A few years ago, Ken Olling began seeing more of his friends invest the bulk of their salaries in cryptocurrency.
“It got to the point where when I went out with my friends, all of them had seven-figure portfolios, but I was the one who was buying dinner,” said Olling, who is co-founder and CEO of Meld, a crypto lending startup that officially launches Thursday. “I had the cash, but they were seeing monthly double-digit increases in their portfolios.
“Everybody who has cryptocurrency knows this feeling: they don't want to get out of their long position, but they need to live their life,” Olling said.
His startup, Meld, is creating a crypto lending protocol that will work with traditional banks to provide loans in fiat dollars using cryptocurrency as collateral.
The Singapore-based company raised $45 million in a private token sale that closed Thursday. It has a team of 45 people.
It’s joining a growing market of crypto lending platforms that let cryptocurrency holders keep their digital assets, yet get some value out of 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 hedge by lending less than the crypto is worth.
This is Meld’s model, too. It plans to start lending outside the U.S. and hopes to eventually do business here when regulations around crypto lending have been 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 many of the same things that Aave and Alchemix do, 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 itself off but you can only borrow more crypto. Our goal is to try and bring these concepts from the world of crypto only into the real world.”
The existing decentralized crypto lending platforms have a different focus than Meld’s, according to Rob Enderle, principal analyst at the Enderle Group.
“Meld is the first I’ve seen that genuinely attempts to provide a crypto service to Joe Public,” he said. “In contrast, the other services are more focused on most early crypto investors, who were far more technology-centric. In concept, Meld is the closest to a bank as opposed to a collaborative crypto service.”
Meld is also the most incomplete crypto lending platform at the moment, Enderle notes.
It will also face an “uphill battle because banks will undoubtedly see the Meld model, which aggressively shares profits with token holders and customers, as a banking profit risk,” Enderle said.
And of course, there is the question of whether U.S. regulators will ever allow Meld’s form of crypto lending in this country.
For that reason, Meld plans to start outside the U.S. It will launch first in Europe, then in Asia and Africa.
“The U.S. still has kind of a moving target when it comes to these kinds of regulations,” Olling noted. He estimates that 63% of all crypto users are outside the U.S. “After we have set up the protocol and things are working well, then we'll move into the U.S. where we can engage regulators and do things by the book, once the regulations are more clear and defined.”
This is a wise move, Enderle said, because U.S. regulators are particularly resistant to change.
“Still, if they are successful overseas, popular support should force their approval in the U.S. market,” he said.
How it works
The Meld protocol runs on the Cardano blockchain. According to Olling, no single node has control over any other node and the blockchain uses a consensus mechanism to verify transactions.
A customer who wants to take out a crypto loan from Meld accesses the service from a webpage or a mobile app. The customer moves some cryptocurrency to the Meld platform; that crypto acts as collateral for the loan.
To account for the volatility of cryptocurrency, Meld loans are overcollateralized. A user with $100,000 worth of bitcoin might be allowed to borrow $50,000 in fiat currency.
“We don't do any leveraging,” Olling said. “We try to avoid as much risk as we possibly can.”
Once the crypto is transferred to Meld, the customer keeps the keys to it, but that digital currency collateral is locked in a smart contract. Terms for the loan, such as the loan-to-value ratio, margin calls, and a liquidation event point are defined in the smart contract.
Bank partners will provide fiat liquidity and technical access to bank accounts, to enable customers to receive the loan funds in fiat currency in their bank account. Today, Meld has three bank partners, Olling said. The company is in talks with one U.S. bank and a few European financial institutions.
When all the terms of the smart contract have been met and the loan has been paid off, the crypto is unlocked and the customer gets it back. Meld also offers a crypto-backed credit line that works with the Meld debit card that customers can use online and in stores.
Both types of credit are “much more open, transparent, democratic and non-nation-state model” than what’s available today, Olling said.
The Meld protocol itself generates yield against the collateralized assets. That yield goes into the Meld protocol’s treasury and becomes profit for people who “stake” on the protocol — in other words, customers who own Meld tokens and put the tokens into stake pools that act as insurance against any unforeseen event on the platform.
“You're securing the protocol and in exchange for the risk that you're taking by putting your tokens there, you get 40% of all of the fees that are 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 finish developing the protocol and to acquire the licenses it needs to handle fiat currency and extend credit.
Who will use this
Meld positions itself as a provider of decentralized finance for the underbanked. In the U.S., at this point, the majority of people who buy cryptocurrency are white males with high incomes.
But in countries like Nigeria and Argentina that have extreme deflation, people “naturally gravitate towards the characteristics of crypto because it provides them with a way to store value that is not going to be exposed to any national interest,” Olling said. “This is in stark contrast to the U.S., where it's largely a speculative choice — you're buying into crypto because you're hoping to make a whole bunch of money. In Nigeria, you're buying into crypto because the naira is going to go down.”
The two fastest-growing groups of crypto buyers are women over 50 and people under the age of 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 make it possible for people to take whatever crypto they have and borrow fiat against it so that they can continue to live their life, but still be exposed to the long-term upside.”
