A few years ago, Ken Olling started seeing more of his friends investing most of their salaries in cryptocurrency.
“It got to the point where when I went out with my friends, they all had seven-figure wallets, but I was the one buying dinner,” said Olling, co-founder and CEO of cryptocurrency Meld. loan startup which officially launches on Thursday. “I had the money, but they were seeing double-digit monthly increases in their wallets.
“Anyone with cryptocurrency knows that feeling: they don’t want to get out of their long position, but they have to live their life,” Olling said.
His startup, Meld, is creating a crypto lending protocol that will work with traditional banks to provide fiat dollar loans using cryptocurrency as collateral.
The Singapore-based company raised $45 million in a private token sale that closed on Thursday. He has a team of 45 people.
It joins a growing market of crypto lending platforms that allow cryptocurrency holders to hold their digital assets, while earning some value from those assets, such as interest or a loan. Crypto lenders compete with traditional banks but have radically different business models. Instead of analyzing FICO scores, debt-to-income ratios, and other determinants of creditworthiness, many use cryptocurrency as collateral and cover by lending less than the crypto is worth.
This is also Meld’s model. He plans to start lending outside of the US and hopes to eventually do business here when crypto lending regulations are established. It will also share profits with stakeholders, people who buy Meld tokens.
The market Meld is entering is already a bit crowded. Existing platforms similar to Meld’s include Aave, MakerDAO, Compound, Alchemix, PhoenixDAO, and Venus.
“We do a lot of the same things as Aave and Alchemix, but we bring the real world of fiat and banking to it,” Olling said. “With Aave you can lend crypto to borrow crypto, with Meld you can lend crypto to borrow fiat. With Alchemix, you can get a loan that pays for itself but you can only borrow more crypto. Our goal is to try and bring these concepts from the crypto-only world to the real world.
According to Rob Enderle, Senior Analyst at Enderle Group, existing decentralized crypto lending platforms serve a different purpose than Meld.
“Meld is the first one I’ve seen that actually attempts to provide encryption service to Joe Public,” he said. “The other services, on the other hand, are more focused on most of the early crypto investors, who were much more tech-focused. In concept, Meld is closest to a bank as opposed to a collaborative crypto service.
Meld is also the most incomplete crypto lending platform right now, Enderle notes.
It will also face an “uphill battle as banks will undoubtedly see the Meld model, which aggressively shares profits with token holders and customers, as a bank profit risk,” Enderle said.
And of course, there’s the question of whether US regulators will ever allow Meld’s form of crypto lending in that country.
For this reason, Meld plans to start outside of the United States. It will first be launched in Europe, then in Asia and Africa.
“The United States always has kind of a moving target when it comes to this kind of regulation,” Olling noted. He estimates that 63% of all crypto users are outside of the United States “Once we have the protocol in place and things are working well, we will move to the United States where we can engage regulators and do things by the rules, once the regulations are more clear and defined.
It’s a wise move, Enderle said, because US regulators are particularly resistant to change.
“Nevertheless, if they succeed overseas, popular support should force their approval in the US market,” he said.
How it works
The Meld protocol runs on the Cardano blockchain. According to Olling, no node has control over another node and the blockchain uses a consensus mechanism to verify transactions.
A customer who wishes to take out a crypto loan from Meld accesses the service from a webpage or mobile application. The client moves a cryptocurrency to the Meld platform; this crypto acts as collateral for the loan.
To account for the volatility of cryptocurrency, Meld loans are over-collateralized. A user with $100,000 worth of bitcoin could be allowed to borrow $50,000 in fiat currency.
“We don’t do any leverage,” Olling said. “We try to avoid as many risks as possible.”
Once the crypto is transferred to Meld, the customer retains the keys to it, but this digital currency collateral is locked into a smart contract. The terms of the loan, such as the loan-to-value ratio, margin calls, and a liquidation event point, are defined in the smart contract.
Banking partners will provide fiat liquidity and technical access to bank accounts, to enable clients to receive loan funds in fiat currency into their bank account. Today, Meld has three banking partners, Olling said. The company is in talks with a US bank and some European financial institutions.
When all the conditions of the smart contract have been met and the loan has been repaid, the crypto is unlocked and the customer collects it. Meld also offers an encrypted line of credit that works with the Meld debit card that customers can use online and in stores.
Both types of credit are “a much more open, transparent, democratic and non-state model” than what is available today, Olling said.
The Meld protocol itself generates a return on the guaranteed assets. This return goes into the Meld protocol treasury and becomes profit for people who “stake” on the protocol – in other words, customers who own Meld tokens and place the tokens in staking pools that act as a insurance against any unforeseen event on the platform.
“You secure the protocol and in exchange for the risk you take putting your tokens in it, you get 40% of all fees generated by the protocol,” Olling said.
Olling expects Meld’s service to go live in the fourth quarter of this year. Meld needs time to complete protocol development and acquire the licenses it needs to handle fiat currency and extend credit.
Who will use this
Meld positions itself as a decentralized finance provider for the underbanked. In the United States right now, the majority of people who buy cryptocurrency are high-income white men.
But in countries like Nigeria and Argentina that are experiencing extreme deflation, people “naturally gravitate toward crypto features because it provides them with a way to store value that will not be exposed to any national interest,” Olling said. “This is in stark contrast to the US, where it’s largely a speculative choice – you buy into crypto because you expect to make a lot of money. In Nigeria, you buy into crypto because that the naira will go down.
The two fastest growing groups of crypto buyers are women over 50 and people under 18, Olling said.
For any crypto investor, “you still have to live your life: get food, buy a car, get married, buy a house,” Olling pointed out. “We want to allow people to take whatever crypto they have and borrow fiat against it so they can get on with living their lives, while being exposed to the long-term upside.”