Meld launches decentralized lending on Cardano for the unbanked

Decentralized businesses built around the blockchain are multiplying, and Meld is unveiling a cryptocurrency borrowing and lending protocol based on the Cardano blockchain today. It raised money through an initial stake pool offering, or ISPO.

If you’re not sure what that means, then sit back while we attempt to explain.

One of the things Meld does is let people use cryptocurrency as collateral for getting loans in fiat (traditional currency such as U.S. dollars). Singapore-based Meld has raised $45 million via the ISPO as well as a separate private token sale. It has created a non-custodial, decentralized lending and borrowing protocol that is aimed at leveling the playing field between financial haves and have-nots.

More than two billion people in the world don’t have bank accounts or are so poor they don’t need them. Meld aims to help them by providing a range of financial tools and solutions built around leveraging cryptocurrency assets as collateral for fiat or crypto-based loans, said Ken Olling, CEO of Meld, in an interview with VentureBeat.

“We are excited to offer billions of people a new way to access powerful financial instruments, products and services — but even better and more innovative thanks to the power of the Meld protocol,” said Olling. “Offering a way to stake cryptocurrency as collateral against a fiat loan is powerful for so many reasons — not the least of which is sheltering highly-volatile cryptocurrencies from a forced sell during a market bottoming out. We are very excited to provide unique financial products and services to our customers in the months to come as Meld tokens become widely-shared across different exchanges.”

The ISPO

Meld set this fundraising up over a period of months and worked on creating a community of supporters. It already claims close to have about 40,000 token holders for its $MELD tokens.

Olling started Meld in late 2020, and the company launched its ISPO, a new kind of crowdfunding, on July 1, 2021. It completed the process in December.

Meld was the first company ever to carry out an ISPO. Token holders staked more than 620 million ADA, the tokens for the Cardano blockchain, which was the equivalent of around $1 billion. That helped the company raise $10 million for its own funding round. Meld raised another $35 million through an additional private token sale.

“We wanted to create as fair a way of raising our money as we could,” Olling said. “We saw that the typical way of raising money was heavily skewed towards institutional investors, aka normal people are not allowed to participate.”

He said they realized that the Cardano blockchain could enable something novel.

“So we could build these stake pools to allow people to stake the way they would normally in a layer one blockchain,” Olling said. “And instead of getting the staking rewards, which is what you would normally get, they would get the Meld token. In exchange, we would keep the rewards. And that would be our formal way of fundraising. And then when the fundraising was complete, we could airdrop tokens, based on a mathematical equation on the amount of tokens that people had staked.”

Built on Cardano

Cardano is a third-generation cryptocurrency, which tries to improve on second-generation cryptocurrencies such as Ethereum and first-generation cryptocurrencies like Bitcoin. A decentralized cryptocurrency keeps track of all transactions by all addresses on a peer-to-peer shared record. One of Cardano’s innovations is the ability to support high-transaction capacities, fast transaction times, and low transaction fees, through a system of proof-of-stake.

Cardano is not minable. The blockchain is a record of all transactions, but rather than validation by anyone who performs the proof-of-work, transactions are validated by consensus proof-of-stake. This is also far more environmentally friendly than mining other cryptocurrencies, as they are not using enormous amounts of electricity.

“We wanted to build a lending and borrowing protocol on the Cardano blockchain,” Olling said. “The reason why we chose the Cardano blockchain was that it was new and had around $40 billion in market cap was not doing anything. And so we wanted to have a first-mover advantage in that space. And also, because it had such low transaction fees. That allowed us to have very high capital efficiency, which meant that we could then offer these services to people outside of the wealthiest nations.”

He added, “So spending 30 to $50 on gas fees, is not realistic if you live in Nigeria, or live in Brazil. So that’s kind of the context for it.”

Blockchain-based cryptocurrencies like Cardano work by grouping transactions together in data blocks and then linking the blocks cryptographically. The chain of blocks is stored across a decentralized network of stakeholder nodes, and distributed as peer-to-peer shared files. Quantities of Cardano are stored at addresses, cryptographic sequences are paired with a private key used to spend the amount at the address. The user’s wallet keeps track of all their Cardano addresses and adds up the balance.

“In the case of Cardano, you do a soft link of the asset from your wallet to the stake pool,” said Olling. “So you’re pledging or you’re voting with your tokens. Your tokens always stay or your coins always stay in your wallet, but they’re locked up and they can’t be used for anything else. So it’s a much safer way of going about it.”

He added, “In our case, we did it for five months. And what that means is you build a community. So people come on slowly, but surely over the period of time. If they believe in you, if they vet you, if they see how the community is, and they want to stick around, they can. So it means that you’re building a community. And it also means that that community is constantly vetting you for a long period of time. So 40,000 people that have been involved in the project for five months.”

Cardano was created by Charles Hoskinson as an attempt to technically improve Bitcoin and Ethereum, increasing the amount of transactions that can be processed, by replacing computationally-expensive proof-of-work with a proof-of-stake. Cardano borrows the blockchain concept from Bitcoin, and the smart contract concept from Ethereum. Cardano is maintained by the IOHK (Input Output Hong Kong), and the software is open-source, so anyone can improve it.

Cardano is used for anything money is used for — buying, selling, donations and a whole lot more. However, Cardano can also be used for even more things than fiat currency, including a means of accepting donations or facilitating commerce that cannot be shut down by governments or the banking system.

Decentralized loans

Meld represents the first decentralized protocol that incorporates fiat (like U.S. dollars) loan capabilities into the cryptocurrency ecosystem. Meld enables low-friction transactions between crypto and fiat positions while maintaining control of a customer’s owned digital assets.

