What Is SALT Blockchain-Based Lending?
SALT is an acronym for Secured Automated Lending Technology. SALT lending provides a platform where members can receive a loan by using a digital asset or cryptocurrency as collateral. SALT Blockchain Inc. was founded in 2016 by a group of Bitcoin enthusiasts as a way to offer crypto-backed lending and provide versatility for investors who hold digital assets.
Cryptocurrencies trade on a blockchain network, which is a shared ledger or database that contains all of the transactions. SALT blockchain-based lending gives investors access to cash without having to sell their cryptocurrency holdings. Investors can borrow a portion of the total amount held as collateral.
However, there are risks to the borrower since cryptocurrency prices can fluctuate wildly. If the digital asset used as collateral drops in value, the borrower may need to pay down a portion of the loan or deposit additional crypto assets to secure the loan.
- SALT—or Secured Automated Lending Technology—provides loans to borrowers by using cryptocurrency as collateral.
- SALT lending provides personal and business loans to their members who put up blockchain assets as collateral.
- SALT loans allow borrowers to maintain ownership of their blockchain assets, while also gaining access to cash via a loan.
- However, if the cryptocurrency's price declines, a breach of the loan-to-value (LTV) threshold can occur, resulting in a Collateral Maintenance Call.
- Loan terms range from three to 12 months, and all SALT loans are currently assessed 9.99% interest.
How SALT Blockchain-Based Lending Works
SALT lending provides personal and business loans to their members who put up blockchain assets as collateral. Users buy a membership to the SALT lending platform by purchasing a SALT token, which is the platform's cryptocurrency. When someone becomes a member, they can borrow money from an extensive network of lenders. SALT's minimum loan amount is $5,000, which can be used for any purpose such as paying down credit card debt or purchasing a car.
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 the loan agreement with cryptographic code. ERC-20 is a standard that any Ethereum token contracts must implement, in order to facilitate the exchange of tokens.
Borrowers can only use blockchain-based cryptocurrencies as collateral. In other words, the borrower must have the ownership of their crypto recorded on a public, permissioned blockchain. Some of the digital assets that can be used as collateral for SALT loans include:
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Ether (ETH)
- Litecoin (LTC)
- TruUSD (TUSD)
- USD Coin (USDC)
- Paxos Standard Token (PAX)
- PAX Gold (PXG)
Following the approval of the loan, the borrower sends collateral to the SALT collateral wallet. In return, the loan proceeds are transferred to the borrower’s bank account. The digital assets held as collateral remain the property of the borrower, meaning any price changes of the assets belong to the borrower.
During the lifetime of the loan, the borrower must make timely, periodic payments to the lender and once the loan has been repaid—called loan completion—the borrower’s collateral is made available for withdrawal.
Requirements for SALT Loan Approval
Since there are assets securing the loan, the lender has no risk since the crypto assets can be liquidated if the borrower fails to repay the loan—a process called default. As a result, there is no credit check of the borrower's credit history.
Also, the loan approval is not based on the borrower's credit score, which is a numerical representation of a person's ability to pay back their debts on time and in full. Typically, traditional lending from a bank would require pay stubs to prove a source of income and a credit check, including a minimum credit score.
With SALT loans, eligibility is based mostly on the value of the borrower's blockchain assets. However, SALT does perform verification of each borrower, which complies with Anti Money Laundering (AML) and Know Your Customer (KYC) regulations. Once a member has been deemed eligible, SALT allows the loan inquiry to move forward.
SALT's Loan-to-Value Ratios
Since the collateral being used to secure the loan is a cryptocurrency, the total value of the digital assets can fluctuate as the market price of the crypto changes over time. In other words, the value of the collateral can rise and fall, depending on the price changes of the underlying cryptocurrency.
If the value of the cryptocurrency rises, the borrower can add the increased value of their collateral asset to the principal of the loan to obtain additional funds from the lender. The borrower can also do nothing and use the additional proceeds from the increased value of the digital assets to eventually pay off the loan.
However, if the price of the cryptocurrency decreases significantly, it can lead to a breach of the loan-to-value (LTV) threshold, resulting in a Collateral Maintenance Call, which is similar to a margin call. A margin call is when the lender requests additional funds to be held as collateral to secure the loan.
