value of the crypto has grown considerably, a SALT loan allows the borrower to access cash without having to sell their digital assets. As a consequence, the borrower may still profit from any market increases in the digital money that they hold.
Regardless of the new form of collateral, the variables to consider when borrowing money from any sort of firm remain largely same. Anyone thinking about getting a personal loan should first utilize a personal loan calculator to figure out how much they can afford to pay back each month.
How Do Crypto Loans Work?
A cryptocurrency-based loan is made possible by digital collateral. The borrower secures the loan by pledging digital assets (i.e. digital currency), and subsequently gets bitcoin as loan principal. The borrower is then charged interest on the overdue loan balance.
What Is Loan-to-Value?
A crypto loan, like many other loans, must be balanced in terms of loan-to-value term requirements. This implies that if the borrower’s collateral loses value, the borrower may have their loan principle called back.
The loan-to-value ratio is the ratio of the loan amount to the value of the secured collateral. If either the loan or the collateral are in assets with changing value (i.e. non-stable cryptocurrencies), the loan is more likely to have an insufficient loan-to-value figure.
What Are the Risks of Crypto Lending?
Smart contract security failures and custodian security vulnerabilities put cryptocurrency loans at danger. Decentralized finance cyber threats may target lending platforms. Furthermore, bitcoin lending restrictions remain ambiguous.
Historically, cryptocurrency has been a volatile alternative asset. As a result, the borrower faces a risk if they sell or short the borrowed asset only to be compelled to buy back the same cryptocurrency amount at a higher US dollar value. The lender is likewise at risk if a borrower’s collateral in non-stable cryptocurrency loses value.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site.
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