SALT Blockchain-Based Lending: How It Works, Benefits & Risks

Borrowers can use crypto as collateral without having to liquidate their holdings

What Is SALT Blockchain-Based Lending?

SALT is an acronym for Secured Automated Lending Technology. SALT Lending provides a platform where members can take out a loan using cryptocurrency as collateral. SALT was founded in 2016 by a group of Bitcoin enthusiasts to offer crypto-backed lending and provide flexibility for investors who hold digital assets. This article explains how it works.

Key Takeaways

  • SALT (Secured Automated Lending Technology) Lending is a company that offers loans to members who put up cryptocurrency as collateral.?
  • SALT Lending provides both personal and business loans.
  • SALT loans allow borrowers to maintain ownership of their digital assets, while also gaining access to cash through the loan.
  • If the cryptocurrency's price declines, a breach of the loan-to-value?(LTV)?threshold can occur, resulting in a "collateral maintenance call," similar to a margin call.
  • Loan terms are 12 months, 36 months, or 60 months. Interest rates recently ranged from 0.95% to 9.99% depending on the term and LTV selected.

How SALT Blockchain-Based Lending Works

SALT Lending provides personal and business loans to members who put up blockchain?assets as collateral.?Users buy a membership to the SALT lending platform by purchasing a SALT token, which is the platform's cryptocurrency. When someone becomes a member, they can borrow money from an extensive network of lenders. SALT's minimum loan amount is $1,000, and loans can be used for any purpose, such as paying down credit card debt or buying a car.

SALT is built on an ERC-20 smart contract. Smart contracts are contracts that, in addition to stipulating the terms of the agreement, also enforce and execute on those terms with cryptographic code. ERC-20 is a standard that any Ethereum token contracts must implement in order to facilitate the exchange of tokens. 

Borrowers can only use blockchain-based cryptocurrencies as collateral. In other words, the borrower must have the ownership of their crypto recorded on a public, permissioned blockchain. Some of the digital assets that can be used as collateral for SALT loans are:

Following the approval of the loan, the borrower sends collateral to the SALT collateral wallet. In return, the loan proceeds are transferred to the borrower's bank account. The digital assets held as collateral remain the property of the borrower, meaning any price changes of the assets belong to them.

During the lifetime of the loan, the borrower must make timely, periodic payments to the lender and once the loan has been repaid—called loan completion—the borrower's collateral is made available for withdrawal.

Like many companies in the cryptocurrency world, SALT Lending became caught up in the collapse of the currency exchange FTX, causing it to temporarily postpone deposits and withdrawals in November 2022. California also suspended SALT's lending license for that state. After an infusion of $64 million in capital in February 2023, the Denver-based lender announced that it had "embarked on a growth plan that we believe positions us for even greater success in the future."

Requirements for SALT Loan Approval

SALT loans do not require a credit check or credit score for the borrower, as many bank loans do. That's because the crypto assets used to secure the loan can be liquidated if the borrower fails to repay the loan—a process called default.

Eligibility is based primarily on the value of the borrower's blockchain assets. However, SALT does perform verification of each borrower, to comply with anti money laundering (AML) and know your client (KYC) regulations. Once a member has been deemed eligible, SALT allows the loan application to move forward.

SALT's Loan-to-Value Ratios

Since the collateral being used to secure the loan is a cryptocurrency, it can fluctuate as the market price of the crypto changes over time.

If the value of the cryptocurrency rises, the borrower can, if they wish, use it to obtain additional funds from the lender. The borrower can also do nothing and use the additional proceeds from the increased value of the digital assets to eventually pay off the loan.

However, if the price of the cryptocurrency decreases significantly, it can lead to a breach of the loan-to-value (LTV) threshold, resulting in a "collateral maintenance call," which is similar to a margin call on a traditional brokerage account. That's when the broker requests additional funds from a customer who has purchased stocks on margin (with borrowed money from the broker), due to a decline in the value of their collateral.

How a Loan-to-Value Ratio Is Calculated

The loan-to-value (LTV) is calculated by dividing the loan principal amount by the current U.S. dollar value of the digital currency in the SALT wallet.?The initial loan-to-value ratio is based on the terms within the original loan agreement. For example, if a $100,000 loan is secured by $155,000 in Bitcoins, the initial loan-to-value ratio would be 65% (100,000 / 155,000 = 0.65). In other words, the loan amount represents 65% of the value of the Bitcoin assets held as collateral.

