Over the last couple of days with us nearing the anniversary of Celsius’ implosion I have been thinking a lot about the fundamentals behind lending and trying to get my head around the concept of borrowing crypto. Was it always a scam or were there ever any solid foundations behind the business.

So to kick off we have to start with first principles and the principle is as simple as the one banks use for their retailing banking model (as opposed to investments / advisory / consultancy and any other services we might use). Retailing banking is the model we are most likely to be familiar with and the form of banking that we use without thinking about it.

The principles are illustrated below.

• Charlie wants to save £1000 and so he puts it in ABC Bank, who promise him 1% interest paid annually.
• Fred wants to borrow £1000 for some home renovations and so ABC Bank lend him “Charlie’s money” at an interest rate of 10%
•  At the end of the year Fred has paid back ABC Bank £1100 (£1000 principle + £100 interest) and given Charlie £10 leaving him with a balance of £1010.
• The bank take £90 for their services and the profit is calculated on the basis of this £90 minus any overhead for staff, premises, utilities, etc.

I have oversimplified the model for the sake of understanding. I have used straight line interest rather than compound interest which is the normal model and not mentioned the fact that any lending organisation needs a level of liquidity to be able to function. Very often banks will also charge clients for having an account with them and this could eat into Charlie’s interest.

While banking fees are applied in the UK they are very rarely applied to personal accounts unless you are paying for additional benefits (eg a preferential exchange rate for foreign currencies and a reduced interest rate on overdrafts etc). Business accounts usually come with fees attached.

I know this is not the general model, but if clients are providing a significant amount of the liquidity in retail banking then it seems immoral to charge those who are providing funds to drive their profits.

This is probably why the dream of unbanking ourselves was born.

So now we have established that we are ready to move on to how this affects Crypto lending and how that model is supposed to work. And that my friends will be the subject of my next post.

As always, my friends stay safe and well.