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We had the opportunity to sit down with Dan Schatt, the co-founder and President of Libra Credit. We dived deep into the role of credit in society and how structures for lending are slowly emerging in the crypto economy.
How does credit emerge in a new, unstable asset class? How can lenders collateralize assets prone to 50% swings in value? How can we bridge the gap between traditional financial markets and crypto? These are the questions Libra Credit sets out to answer with their decentralized lending platform for crypto-to-crypto and crypto-to-fiat borrowing.
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Credit is at the heart of any financial system. Let’s start by going deep. What is the role of credit within an economy?
There’s like fifty trillion dollars of lending happening around the world. The saying that money makes the world go round is really true when it comes to credit. You can’t buy a house, a car, your education, without credit. Things that we rely on day to day. Companies use credit to transact with each other, so if you don’t have a good functioning credit market, most economies slow to a standstill.
The challenge now is that you have a new burgeoning asset class coming on the scene in crypto, and there are countries where nearly 20% of the citizenry own some type of crypto-asset. Yet, no nation or institution recognizes crypto as a secure asset class that can be lent against.
The beauty of crypto is that you can go anywhere in the world and a Bitcoin is a Bitcoin, and you should be able to borrow against it, anywhere in the world.
Crypto-assets are still struggling to fashion themselves as a new asset class. Why is the ability to use crypto as collateral important for the ecosystem, especially this early on?
What’s holding crypto back from the mainstream population is its volatility. Volatility is tempered by liquidity. When you think about crypto exchanges today, everyone takes their money out and it goes somewhere else. But imagine if exchanges offered you a line of credit secured by your crypto, as long your assets stayed on the exchange.
Can you imagine how much more stable the market would be? How much would more stable exchanges be? Credit would temper the volatility—we’re not necessarily talking about borrowing crypto to buy more crypto; we’re talking about leaving the crypto on exchanges. Most people are believers in wanting to invest long term, but they have to spend some of it to survive, and if you can get a low interest line of credit against it, you can let it grow.
It can accelerate the maturation, and it also allows for financial inclusion.
If you don’t have any credit history, if you’re living in a country that doesn’t collect credit history, you have the ability to work your way up and get a bit of credit just by owning a bit of Bitcoin. And that Bitcoin is immutable. In terms of bringing people into the fold, into the real economy, crypto can do a lot.
We’ve touched on credit and crypto lending in theory, but what is Libra Credits?
Libra Credits is a platform to allow everyone involved with lending & borrowing to come together on the blockchain & make credit more efficient.
We’re not just a product; we’re a platform that allows companies to leverage their customer bases. For example, if you’re an exchange provider, Libra Credits is a great way to make sure you can maintain liquidity for your customers; Libra can provide you (the exchange) with a line of credit.
As another example, let’s say you’re a mobile gaming company, and say you want to lend to your customer base; you could use the Libra Credit platform to generate a special Libra score on your base, which you can use to lend to them.
What’s the difference between Libra Credits and other lending platforms like SALT?
We’re a whole ecosystem—we’re really the bridge between the traditional financial services industry & the crypto community. We’re not just lending to the crypto industry, we’re not just lending fiat or crypto, we’re offering many different financial products.
We’re not even just lending, we’re also offering a scoring capability that takes into consideration someone’s behavior and patterns of behavior on the blockchain. You may have used your bitcoin address to spend & receive; we take all of that information into consideration. You may contribute to GitHub. We take all these considerations into a credit score. Think of it as the modern day FIKO score.
We’re equipping the entire financial services industry—think of it as Elon Musk and Tesla; he sells battery packs to his competitors, because he thinks of it as building the entire ecosystem.
It’s a bigger strategy than anyone else who is just doing crypto scoring & lending.
Where do stablecoins fit into the picture? What if they fail?
Part of being an ecosystem is we have a good read on what seems to be succeeding & failing, and we can swap out things that aren’t working for ones that are. In the stablecoin world, as trust grows in a stablecoin, people view it as an easy way to get in and out of a token, or even connect them to the traditional financial world. The ability to lend stablecoins contributes also to providing more stability to the entire ecosystem.
If they fail, it wouldn’t materially hurt Libra—Libra operates with many fiat currencies and many cryptos.
Will the platform incorporate fiat gateways?
The gateways are set and we are building partnerships right now.
Let’s talk about the dangers of credit. Most bubbles are fueled by leverage and some would say that giving people the opportunity to borrow crypto is adding fuel to the already speculative fire. What do you think?
I’d say there’s a bigger risk of not being able to borrow, period.
Some economists think of credit like booze—it’s great if the host knows when to take it away and the guest knows when to stop. How can we enjoy the virtues of credit while avoiding the hangover?
Think of it like rubbing alcohol, it also stops the bleeding. It contributes to stability.
In your whitepaper, you mention an AI-based credit assessment framework. Can you give me an example of how this works in practice?
The framework allows us to grade crypto assets based on their fundamentals & volatility. We use this grade alongside an individual’s overall reputation score to come up with a collateralization ratio. This helps us figure out how much we can lend.
As the underlying crypto asset becomes more stable over time due to higher liquidity, our AI machine learning “upgrades” the asset, allowing for even more credit to be lent against the underlying collateral.
Do you have a working product?
We do. We’ve developed a crypto-to-crypto lending product that’s out today. We’ve raised a good amount of money in the ICO to support this.
What are some of the use cases that access to credit make possible?
Imagine a credit card with single digit interest rates. Imagine how rare it is to get a home equity line of credit, which gets you 3-4% interest, imagine everyone could have that line of credit, which everybody could have access to. The scoring will allow people to take their reputation with them.