Unsecured Lending Resurgence in Crypto: Divine Research Leads the Charge
The landscape of unsecured lending in the cryptocurrency sector is undergoing a notable revival as new startups embrace high-risk microfinance strategies, just three years after a catastrophic collapse led to widespread bankruptcies within the industry.
Divine Research at the Forefront
San Francisco-based Divine Research is spearheading this resurgence, having offered over 30,000 uncollateralised short-term loans since December. The company is targeting underserved global borrowers, focusing on loans typically under US$1,000 (approximately AU$1,520). These loans are disbursed in USDC, a stablecoin issued by Circle, with interest rates ranging from 20% to 30%.
In an effort to mitigate fraud, Divine Research has integrated biometric verification from Sam Altman’s Worldcoin. By utilising iris scans, the company aims to prevent individuals who have defaulted from returning under different identities. Diego Estevez, a co-founder of Divine, described their approach as “microfinance on steroids,” highlighting their commitment to aiding individuals like high-school teachers and fruit vendors who have access to the internet.
Operational Challenges and High Default Rates
Despite the aggressive growth, Divine is grappling with significant operational challenges, including a reported 40% default rate on its initial loans. To counter these losses, the platform plans to rely on interest income and potential recovery of free tokens.
Estevez asserts that the system has been designed in such a way that liquidity providers can still profit after accounting for default rates and interest. This model leans heavily on the integrity of identity verification systems and the borrowers’ honesty, presenting a gamble on a structure that lacks traditional collateral protections.
Emergence of New Players
Divine isn’t the only player in this space. Another startup, 3Jane, recently raised USD 5.2 million (AU$7.91 million) in seed funding from Paradigm, which also backed the infamous exchange FTX. Unlike Divine, 3Jane only operates on-chain and demands borrowers to submit verifiable data regarding their crypto holdings or banking assets. Even so, it does not require collateral, creating similar challenges in case of defaults.
The Shift in Risk Appetite
This revival of unsecured lending mirrors broader trends in the crypto market, with Bitcoin recently hitting new all-time highs and increasing intrigue from institutional investors. Major financial institutions, including JPMorgan, are also venturing into crypto-backed loans, marking a distinct shift in risk appetite in the wake of the 2022 collapses of companies like Celsius, BlockFi, and FTX.
Despite this optimism, the underlying structure of these loans remains precarious. The absence of collateral means that the success of the model depends on the reliability of identity systems, the honesty of borrowers, and robust data verification processes. This scenario bears striking similarities to the assumptions prevalent before the disastrous events of 2022.
Conclusion
The renewed interest in unsecured lending within the cryptocurrency space signals a bold new chapter characterised by a blend of innovation and risk. As new financial models continue to emerge, the success of these initiatives will largely depend on their ability to navigate the complexities of verification and borrower accountability. With significant profits at stake and the potential to support underserved demographics, the industry is at a pivotal moment where both risk and opportunity are inextricably linked.
