Blockchain loan settlement

For now, the government has put federal loan repayments on pause until January , but that deadline is fast approaching. For students who hold crypto assets and are interested in exploring different avenues for repaying their loans, there are a number of decentralized finance DeFi options worth knowing — though they should be aware of the risks. This article is for educational purposes only and not financial advice; do your own research and consult a professional before making any kind of investment. DeFi expands the use of blockchain from simple value transfer to more complex financial services. Specifically, DeFi refers to an ecosystem of decentralized applications — autonomous applications that operate using smart contracts instead of relying on an underlying company to manage them. Smart contracts are self-executing computer programs that perform certain functions when conditions are met.

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Content:

• Will Blockchain Replace Clearinghouses? A Case Of DVP Post-Trade Settlement
• Blockchain based Loan Syndication
• Paying Off Student Loans? You Can Do It With Crypto
• Mike Cagney launches blockchain for loan trading. Will banks go for it?
• Five use cases for blockchain in financial services
• Making sense of loans against cryptocurrencies
• Blockchain: the future of finance
• Blockchain Mortgage
• BBVA signs world-first blockchain-based syndicated loan arrangement with Red Eléctrica Corporación

WATCH RELATED VIDEO: How Mizuho Bank leverages IBM Blockchain for trade finance

Will Blockchain Replace Clearinghouses? A Case Of DVP Post-Trade Settlement

The term decentralized finance DeFi refers to an alternative financial infrastructure built on top of the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way.

This article highlights opportunities and potential risks of the DeFi ecosystem. I propose a multi-layered framework to analyze the implicit architecture and the various DeFi building blocks, including token standards, decentralized exchanges, decentralized debt markets, blockchain derivatives, and on-chain asset management protocols. I conclude that DeFi still is a niche market with certain risks but that it also has interesting properties in terms of efficiency, transparency, accessibility, and composability.

As such, DeFi may potentially contribute to a more robust and transparent financial infrastructure. The author thanks two anonymous reviewers for their valuable comments and especially Florian Bitterli, Raphael Knechtli, and Tobias Wagner for their support with data collection and visualization and Emma Littlejohn and Amadeo Brands for proofreading. Decentralized finance DeFi is a blockchain-based financial infrastructure that has recently gained a lot of traction.

The term generally refers to an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms, such as the Ethereum blockchain see Buterin, It replicates existing financial services in a more open and transparent way. In particular, DeFi does not rely on intermediaries and centralized institutions.

Instead, it is based on open protocols and decentralized applications DApps. Agreements are enforced by code, transactions are executed in a secure and verifiable way, and legitimate state changes persist on a public blockchain.

Thus, this architecture can create an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services, as most of these roles can be assumed by "smart contracts. DeFi already offers a wide variety of applications. For example, one can buy U. The backbone of all DeFi protocols and applications is smart contracts.

Smart contracts generally refer to small applications stored on a blockchain and executed in parallel by a large set of validators. In the context of public blockchains, the network is designed so that each participant can be involved in and verify the correct execution of any operation. As a result, smart contracts are somewhat inefficient compared with traditional centralized computing. However, their advantage is a high level of security: Smart contracts will always be executed as specified and allow anyone to verify the resulting state changes independently.

When implemented securely, smart contracts are highly transparent and minimize the risk of manipulation and arbitrary intervention. To understand the novelty of smart contracts, we first must look at regular server-based web applications. When a user interacts with such an application, they cannot observe the application's internal logic. Moreover, the user is not in control of the execution environment.

Either one or both could be manipulated. As a result, the user has to trust the application service provider. Smart contracts mitigate both problems and ensure that an application runs as expected. The contract code is stored on the underlying blockchain and can therefore be publicly scrutinized.

The contract's behavior is deterministic, and function calls in the form of transactions are processed by thousands of network participants in parallel, ensuring the execution's legitimacy. When the execution leads to state changes, for example, the change of account balances, these changes are subject to the blockchain network's consensus rules and will be reflected in and protected by the blockchain's state tree.

