- Dharma raised $7 million to take on decentralized lending
- The company is going head-to-head against Genesis and BlockFi
A San Francisco startup wants to decentralize one of the fastest growing corners of the crypto market.
Dharma, the company behind the open-source blockchain of the same name, has raised $7 million to build out a decentralized lending platform for large investors and traders in crypto.
The firm announced its Series A fundraise, led by Green Visor Capital, in a press release on Tuesday. Other investors include Polychain Capital, Passport Capital, Y Combinator, and Coinbase Ventures. Much of the capital raised will be used to build Lever, a platform that will facilitate peer-to-peer crypto lending, the firm’s marketing head Max Bronstein said. Lending has been a red-hot area of growth in the dwindling market for digital currencies.
Genesis Global Trading, a market maker in New York, is one company cashing in on the breakneck growth of the sector as institutions borrow digital currencies as part of their trading strategies. It originated more than $500 million worth of loans in digital assets to its institutional clients in the 4th quarter of 2018, pushing their cumulative origination volumes to more than $1 billion over the last 10 months.
Dharma’s Lever, however, serves as a decentralized alternative to the services provided by the likes of Genesis and BlockFi. “Lever is the smart-contract alternative to Genesis,” Bronstein said in a phone interview with The Block. “It is an easy to use software tool for anyone looking to borrow crypto-assets.”
Dharma’s Lever allows two sides of a loan to discover each other in a peer-to-peer manner, thus diminishing the role of the middleman and putting trust in the blockchain. Loans are issued via smart contracts on Lever, rather than issued by centralized entity such as Genesis.
The idea is to return crypto lending back to its decentralized roots. But that comes with tangible benefits, Bronstein said, noting it brings down the costs of the loan process and makes it more transparent. “It will be open to everyone and the design is very simple, similar to Coinbase. We are trying to reduce friction.” When a person lends Genesis crypto, the lender doesn’t know what the firm is doing with it, Bronstein said. “And you are at the mercy of Genesis to decide what rate they are going to give you.” Dharma, on the other hand, doesn’t custody the crypto its clients lend to the platform.
Lending using non-custodial services offers a number of benefits to users, Bronstein said.
“Investors can take out loans against a number of different assets in sheer minutes, counter-party risk can be eliminated by smart contracts, borrowers can freely move their principal anywhere they’d like, and most importantly, all of this can be done at almost half of the cost offered by traditional lenders.”
Still, decentralized crypto lending presents its own headaches. For one, these platforms have yet to be tested by institutional investors and traders. The lack of KYC can serve as a noteworthy impediment to lenders adding liquidity to these platforms. This is because most large, regulated firms need to know that the counter-parties they are engaging with in such transactions are vetted. For most customers, centralized lenders will likely offer more competitive rates for a while, though they may not be as easy to use as getting an instant loan from a hardware wallet, one insider noted.
Elsewhere in the crypto world, decentralized exchanges were once heralded as a superior alternative to centralized exchanges, but have been plagued by similar issues and have failed to attract notable volumes.
“Lending is a bit different,” Bronstein said. “The status quo in lending is far more inefficient than it is for DEXs so we think individuals will be quicker to explore new options. In lending today, settlement often takes days and interest rates fluctuate widely when investors are constrained to one order book.”
Bronstein said 400 firms are on a waiting list to use the service, including a number of proprietary trading shops. In long-run, however, Bronstein said Dharma aims to have impact far behind the financial-services world. “Our kind of end vision is to have this global, transparent, pool of credit liquidity. That’s a ten to twenty year vision.”