The initial loan-to-value ratio will decrease over time as the borrower pays down the loan. However, if Bitcoin's price declined significantly, the loan-to-value ratio would increase. For example, if the total value of the collateral decreased to $110,000 due to a fall in Bitcoin, the loan-to-value ratio would increase to about 91%.

The borrower would then have to provide more collateral by depositing an additional amount of the cryptocurrency or else make a payment to reduce the outstanding loan balance. The loan-to-value ratio is tracked by a smart contract, which calculates and updates the ratio throughout the life of the loan based on the changes in the price of the digital asset held as collateral and the various payments made by the borrower.

SALT Loan-to-Value Ratio Triggers

These are the loan-to-value ratios that would trigger a margin call for a SALT loan:

  • 75% LTV: 1st margin call warning
  • 83.3% LTV: Margin call with 48 hours?to reduce LTV to 70%
  • 90.91% LTV: Automatic stabilization with a 5% fee

If the value of the digital asset held as collateral crashes and the loan-to-value ratio reaches 90.91%, SALT converts the entire crypto portfolio into a U.S. dollar-based stable coin—a process called automatic stabilization. Once the loan-to-value has been reduced to 83.33% or lower by either making a payment to reduce the amount outstanding or depositing additional collateral, the borrower can then re-enter the market by converting the stable coin back into their original digital currency.

The stabilization process helps to preserve the value of the cryptocurrency assets held as collateral during market downturns. Stabilization also provides the borrower with time to decide when they want to re-enter the market and purchase the original digital asset.

Loan Length, Interest, and Fees

The loan term can be 12, 36, or 60 months, and SALT does not charge an origination fee for setting up the loan. Borrowers pay interest on the loan, as they would on any other loan. Rates recently ranged between 0.95% and 9.99% depending on loan length and LTV. Also, if stabilization is triggered, SALT charges a 5% processing fee.

The deposited funds held as collateral do not earn interest.

Benefits of SALT Loans

A likely SALT borrower would be someone who believes the digital assets they use as collateral will increase in value over time or at least remain the same. (In crypto jargon, that makes them HODLers.) SALT loans allow them to maintain ownership and benefit from any gain in their digital currency's value, while also obtaining cash for other purposes.

What Is a HODLer?

HODLer is a crypto-world term for someone who plans to hold onto their digital assets, rather than a short-term speculator. HODL originated as a misspelling of the word "hold." The term has since come to be translated as an acronym for "hold on for dear life."

What Is Loan-to-Value?

Loan-to-value is the ratio between the size of the loan and the value of the collateral securing it. If either the loan or the collateral are in assets with variable value (such as non-stable cryptocurrencies), the loan is at higher risk of having an inadequate loan-to-value at some point, requiring action on the borrower's part.

What Are the Risks of Crypto Lending?

Among other things, cryptocurrency loans are at risk of smart contract security failures and custodian security issues. Lending platforms may also be the target of cyberattacks. In addition, there are still unclear cryptocurrency lending regulations.

Cryptocurrency has historically been volatile, which poses risks to borrowers and lenders alike.

The Bottom Line

SALT blockchain-based lending gives investors access to cash without having to sell their cryptocurrency holdings. However, there are risks to the borrower since cryptocurrency prices can fluctuate wildly. If the digital asset used as collateral drops in value, the borrower may need to pay down a portion of the loan or deposit additional crypto assets as security.

Investing in cryptocurrencies or Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

Article Sources
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  3. SALT. "Personal Loans for HODLers Like You."

  4. SALT. "Update Regarding Our Supported Collateral Types."

  5. State of California Department of Financial Protection and Innovation. "DFPI Suspends SALT Lending LLCs Financing License Pending Investigation."

  6. SALT. "Notice to All California Residents, SALT Has Entered Into an Agreement With the Department of Financial Protection and Innovation of theState of California."

  7. Global Newswire. "SALT Lending Completes a Conversion of Approximately $64M in Debt Through a Series A Preferred Stock Issuance in Preparation for Growth."

  8. SALT. "How Are the LTV Margin Triggers Determined?"

  9. SALT. "Stabilization."

  10. SALT. "Personal Loans for HODLers Like You."

  11. SALT. "How Are the LTV Margin Triggers Determined?"

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