Smart contracts have access to a rich instruction set and are therefore quite flexible. Additionally, they can store cryptoassets and thereby assume the role of a custodian, with entirely customizable criteria for how, when, and to whom these assets can be released.

This allows for a large variety of novel applications and flourishing ecosystems. The original concept of a smart contract was coined by Szabo Szabo used the example of a vending machine to describe the idea further and argued that many agreements could be "embedded in the hardware and software we deal with, in such a way as to make a breach of contract expensive…for the breacher.

Additionally, this platform allows the contracts to interact with and build on top of each other composability. The concept was further formalized by Wood and implemented under the name Ethereum. Although there are many alternatives, Ethereum is the largest smart contract platform in terms of market cap, available applications, and development activity.

DeFi still is a niche market with relatively low volumes—however, these numbers are growing rapidly. It is essential to understand that these are not transaction volume or market cap numbers; the value refers to reserves locked in smart contracts for use in various ways that will be explained in the course of this paper.

The spectacular growth of these assets alongside some truly innovative protocols suggests that DeFi may become relevant in a much broader context and has sparked interest among policymakers, researchers, and financial institutions. This article is targeted at individuals from these organizations with an economics or legal background and serves as a survey and an introduction to the topic.

In particular, it identifies opportunities and risks and should be seen as a foundation for further research. DeFi uses a multi-layered architecture. Every layer has a distinct purpose. The layers build on each other and create an open and highly composable infrastructure that allows everyone to build on, rehash, or use other parts of the stack.

It is also crucial to understand that these layers are hierarchical: They are only as secure as the layers below. If, for example, the blockchain in the settlement layer is compromised, all subsequent layers would not be secure. Similarly, if we were to use a permissioned ledger as the foundation, any decentralization efforts on subsequent layers would be ineffective. This section proposes a conceptual framework for analyzing these layers and studying the token and the protocol layers in greater detail.

Now that we understand the conceptual model, let us take a closer look at tokenization and the protocol layer. After a short introduction to asset tokenization, we will investigate decentralized exchange protocols, decentralized lending platforms, decentralized derivatives, and on-chain asset management. This allows us to establish the foundation needed for our analysis of the potential and risks of DeFi. Public blockchains are databases that allow participants to establish a shared and immutable record of ownership—a ledger.

Usually, a ledger is used to track the native protocol asset of the respective blockchain. However, when public blockchain technology became more popular, so did the idea of making additional assets available on these ledgers.

The process of adding new assets to a blockchain is called tokenization, and the blockchain representation of the asset is referred to as a token.

The general idea of tokenization is to make assets more accessible and transactions more efficient. In particular, tokenized assets can be transferred easily and within seconds from and to anyone in the world.

They can be used in many decentralized applications and stored within smart contracts. As such, these tokens are an essential part of the DeFi ecosystem. However, most of these options can be ignored, as the vast majority of tokens are issued on the Ethereum blockchain through a smart contract template referred to as the ERC token standard Vogelsteller and Buterin, These tokens are interoperable and can be used in almost all DeFi applications.

Almost 90 percent of all listed tokens are issued on the Ethereum blockchain. The slight deviation in terms of market cap originates from the fact that a relatively large portion of the USDT stablecoin has been issued on Omni. From an economic perspective, I am more interested in the asset's nature than in the underlying technical standard used to implement the asset's digital representation. The main motivation for adding additional assets on-chain is the addition of a stablecoin. While it would be possible to use the aforementioned protocol assets BTC or ETH , many financial contracts require a low-volatility asset.

Tokenization enables the creation of these assets. However, one of the main concerns with tokenized assets is issuer risk. In contrast, when someone introduces tokens with a promise, for example, interest payments, dividends, or the delivery of a good or service, the corresponding token's value will depend on this claim's credibility.

If an issuer is unwilling or unable to deliver, the token may become worthless or trade at a significant discount. This logic also applies to stablecoins. Generally speaking, there are three backing models for promise-based tokens: off-chain collateral , on-chain collateral , and no collateral.

