Today’s episode is from a 2018 conversation with Dhruv Bansal, co-founder and CSO of Unchained Capital, a company that provides cash loans to holders of cryptoassets. We discuss what happens when the market tanks and shrinks a customer’s collateral. For the full conversation, check out Flippening episode 8.
Links Relevant To This Episode
- Nomics on Twitter
- Clay Collins
- Nomics API
- Dhruv Bansal
- Unchained Capital
- Bitcoin (BTC)
- Ethereum (ETH)
Clay: Welcome to Daily Wisdom from the Flippening Podcast. These episodes feature short, to the point clips from our full-length interviews. We talk to the men and women behind the trades, crypto exchanges, and regulations with the goal of helping you become a better, more informed investor.
This episode is taken from a 2018 conversation with Dhruv Bansal, co-founder and CSO of Unchained Capital, a company that provides cash loans to holders of crypto assets. We discuss what happens when the market tanks and shrinks a customer’s collateral. [00:00:30] For the full conversation, check out Flippening episode 8.
This episode has two sponsors. The first sponsor is Nexo, which offers INSTANT crypto credit lines. Check them out at Nexo.io. Our second sponsor is the Nomics Cryptocurrency Market Cap & Data API for institutions, fintech apps, and funds.
Without further ado, here’s my conversation with Dhruv Bansal, co-founder and CSO of Unchained Capital. Enjoy.
Dhruv: The way we handle volatility is that we have a right to do collateral maintenance calls since we lend at a 50% loan to value ratio, [00:01:00] you got $100,000 of cash for putting $200,000 of Bitcoin with us. If the Bitcoin price were to collapse by 25% and it was to reach, say, $150,000, we would issue the maintenance requests. We’d ask you either repay some of the principal, or provide more collateral, your choice, nothing happens automatically.
Clay: Which one of those do you find people doing more often, giving more collateral?
Dhruv: Usually putting in more collateral. We’re very careful again to ensure the customers aren’t borrowing against the full amount of Bitcoin that they hold, [00:01:30] and usually for us that’s a risk flag. It’s also just so much easier to deposit more collateral. Our average time–it’s an interesting statistic–there have been two major price drops since we’ve been lending that we’ve had to do this for, and our average time to get more collateral is about an hour, just pretty incredible.
In one case, a customer provided more collateral in seven minutes, that’s an amazing speed to re-collateralize.
Clay: They’re like, “Don’t sell my Bitcoin.”
Dhruv: Yeah, exactly. I mean it’s funny, [00:02:00] customers are so on top of the price motion that they’ll call us the night before. “Hey man, I think it’s going to happen tomorrow.” “Well alright dude, chill out, it’s cool. If it happens, it happens. We’ll call you, it’s going to be easy. It’s actually very nice how informed our borrowers are about the price and their obligations, which makes sense; they don’t want to lose their Bitcoin.
Clay: If it depreciates more than 25%, then do they have to get back to–
Dhruv: I think contractually they have 48 hours, and then if the price descends further [00:02:30], typically a 45% price drop. If that 200,000 dollars in Bitcoin becomes 110,000 dollars, if I did the math right, at that point the loan is technically in default. We’re allowed to repossess the collateral to pay for our principal obligations, liquidate it. If there is any remainder, it goes back to the borrower. We’re not allowed to keep any of it, and we don’t intend to.
Clay: When they refresh their collateral, they need to get back to having two times what they’re borrowing, is that correct?
Dhruv: That’s usually the way we set it up, though they are of course free to just repay some of the principal [00:03:00] if they would prefer to do that.
Clay: What’s the interest rate?
Dhruv: Typically we’re charging between 10 and 14 percent. Depends on the state, and depends on the loan size and various other parameters. Often times we’re constrained by the lending capital sources we have, and the particular laws around lending in the states that we are active in. We tend to just quote a broad range because it’s a little bit too complicated to get more specific unless we really get into the particulars of each case. We encourage borrowers if that’s a rate that [00:03:30] you can tolerate, if you feel that that’s fair for the liquidity we are offering, get in touch, let’s find out if we can work together.
Clay: Is there a service fee, or what other fees exist in addition to interest?
Dhruv: We charge a 1% origination fee which is part of that 10 to 14 percent figure I quoted previously. Most of the interest that we’re charging is usually going back to our lending capital providers. I’ll make a comment that if you think 10 to 14 percent is too high, and you’re a borrower and you’re like, “That’s a really high figure, I don’t know if that makes sense.” Trust me, I’m talking to the lending capital providers, [00:04:00] and they’re telling me 10 to 14 percent is way too low, this is Bitcoin, it’s risky, it should be way up here.
It feels to me like we are not in control of the rates, that’s just what the money markets, so to speak, are willing to lend Bitcoin at. Demonstrably, borrowers are borrowing at those rates, so I feel like market dynamics have calculated the effect of interest rate band. One thing I really like about having other competitors in the market like Salt and a few others is that it’s only going to act to decrease the rates to borrowers which I’m a big fan of. I’m a Bitcoin holder and I want this [00:04:30] to be cheaper for Bitcoin holders.
As a company, I also think that being able to access lower-cost capital for crypto as collateral is a great way for us to start being able to engineer new classes of financial instruments beyond just loans, which would require those low costs of capital. 10 to 14 percent is where we’re at right now, inclusive of all our fees.
Clay: Let’s talk about future roadmap. When you think about what’s coming down the pike, it seems like there’s different routes you can go down, a whole bunch of them and you’ve thought about this a lot I’m sure. [00:05:00] Do you ever see yourself ever lending crypto assets in exchange for other cryptoassets? In other words, if I want to sell my Bitcoin to get Ether, that can generate a taxable event. But if I take out a loan, it doesn’t have to be a taxable event. Is that something you think you would do? If you could just share with us your thoughts on future roadmap, that would be awesome.
Dhruv: Yeah absolutely, lending against Bitcoin as a form of collateral is zeroth and very first and laser-focused place that we started, but you’re right. Our ambition is to go quite a bit more broadly than that. [00:05:30] Absolutely, we want to accept other forms of cryptocurrency as collateral, so we already have Ethereum working internally, we have a gold as quarter to do kind of a bug bounty around our very multisig contracts which we’re going to open source so folks feel comfortable putting their Ethereum with us when they borrow.
We anticipate having done Ethereum we’ll expand to ERC20 tokens and other kinds of assets as customers demand them, so there’s sort of that direction in which we’d like to expand. I think what you’re asking about is also really interesting. Instead of just doing crypto [00:06:00] for cash loans, we could do crypto to crypto loans, and that’s also really compelling and interesting for a certain class of customers. It’s a very natural extension past the product we’re already delivering, but I would say our ambitions are even more broad than that. We’re not Unchained Lending because we don’t view ourselves as truly just a lender.
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