SALT: The Basics
Salt is an acronym for Secured Automated Lending Technology. Salt Lending describes itself as "a next generation lending platform for blockchain backed loans." Essentially, Salt Lending provides a lending platform where members of the platform can put up their blockchain assets as collateral.
Salt argues that blockchain assets are ideal collateral because they exist in a distributed, peer-to-peer ledger, with efficient transfer, storage and liquidation, that is transparent and publicly viewable. This lowers both costs and instances of fraud.
(For related reading, see: Now You Can Use Bitcoin As Collateral For Loans)
How It Works
Users buy membership to the Salt Lending platform by purchasing Salt, which is the platform's cryptocurrency. Salt is built on an ERC-20 smart contract. Smart contracts are contracts that, in addition to stipulating the terms of the agreement, also enforce and execute on the terms of agreement with cryptographic code. ERC-20 is a standard that any Ethereum token contracts must implement, in order to facilitating the exchange of tokens.
(Read also: Understanding Smart Contracts)
When someone becomes a member, they can borrow money from an extensive network of lenders. Borrowers put up bitcoin, ether, ripple and other blockchain assets as collateral. This is because Salt Lending, instead of determining the eligibility of a borrower by focussing on their credit score, grants eligibility on the value of the borrower's blockchain assets. Because of this, approval is fast. Salt keeps collateral assets safe in a "fully-audited, ultra-secure architecture during the life of the loan so members can borrow with confidence," according to their website.
Borrowers are charged interest on the loan, as they would be on any other loan. However, unlike other loans, when a borrower pays it off, they receive their blockchain-backed assets back.
Salt's tagline? "Keep Your Crypto, Get Your Cash."
Salt: Benefits and Costs
It's true that this is the service Salt Lending is providing. In putting up blockchain assets as collateral, the borrower maintains ownership of the blockchain assets, while also gaining access to cash. However, this does not come without a catch.
Due to the high volatility of blockchain assets, lenders need a substantial incentive to finance loans which are collateralized by blockchain assets. According to Bloomberg Technology, this means that "someone looking to tap $100,000 in cash would probably need to put up $200,000 in bitcoin as collateral, and pay 12 percent to 20 percent interest in a year." That's according to Salt Lendings' CFO, David Lechter. Those rates, while high, are actually not dissimilar to the rates seen on other unsecured loans. But the difference is that, because of the collateral, Salt can allow borrowers to borrow more.
Salt loans, with blockchain assets as collateral, are great for a very specific kind of borrower – those with a lot of value tied up in blockchain assets who are loath to liquidate them. In fact, probably the vast majority of their value is tied up in blockchain assets, because why else would they put up with such steep interest rates and a 2-1 ratio in collateral to capital made available to them.
The answer is that the vast majority of their assets are probably in blockchain assets, and they're long on them, and believe they will continue to appreciate in value. So, they tolerate the rates and the ratio.
Collateral means that only in the event of default on these loans will the borrower lose those blockchain assets. However, if the value of the blockchain asset used as collateral changes (as it almost certainly will, over the course of a loan), there are decisions the borrower has to make.
If the value of their collateral rises, the borrower can add the increased value of their collateral asset to the principal of the loan for additional capital from the lender, or they can do nothing, leave the loan as is, and receive this blockchain asset back, at its increased value when they pay off the loan.
If the value of their collateral drops a significant amount and causes breach of the loan-to-value (LTV) threshold, Salt will contact the borrower, and give them the option to add collateral, or make an additional principal payment, to bring the collateral account balance back into balance.
This must mean that those who borrow on the Salt lending platform are bullish on cryptocurrency and other blockchain assets, or at the very least long on them.
In a spin-off of this application of blockchain, some lenders are hoping to leverage blockchain technology, and smart contract technology directly in loans. This would mean that the terms of the loan would exist within the ledger itself, and this would facilitate automatic functions in the loan, like payment and collection. This has huge implications for peer-to-peer, unsecured lending, which could be made more efficient, and much more secure and reliable.