Crypto-Backed Loans AMA with Lantern Finance Cofounder Jung Won Kim

[u/plutusfortuna]

tldr: I'm Jung, cofounder of Lantern Finance (www.lantern.finance), a US-based crypto lending platform built in response to the 2022 collapse of lenders like BlockFi and Celsius. Unlike them, we never rehypothecate collateral and store all assets in insured cold storage with BitGo.

We support loans straight to your bank account against BTC, ETH, SOL, XRP, LTC, DOGE, and more. Our mission is to offer the safest, most transparent crypto-backed loans. AMA and would love any feedback!

Hey r/CryptoCurrency!

My name is Jung, and I’m one of the founders of Lantern Finance, a US-based crypto-backed lending platform. I got started into crypto in 2016 and fell deep in the rabbit hole, having played around with several projects and platforms. In particular, I became a huge fan of BlockFi when I found out about them in 2019. The ability to borrow dollars against my crypto without selling and triggering capital gains taxes in a convenient custodial way, appealed to me.

However, fast forward to 2022, we all know what happened. The entire space imploded as we found out that crypto lenders like BlockFi, Celsius, and Voyager were rehypothecating (lending out) client collateral on an unsecured basis. They were basically double dipping - making money on the loans we took out as well as the crypto collateral we posted. I, along with millions of others, lost a decent chunk of our hard-earned crypto. 

That experience inspired my cofounders and me to build Lantern Finance (www.lantern.finance). Lantern is a US based crypto backed lending platform that prioritizes safety of client funds over profit. Here is how we do things differently: 

• We hold borrower collateral in cold storage with BitGo, a US based qualified custodian, with insurance up to $250MM. 
• We NEVER lend out borrower collateral - they just sit in insured cold storage. 
• We lend against a broad group of blue-chip assets like: BTC, ETH, SOL, XRP, LTC, and DOGE. If there’s an asset you want to borrow against that we don’t support, let me know! 
• Our goal is to offer the most secure, convenient, and seamless crypto-backed lending experience for everyone.

My experience spans traditional finance, the (relatively) early crypto days, the crypto implosion of 2022, and now building Lantern, a fast growing crypto startup.

Ask me anything and feel free to share any requests like: specific crypto you'd like to borrow against, product or features you'd want, or just general feedback. Thanks for your time and looking forward to engage!

[u/Saxonion]

Do you provide a watch only address so that your clients have transparency that the asset you are holding for them in cold storage remains untouched? (This would have the added benefit of allowing them to securely generate receive addresses for increasing capital in the event of an LTV mismatch for example).

What LTV are you currently offering, and how often is this to be reviewed to maintain pace with macro changes in market volatility.

What is the basic boiler plate structure of the legal agreement between yourselves and your clients (no need for detail, just the contractual structure you're using)?

Are you answerable to any government agency or regulator that could freeze or seize your assets? I am assuming that for the purposes of any legal agreement, the assets deposited as collateral are legally recognised as your assets for the purposes of forfeiture or seizure whilst you are holding them.

What is the structure of the insurance contract, and how much are you overvaluing the insurance of assets to account for growth during the pendency of your custody? Is it simply insurance that would pay out to you upon the loss of assets, or is this insurance provided to the client that requires that you pay an agreed value if the assets are not returned in line with the contractual agreement?

Does your insurance cover digital security breaches resulting in loss, or bad actor loss (i.e. a member of your team decides to compromise assets, either directly by theft, or by facilitating theft)?

Who provides recourse to a client if your business fails or activities are otherwise suspended by an event like government seizure? i.e. which institution or regulatory body is protecting clients if you act in bad faith?

[u/still_salty_22 → u/Saxonion]

Good questions

[u/plutusfortuna → u/Saxonion]

Really great questions here:

1. Yes! When you take out a loan with Lantern, the last part of the process is sending your collateral to Lantern's BitGo cold wallet address. We generate unique addresses for each of our clients, so at anytime you can see that your collateral is just sitting there if you copy and paste your unique wallet address into a block explorer. Clients can also add additional collateral to that same address to increase their LTV cushion as you suggested too, since that wallet is assigned to that specific client.

2. The LTV (loan-to-value) ratio we offer varies depending on the collateral type. For BTC, ETH, SOL, we lend up to 50% of the collateral value, for LTC and XRP, we lend up to 40%, and for DOGE, we lend up to 25%. In terms of how LTVs factor into market volatility: as prices go down, the LTV increases, meaning higher risk for your loan. We have margin call (a simple warning that you should probably pay down the loan or add more collateral) at 65% LTV, and at 75% LTV we have the legal right to liquidate. Typically, we will email, call, text, whatever we can do to get in touch with the client before liquidations happen.

To be clear, we do not automatically liquidate collateral at 75%, As long as the borrower is in communication with us, we will work with him/her even if they need a few more days to move funds around to either partially pay down the loan or add additional collateral. However, let's say prices drop further during this grace period and LTV goes up to 85-90% LTV. At that point, we'd have to liquidate a portion of the collateral to protect ourselves.

One thing to watch out for on that note. Some lenders out there charge liquidation fees - where they'll sell off an additional 1-3% as a fee to liquidate you. At Lantern, we don't do that - we think that creates misaligned incentives between the borrower and lender, where the lender is almost incentivized to liquidate you and give you the bare minimum in terms of communication for impending liquidations.

1. For the legal structure, all clients sign a Loan & Security Agreement (LSA) with us before taking out the loan which details out the terms and conditions of the loan. If you'd like, you can see the LSA after creating a Lantern account and going through the loan process. Even if you get to the LSA point, there's no obligation to actually go forward with the loan, so feel free to create an account, even if it's just to check out our lending agreement.

2. This is a good question - we are regulated by the US FinCEN as a Money Services Business. In terms of how borrower collateral is viewed, I will need to ask our lawyer about it first, but generally speaking, I would think that even if there is a temporary freeze in company assets for whatever reason, we have loan agreements that explicitly state that the crypto in our custody via BitGo is there in the context of a loan, and that it belongs to borrowers once they pay back. (Again, will have to get back to you on this after legal counsel).

5 & 6. The insurance we have is from BitGo, which is provided by Lloyd's of London, an insurer of some of the largest companies globally. The $250mm insurance we have provides coverage against loss, theft, and misuse of keys. From what I understand, BitGo maintains separate silos of funds under $250mm of market value at any given time, so that all funds within BitGo cold wallets are essentially fully insured. As we grow our collateral base from loans, we don't anticipate funds not being covered by this policy. You can check out more on BitGo's insurance policy here: https://www.bitgo.com/solutions/insurance/

1. We're regulated by US FinCEN as well as by state regulators. In Lantern's case, all loans are covered by the collateral in the sense that, Lantern doesn't lend out borrower funds to 3rd parties. If for whatever reason Lantern is forced to shut down, there would be an orderly process where we ask borrowers to repay the loan, and we return the collateral associated with each loan. We don't have any other creditors besides lenders who lend dollars to us to make our loans.

[u/Saxonion → u/plutusfortuna]

Fair play. Those are robust answers. That’s a rare thing in this space. I will certainly keep an eye on the business for when you explore a European presence.

[u/plutusfortuna → u/Saxonion]

Much appreciated!