Celsius Lending: The Battle Against Big Banks Has Begun
Alex Mashinsky, a 25-year veteran of investing and entrepreneurship in the tech world has just dropped a massive bombshell on both the traditional financial world and the wild frontier lands of cryptocurrency. Mashinsky is a man with a plan, and he and his team of 25 bright minds have been working for a year on a way to bring lending and credit to the people. Their solution is Celsius — it will reach out to the young, the underbanked, and anyone else looking to free themselves from the yoke of the big banks’ monopolistic empire. Not only that, but he plans to do it all on the Ethereum network.
Celsius Network is a distributed peer-to-peer (P2P) lending network that Mashinsky’s team says is unlike any other P2P lending company before it.
The concept of P2P lending became popular in the late 2000s, with the launch of sites like LendingClub and Prosper. It has since expanded into real estate-backed P2P loans on sites such as Peer Street and Groundfloor.
In these systems, an investor purchases “notes”, individual pieces of a larger loan, and they receive monthly payments on the principle and interest. Notes are usually denominated from $10 USD to as high as $10,000 for some real estate based sites.
While Celsius may have been created with a few of the same concepts as these platforms, the ideology behind it and the technology powering it makes the difference.
How Celsius Works
The way Celsius works is: members of the platform join and purchase a membership by using the native cryptocurrency token called Degree. Once membership is secured, the member can choose to either deposit cryptocurrency assets (BTC and ETH currently) and then decide what kinds of loans they would like to fund.
In exchange for this, the investor is rewarded with interest payments. Members can also apply for loans (denominated in fiat currency) which potentially can be approved in minutes, and often without the use of a traditional credit score like FICO.
This is different from competing blockchain based lender Salt Lending, which works by first requiring a borrower to deposit bitcoin or ether, and then lending fiat against that deposit. Celsius does not require borrowers to deposit digital assets in order to borrow against them. Instead, it uses a proprietary machine learning system to assess borrows and their risk levels.
Interview With Alex Mashinsky
To understand the platform better, I checked in with Mashinsky himself. He was very friendly and forthcoming, and he clearly not only knows his platform well but is also a true believer in the technology and the ethics that guide it.
First, I asked him what were some of the advantages that Celsius offers over its traditional P2P lending competitors. He said:
“The Ethereum and Bitcoin blockchain is a movement and [has] a very loyal membership that likes to promote projects that grow and enforce the community. We represent one of the first distributed consumer credit solutions which can bring the next [hundred million] adopters to cryptocurrencies. LendingClub is a centralized system where 85 percent of the loans end up with banks and financial institutions, not peers.”
In the past I had personally tried investing with LendingClub, seeking better returns than just a bank account or the stock market. However, what I found was that, time and time again, the loans I was funding (or notes that I was buying) would quickly go into “late” status, followed by being charged off, and disappearing — along with my investment.
Protecting Lenders Against Defaulters
I wanted to know what Mashinsky planned to do in order to protect investors from borrowers that take out large loans and then quickly default.
“The problem with all the centralized systems is that while they are better than most banks they are still profit motivated and don’t focus on what is in the best interest of their lenders. Celsius is a membership organization like Costco where all we care about is how we give lenders the highest interest rate while charging borrowers the lowest rate. We take the bank profits and split them between the borrower and lender after reserving for bad debt.”
Indeed all currently existing P2P lending platforms are profit driven, and so I was surprised to see that Celsius was not. Mashinsky went on to clarify further, saying:
“The trick with bad debt is to figure out who is a good actor and who is a bad one. LendingClub did not use A.I. and [machine learning] to figure this out so they became a magnet for bad actors. We use the social graph to tell us what circles each applicant travels, and so we can predict very well who is going to try and defraud our platform. We also [work with] people who don’t have credit scores or long social history. If they can get a few family members to vouch for them by linking their digital wallet to our smart contract, we match these guarantees to issue basic credit and allow these members to build their credit score on the blockchain.”
Lending to a Basket of Loans, Not Individuals
A large part of what this means is that loans are handled in a completely different way to sites like LendingClub and Prosper. Instead of investors purchasing a note in a specific loan, investors can choose to put their funds in a basket of money that is loaned out to people of various risk grades, from low to high.
When defaults occur, investors will often be protected from losses as the system automatically factors this into each loan.
Mashinsky says that once an investor chooses the loan types to fund, the system will automatically divide their capital into as many loans as possible, spreading the risk of a handful of loans defaulting down to an almost negligible degree of risk. He added:
“The borrowers get a score from the system that tells them what their credit limit is and what interest they can get. To get access, they need to deposit a Celsius Degree coin to activate the smart contract just like a vending machine. This triggers the match and loan. We also provide refunds of half the losses for the low-risk loans out of the bad debt reserves because we scored these people wrong. The A.I. [machine learning] learns fast so we don’t expect to use much of our ICO capital to get below a 2 percent loss rate.”
Problems for Celsius to Solve in the Future
We then talked more about the goals of the platform as a whole. He outlined to me the four problems that Celsius aims to resolve:
1. How can a lender earn interest on their ether or bitcoin holdings without selling their position, and while keeping the upside?
2. How can a borrower get a loan against their ether at a low rate?
3. Who will manage potential income from proof-of-stake for an investor’s ETH and BTC?
4. How can an investor lend in ether, but the borrower gets the loan in fiat currency so that the borrower has no exposure to the cryptocurrency fluctuations?
The answer to all of these issues, according to Mashinsky, is the Celsius Network.
While we have yet to see how this will all play out once the platform officially launches and lending and investment begins, I found Mashinsky’s enthusiasm and vision contagious.
Investors will be able to purchase Degree tokens sometime early next year, when Celsius launches their “token generating event”, (or TGE) at a yet-unspecified date in 2018.
Does Celsius sound like a promising idea? Let’s hear your thoughts.
Images via Celsius, VentureBeat, Pixabay