Chain financing: what is it and how does it work?

Few companies enter the market without resorting to external financing. In traditional finance, loans to businesses depend on their borrowing capacity. Is it the same in the world of DeFi?

However, it emerged that leverage is not always a reliable indicator of a company’s real financial situation. Focusing primarily on this criterion, traditional banks exclude crypto companies that are still able to honor their debts.

Instead of engaging in tedious procedures with banks, companies can resort to on-chain financial tools and Web3 accounting such as the Bulla Network. As the name suggests, chain finance is a system that allows businesses to apply for loans directly on the blockchain.

In other words, it is a crowdfunding system that offers Web3 companies the opportunity to apply for loans directly from the cryptocurrency community.

Chain financing: progress

Today, Web3 companies, including metaverses, DeFi projects, and NFT or Play to Earn platforms, face major hurdles when it comes to funding. In fact, some banks avoid funding cryptocurrency projects at all costs, treating them like a lottery or pornography company.

Worse still, even the few banks that allow cryptocurrencies can block or seize their customers’ accounts at any time and without warning. An Indian bank recently froze more than 70 BTC, while the South Korean authorities asked for the freezing of more than 3,000 BTC belonging to Do Kwon.

If Web3 companies can’t even open a bank account, how can they access traditional forms of financing? And even if a bank agrees to open a bank account in the name of a cryptocurrency company, the risk of seizing the funds doesn’t encourage leaders at all. Likewise, the absence of an established history of fiduciary transactions makes it nearly impossible to obtain a loan. This is where chain financing comes in.

Chain financing: how does it work?

Chain financing, also known as decentralized or crypto lending, is a form of loan that is applied for and obtained on the blockchain. In other words, instead of going through a traditional financial institution, companies borrow directly from cryptocurrency investors. To do this, they deposit their crypto assets as collateral and present the transaction history to the lenders.

Web3: The Internet of Tomorrow – Photo by BeInCrypto

On-chain financing is accessible to all Web3 projects excluded from the traditional banking system. This type of loan also offers numerous benefits to the borrowers, including the ability to directly access the borrowers’ transaction history, etc. Likewise, companies can use their crypto assets as collateral, regardless of their borrowing capacity.

Additionally, chain lending platforms typically require borrowers to send collateral in excess of the loan amount, which reduces the risk of default and protects investors. (or lenders).

Finally, on-chain financing platforms are generally based on completely transparent blockchains. This way, investors can see where their funds are going and how they are being used.

The Web3 at the service of crowdfunding

Accounting software such as QuickBooks or Xero are not intended for cryptographic businesses, as they were not designed for cryptographic assets and transactions. Therefore, these software cannot track the value of your cryptographic collateral, nor properly account for chain transactions.

Fortunately, there are Web3 accounting solutions that make things a lot easier for companies in the cryptocurrency sphere. Through these platforms, companies can track their crypto assets and transactions in real time. Likewise, they can at any time provide financial information to their potential investors, thereby gaining credibility.

Even better, web3 accounting platforms allow businesses to use their networks to raise money through what is known as chain crowdfundingor chain crowdfunding.

Like platforms like GoFundMe, chain crowdfunding allows anyone with a network to request donations and any Web3 business to borrow funds.

challenge
Traditional finance excludes many sectors, especially cryptocurrencies. DeFi Loans Can Solve This Problem – Photo by BeInCrypto

To sum up

Chain Loans are a perfect financing option for Web3 businesses. The latter can use their crypto assets as collateral, their transaction history as proof, and members of their networks as potential lenders.

Disclaimer

All information on our website is published in good faith and for general information purposes only. Any action taken by the reader based on the information found on our website is entirely at your own risk.

Leave a Comment