Meld believes that its crypto-backed fiat loans will be more useful than just taking out a cash microloan. It offers a different type of utility because users are able to deposit cryptocurrency, which is locked in the account, and then borrow value against that locked collateral. The use will be determined by the individual. 

The Meld token can be staked on the Meldapp to provide insurance for the Meld protocol. In doing so, Meld stakers will earn a yield through protocol fees and liquidity reward programs (up to 15% currently). The Meld protocol was created to bind the on-chain (crypto) and the off-chain (fiat) worlds together, as well as uniting the many blockchains and DeFi (decentralized finance) protocols.

Meld has two locked staking options. One is a six-month lock and the other is 12 months. They are earning a 12% annual percentage rate and a 15% annual percentage rate, respectively.

Meld was designed as a DeFi protocol, powered by the Cardano blockchain and smart contracts to ensure transparency and fairness for all parties (including both the minting and distribution of tokens). The Meld token is used for governance of the protocol, and users can stake it to earn yield.

Meld capitalizes on Cardano’s transaction efficiency compared to older blockchains, which drastically reduces fees by more than 99% compared to Ethereum-based solutions. That means the computing costs and environmental costs are lower, resulting in lower fees.

The service is expected to be appealing in the European Union and countries such as El Salvador and Nigeria, where cryptocurrency is either already fiat currency or is in mainstream usage. Meld said that countries that adopt crypto as their main currency would be in a tremendously advantageous position, as they can seamlessly leverage their value and earn an interest return for providing it as lending liquidity.

The African mobile provider Tingo is working with Meld on our effort towards seamless mobile app integration as well as Polygon, and Vent Finance with ADAmatic, a bridge that will connect the Polygon blockchain to the Cardano blockchain.

Genius Loans

Meld tokens will be available for purchase from crypto exchanges such as Bitrue and FMFW beginning today. Currently the Meldapp is being utilized with the Nami wallet. To reduce the environmental effect of the blockchain computing, Meld has donated 87,500 ADA towards planting trees.

Meld will provide new financial services never offered by traditional banks, including not only standard cryptocurrency-backed loans, but also the company’s unique Genius Loans. With a Genius Loan, the customer collateralizes their cryptocurrency and takes out a loan with a slightly-higher interest rate. The customer is only required to service the interest on the loan, while the yield generated from the crypto collateral pays down the principal.

Since Nigeria has had big currency fluctuations, people have had to hedge their positions in cryptocurrency. But because they are hoping the value will go up, they don’t want to touch that crypto. So they have to let it sit in the account and appreciate. With Genius Loans, they can get access to money.

Tingo has preloaded mobile phones with the Meld application on them. People can take their cryptocurrency, lock it up in a non-custodial manner, and then borrow fiat against that. So someone who makes $800 a month can take out a loan.

“We’re not putting anybody into debt,” said Olling. “We don’t believe that putting people into debt is a good way of getting them out of poverty. We’re trying to make it so that they make the best decisions, to invest in assets that are going to benefit them in the long run. And they can get some of the value from those assets now, and then be able to pay that back and keep their long positions.”

He added, “We wanted to try and do something a bit fairer, along the same lines, as we did with the ISPO, and so we came up with this idea of a Genius Loan. In a Genius Loan someone locks up their crypto into a smart contract, and they can borrow fiat. That crypto is then used as collateral in the DeFy space and generates a yield. And part of that yield is used to pay the principal on the loan. So it’s a self-paying loan. The customer has to pay the interest, which is tax deductible, but they don’t have to pay the principal. So depending on market conditions, the loan will pay itself off between three and six years.”

And he said, “For the unbanked, these Genius Loans let you take out a loan, and, except for the interest, it just pays itself back. That’s fantastic for people who are poor, or don’t even have a bank account to borrow against.”

Meld also offers a Crypto-Backed Credit Line (CBCL), which provides a flexible tool for managing fiat cash requirements while only being exposed to interest on the amount of fiat used. The CBCL works in conjunction with the Meld debit card where users can spend with their Meld Card both at point-of-sale and online.

The CBCL works similar to a fiat loan, where cryptocurrency is collateralized in a smart contract and 50% of the collateral value can be used as a line of credit. Margin calls and liquidation events work the same in the line of credit product as they do in the Meld Loan.

Users interact with the Meldapp via iOS, Android or in the browser to access their digital assets to lend, borrow and manage the services offered by Meld. Customers keep the keys to their assets at all times for security. Other crypto-to-fiat loan options are centralized and require the user to give up their private keys, Meld said.

Finally, Meld also enables so-called “Melded assets,” where anyone can bring in tokens from other blockchains such as BTC, ETH and BNB directly into the third-generation Cardano smart contract enabled blockchain. This not only increases crypto liquidity, it also allows people to stay long in their crypto of choice instead of forcing them to use only Cardano’s ADA tokens. Meld also benefits from the performance and user transparency of Cardano.

The Meld Foundation in Switzerland controls the protocol, and the development company Meld Labs is based in Singapore. Meld Labs has 45 people. Meld is still trying to get licenses required by regulators in the U.S. and Europe.

“What we’re doing now is we’re building the protocol,” Olling said. The protocol will be built over the summer, and we’re most likely going to launch it sometime at the end of this year. We’re doing something that no one has ever done before it which is lending and borrowing to both crypto to crypto, as well as crypto to fiat, in a decentralized manner. We have a lot of regulatory hurdles that we have to go through in order to be able to achieve the goal.”