Off-chain collateral means that the underlying assets are stored with an escrow service, for example, a commercial bank. On-chain collateral means that the assets are locked on the blockchain, usually within a smart contract.

In this case, the promise is entirely trust-based. On-chain collateral has several advantages. It is highly transparent, and claims can be secured by smart contracts, allowing processes to be executed in a semi-automatic way.

A disadvantage of on-chain collateral is that this collateral is usually held in a native protocol asset or a derivative thereof and, therefore, will experience price fluctuations.

Take the example of the Dai stablecoin, which mainly uses ETH as its on-chain collateral to create a decentralized and trustless Dai token pegged to the value of 1 USD. Whenever anyone wants to issue new Dai tokens, they first need to lock enough ETH as underlying collateral in a smart contract provided by the Maker Protocol. If the value of the underlying ETH collateral at any point falls below the minimum threshold of percent of the outstanding Dai value, the smart contract will auction off the collateral to cancel the debt in Dai.

Figure 3 shows some key metrics of the Dai stablecoin, including price, total Dai in circulation, and the stability fee, that is, the interest rate that has to be paid by anyone who is creating new Dai see Section 2. There are also several examples of off-chain collateralized stablecoins.

They are both available as ERC tokens on the Ethereum blockchain. Off-chain collateralized tokens can mitigate exchange rate risk, as the collateral may be equivalent to the tokenized claim e. However, off-chain collateralized tokens introduce counterparty risk and external dependencies. Tokens that use off-chain collateral require regular audits and precautionary measures to ensure that the underlying collateral is available at all times.

This process is costly and, in many cases, not entirely transparent for the token holders. While I am unaware of any functional designs for unbacked stablecoins, that is, stablecoins that do not use any form of collateral to maintain the peg, several organizations are working on that idea.

Note that rebase tokens such as Ampleforth or YAM do not qualify as stablecoins. They only provide a stable unit of account but still expose the holder to volatility in the form of a dynamic token quantity. Although stablecoins serve a vital role in the DeFi ecosystem, it would not do justice to the subject of tokenization to limit the discussion to these assets. There are all kinds of tokens that serve a variety of purposes, including governance tokens for decentralized autonomous organizations DAO , tokens that allow the holder to perform specific actions in a smart contract, tokens that resemble shares or bonds, and even synthetic tokens that can track the price of any real-world asset.

Another distinct category are so-called non-fungible tokens NFTs. NFTs are tokens that represent unique assets, that is, collectibles. They can either be the digital representation of a physical object such as a piece of art, making them subject to the usual counterparty risk, or a digitally native unit of value with unique characteristics.

Blockchain based Loan Syndication

Decentralized finance DeFi is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services. Some of the key attractions of DeFi for many consumers are:. To understand decentralized finance and how it works, it helps to understand how centralized finance differs from DeFi. In centralized finance, your money is held by banks, corporations whose overarching goal is to make money. The financial system is full of third parties who facilitate money movement between parties, with each one charging fees for using their services. For example, say you purchase a gallon of milk using your credit card.

Paying Off Student Loans? You Can Do It With Crypto

Megan DeMatteo is an editor and poet based in New York. In she helped launch CNBC…. Even mortgage lenders are starting to murmur about making cryptocurrency payments a thing. No, to put it simply. Cryptocurrency is a notoriously volatile and speculative asset to hold. For starters, the price you pay for something today might not be what your purchase or payment is worth tomorrow. Also, most businesses that accept crypto start with the most popular cryptos like Bitcoin and Ethereum , which on account of their volatility are particularly ill-suited to use for payments and purchases, experts say. There are a few ways a borrower might use cryptocurrency in the mortgage process, says Robert Heck , vice president of mortgage at online mortgage marketplace Morty.

Mike Cagney launches blockchain for loan trading. Will banks go for it?

