Revealed Monday, crypto lender Dharma is now open to all. Borrowers and lenders are matched P2P to arrange crypto lending terms in a non-custodial way, governed by the smart contracts of Dharma.
Unlike others in the market, Dharma will offer depositors a fixed rate of return on the cryptocurrency they make available to lend. However, deposits will only earn interest if the borrower uses the assets.
“We are doing fixed-term loans with fixed rates,” Dharma CEO Nadav Hollander said, explaining that the firm worked hard to enhance the user experience for every party.
“There are a handful ways to earn interest on your crypto in a non-custodial manner, pretty much all of those require a high degree of technical knowledge,” he stated.
Hollander revealed that they have decided “strategically as a company to go user-first rather than developer-first. With all that being said, the underlying smart contract is still primarily open source.”
He said the company has been facilitating loans already under a pilot reaching 2,500 users. Per a third-party explorer called Dharmalytics developed by ConsenSys alum Matt Tyndall, about $1.16 million in principal was borrowed across 1,575 loans.
These users came in under Dharma Lever, but as the firm pivots away from the protocol approach, it is changing that name to just Dharma.
“We see the broader shift to blockchain-based financial services as the beginning of a much more efficient, programmable, and equitable financial system,” Dharma co-founder and COO Brendan Forster stated in a press release.
Dharma has significantly changed since its white paper, which detailed a platform in which outside parties would establish themselves to underwrite loans as well as facilitate identifying borrowers.
The company—backed by Polychain, Coinbase Ventures, Green Visor, etc.—has re-oriented itself to function as the only underwriter.
Similar to other collateralized crypto lending products available, Dharma asks borrowers to put up 150% of their loan’s value as collateral. Since there is more demand to lend cryptocurrency than to borrow it, borrowers need to be matched with a lender immediately. After they do, they may borrow DAI or ETH on 28-day terms with a fixed interest rate.
It is during this time when decentralized finance stands out as “borrowers get their principal in less than 30 seconds,” said the firm’s marketing manager Max Bronstein.
If the collateral’s value falls under 125% of the principal, the smart contract will start liquidating the collateral of the borrower.
That is one of the two primary risks faced by users, what Hollander refers to as “volatility risk.” When the price moves badly against the borrower, they might suffer a painful margin call or be liquidated.
Another risk is that Dharma could have wrongly written its smart contacts. Users are somehow protected by audits as well as the “wisdom of the crowd” brought to bear on open-source smart contracts. Per Hollander, “those risks are all transparently understood.”
The firm puts in more business development work to increase demand on the borrowing side. Hedge funds collaborating with Dharma early on to source borrow demand are Wyre Capital, Spartan Capital, Spartan Capital, and Passport Capital.
“Although there is a lot of demand for market trading, we think that by making a much more useable interface we will be able to find more use cases,” Bronstein stated.
Bronstein claims that there will be demand from well-financed ICO startups with massive ETH supplies and staff who are willing to accept DAI instead of dollars.
Either way, Hollander said that “there is much more interest in lending cryptocurrencies than there is in borrowing them.”
Dharma is somewhat subsidizing lenders since the rates paid for borrowing are lower compared to the return received by lenders. Borrowers settle 2% while the lender earns 4% on ETH and 5.5% on DAI if their capital is in a loan.
Such state of affairs is not new in this category though. Delphi Digital’s Anil Lulla said “Dharma is far from the only project in the space currently subsidizing the market,” adding:
“Even centralized options like BlockFi are offering a 6.2 percent return for anything underneath 25 BTC and 500 ETH. These projects are all competing for people’s crypto holdings and need to subsidize temporarily to attract new depositors and quickly gain market share.”
“We think the winner of that battle will be on identity and brand,” Bronstein noted. “Prices will converge.”
Dharma seems like the kind of financing many individuals are familiar with, but it is still not quite similar to personal banking, Hollander highlights—except that it is created to be easy for every participant to comprehend.
“Our approach is to build a non-custodial DeFi product … that can be used from any crypto wallet, including Coinbase,” he stated.
The length of all loans is presently 28 days. Bronstein said they “are working hard to allow more optionality,” noting that the startup is looking to add three- and six-month loan terms in the future.
Several other aspects will change over time. Dharma is currently subsidizing all of the user’s gas fees, but it might not last forever. It is also considering to eventually collect an origination fee, which would probably indicate its pivot from a protocol to a company.
“We will be a very standard revenue-generating business. A normal company, making revenue off of good software,” Bronstein stated.