How a Loan-to-Value Ratio Is Calculated
The loan-to-value (LTV) is calculated by dividing the loan principal amount by the current U.S. dollar value of the digital currency in the SALT wallet. The initial loan-to-value ratio is based on the terms within the original loan agreement. For example, if a $100,000 loan is secured by $155,000 in bitcoins, the initial loan-to-value ratio would be 65% ($100,000 / $155,000 = .65). In other words, the loan amount represents 65% of the value of the bitcoin assets held as collateral.
The initial loan-to-value ratio would decrease over time as the borrower pays down the loan. However, if bitcoin's price declined significantly, the loan-to-value ratio would increase. For example, if the total value of the collateral decreased to $110,000 due to a fall in bitcoin, the loan-to-value ratio would increase to 90%.
The borrower would have to provide more collateral by depositing an additional amount of the cryptocurrency or the borrower would need to make a payment to reduce the outstanding loan balance. The loan-to-value ratio is tracked by a smart contract, which autonomously calculates and updates the ratio throughout the life of the loan based on the changes in the price of the digital asset held as collateral and the various payments made by the borrower.
SALT Loan-to-Value Ratios
As of May 2022, these are the following loan-to-value ratios, which would trigger a margin call for a SALT loan:
- LTV: 75% LTV: 1st LTV alert
- LTV: 83.3% LTV: Margin Call for up to 48 hours
- LTV: 88% LTV: Stabilization alert
- LTV: 90.91% LTV: Automatic Stabilization
If the value of the digital asset held as collateral crashes and the loan-to-value ratio reaches 90.91%, SALT converts the entire crypto portfolio into a U.S. Dollar-based stable coin—a process called automatic stabilization. Once the loan-to-value has been reduced to 83.33% or lower by either making a payment to reduce the amount outstanding or depositing additional collateral, the borrower can then re-enter the market by converting the stable coin into their original digital currency.
The stabilization process helps to preserve the value of the cryptocurrency assets held as collateral during market downturns. Stabilization also provides the borrower with time to decide when they want to re-enter the market and purchase the original digital asset.
Loan Terms, Interest, and Fees
The loan term can range from three months to 12 months and SALT does not charge an origination fee for setting up the loan. Borrowers are charged interest on the loan, as they would be on any other loan, and the rate charged across all loan terms is currently 9.99%. Also, if stabilization is triggered, SALT may charge a fee for converting the digital assets, which may equal 5% of their total value.
However, the rates and terms are subject to change, which can vary based on several factors including the loan amount, qualifications, and collateral. Also, there is no interest earned on the deposited funds held as collateral.
Benefits of SALT Loans
A SALT borrower would likely be someone who believes their digital assets used as collateral will increase in value over time or at least, remain the same. SALT loans allow borrowers to maintain ownership of their blockchain assets, while also gaining access to cash via a loan.
If a borrower plans on holding their digital asset over the long term, or the value of the crypto has increased significantly, a SALT loan provides the borrower with access to cash without having to liquidate their digital assets. As a result, the borrower can still participate in any market moves higher for the digital currency that they own.
Despite the new type of collateral, the factors to consider when borrowing money from any kind of company remain much the same. Anyone interested in taking out a personal loan should first use a personal loan calculator to determine the amount they can afford to repay each month.
How Do Crypto Loans Work?
A cryptocurrency-based loan is facilitated through digital collateral. The borrower pledges digital assets (i.e. digital currency) to secure the loan, then receives cryptocurrency as their loan principal. The borrower then incurs interest on unpaid loan amounts.
What Is Loan-to-Value?
Like many other loans, a crypto loan must be held in balance regarding loan-to-value term requirements. This means if the borrower's collateral declines in the value, the borrower may be at risk at having their loan principal called back.
Loan-to-value is the ratio between the size of the loan and the value of the secured collateral. If either the loan or the collateral are in assets with variable value (i.e. non-stable cryptocurrencies), the loan is at higher risk of having inadequate a loan-to-value figure.
What Are the Risks of Crypto Lending?
Cryptocurrency loans are at risk of smart contract security failures and custodian security issues. Lending platforms may be the target for decentralized finance cyber attacks. In addition, there are still unclear cryptocurrency lending regulations.
Cryptocurrency has historically been a volatile alternative asset. Therefore, there is a risk to the borrower should they sell or short the borrowed asset only to be required to buy back the same cryptocurrency amount at a higher U.S. Dollar value. There is also a risk to the lender should a borrower's collateral in non-stable cryptocurrencies lose its value.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.