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Five use cases for blockchain in financial services

The ledger revolutionized trading in Europe, allowing multi-party transactions to occur over a span of time and across countries, to be recorded on one day in a central location. Due to the number of parties involved, using ledger entries as a medium of exchange had its risks. At the end of market fairs across Europe, debtors and creditors with mutual obligations would pair off where possible to cancel their reciprocal debts. Clearing chain: 'A' owes 'B' 10 units, and 'B' owes 'C' 10 units. Fast-forward to today: like DLT, these early clearing systems were multilateral and deployed a series of sequential algorithms meant to net and clear transactions. Decentralized, multilateral clearing continued for more than years at gatherings like the London Clearing Club, the London and Amsterdam stock exchanges, and the Chicago Board of Trade.

Making sense of loans against cryptocurrencies

The client is a leading European bank who wanted to develop a blockchain-based decentralized and transparent micro-lending platform that facilitates free market decision of interest rates and transparency of all transactions with no middleman involved. Client Overview The client is a leading European bank who wanted to develop a blockchain-based decentralized and transparent micro-lending platform that facilitates free market decision of interest rates and transparency of all transactions with no middleman involved. Business Challenge Eliminating middlemen that are affecting borrowers with time-consuming processes and exorbitant costs. Difficult to track and manage payments No real-time transaction data is available Fewer choices are available to the borrowers for the selection of loans Solution Highlights Market determination on interest rates enabling lenders to decide the interest rate for borrowers Loan settlement by the borrower if they fail to pay the loan amount within the given timeframe Recommendation of lenders based on borrower reputation determined A central head that facilitates account opening and solving disputes between parties Prevents financial frauds by logging details of all transactions Saving time with paperless banking processes A secured system that leveraged SAML2. By eliminating third-parties, loan seekers rely on social safety networks to verify and approve responsible loans. This solution ensures that both the loan seekers and lenders agree to fair and feasible terms regarding proof-of-funds and payment planning. Borrowers access a larger pool of competitive financing offers. Loan seekers lock into responsible loans using smart contracts.

Blockchain: the future of finance

On 27 April , the EIB launched a digital bond issuance on a blockchain platform, deploying this distributed ledger technology for the registration and settlement of digital bonds, in collaboration with Goldman Sachs, Santander and Societe Generale. The EIB believes that the digitalisation of capital markets may bring benefits to market participants in the coming years, including a reduction of intermediaries and fixed costs, better market transparency through an increased capacity to see trading flows and identity of asset owners, as well as a much faster settlement speed. These digital bonds will play a role in giving the Bank a quicker and more streamlined access to alternative sources of finance to boost finance for projects across the globe.

Blockchain Mortgage

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This article sheds light on the application of blockchain technology to the existing financial market infrastructure, namely to post-trade settlement. We show how blockchain technology can facilitate trustless delivery vs. Moving settlement processes entirely on decentral technologies makes the settlement process more efficient since it decreases the associated transaction costs and reduces involved risks. Hence, the blockchain-based multichain atomic swap technology will become a peer-to-peer alternative to a central clearing counterparty that normally facilitates the DVP settlement of financial assets. Blockchain technology is more and more applied to financial sector use cases, in particular digital assets. In Europe, there are tremendous ongoing efforts to tokenize securities as well as accommodating asset classes such as real estate, art etc.

BBVA signs world-first blockchain-based syndicated loan arrangement with Red Eléctrica Corporación

Blockchain could drive tremendous change across the financial services industry. Research shows that it could lower the cost for central finance reporting by by 70 percent for some FS organizations. It could also transform the industry as we know it. In time, blockchain might eliminate the need for bank branches, or radically boost competition by lowering the barriers to entry. The technology is so powerful and so new that projecting its ultimate consequences is impossible. FS firms are already deploying it and seeing results. Here are the five most common use cases for blockchain in FS right now.

BEIJING, May 18 Reuters - China has banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading. Under the ban , such institutions, including banks and online payments channels, must not offer clients any service involving cryptocurrency, such as registration, trading, clearing and settlement, three industry bodies said in a joint statement on Tuesday. China has banned crypto exchanges and initial coin offerings but has not barred individuals from holding cryptocurrencies.