Lending in Crypto Doesn’t Have To Be Risky. Here’s How Kyoko Does It.

6 min readJan 14, 2022

Lending and borrowing has always been a risky business. To lower the risk of default, borrowers are traditionally subject to thorough credit reports and background checks. For larger purchases, like homes or property, a third-party estimator is typically engaged to provide independent valuations. The cost of risk in lending is so pervasive that an entire sub-industry has emerged specifically to assign default risk scores to loan applicants.

Similar issues plague the blockchain lending environment as well. While there is no shortage of decentralized apps (“DApps”) that allow users to lend or borrow cryptocurrencies, these loans can be quite limited or risky. Due to the pseudonymous nature of cryptocurrencies, blockchain-based credit lending brings a whole host of issues unique to the cryptosphere, such as lack of demographic data, credit histories, income information, and more. This is just one of the challenges that Kyoko aims to solve with its DAO-to-DAO and P2P lending models.

What Are the Limitations of Cryptocurrency Lending?

Like loans for houses or cars, cryptocurrency loans typically require that a borrower post collateral through other digital tokens or assets like NFTs. This form of crypto lending can be useful: these loans are given without a credit check, with relatively low interest rates, and can be approved nearly instantaneously.

However, posting cryptocurrency as collateral fundamentally limits the efficiency of this lending model. For instance, these loans are typically capped by how many digital assets a borrower may have on hand. This limit is expressed by a loan-to-value (LTV) ratio. Most tokens can be borrowed at a LTV ratio of approximately 75%, which would require that a borrower post 1 BTC to borrow 0.75 BTC worth of USDT. However, some tokens may see LTV ratios as low as 25%.

Additionally, crypto-based collateral presents a second challenge: extreme volatility. In the three months since November 2021, the price of Bitcoin has plummeted from $69,000 to its current price just shy of $43,000. Due to rapid price fluctuations, borrowers are at high risk of having their positions liquidated as the value of their collateral may drop below the threshold needed to satisfy the LTV requirement. Following sudden market fluctuations, lending platforms will typically require that the borrower post additional collateral to achieve the required LTV over a short time period. Should borrowers fail to act within the allotted period, the platform will automatically liquidate and transfer ownership of the collateralized tokens.

This is the challenge that Kyoko.Finance aims to solve.

What Is the Kyoko Solution?

Kyoko Finance is a cross-chain lending platform developed specifically with DAOs, guilds, and GameFi players in mind. As game-based NFTs continue to grow in value, it’s important to have flexibility in how to generate value from them. While gaming assets can be used in game, Kyoko also unlocks the ability to generate liquidity through unused NFTs across different gamechains. Through NFT-collateralized lending and unsecured credit loans to DAOs and guilds, Kyoko’s lending models chip away at the current limitations of typical blockchain-based loans. Let’s peek into Kyoko’s lending models to better understand how they work.

DAO-to-DAO Lending

DAOs play a pivotal role in both GameFi as well as the broader cryptosphere. Within the GameFi industry, DAOs are at the heart of large communities of players and investors that pool resources and in-game assets through guilds. Guilds can collect quite a large inventory of in-game NFTs and they’ve grown to enormous valuations. Still, while the industry has blossomed, there still remains limited interoperability in terms of transferring NFTs and their values across different games. This greatly increases the cost and liquidity needed for guilds to expand into new games across different gamechains.

Kyoko has set out to change this with DAO-to-DAO (“D2D”) loans. DAOs that govern well-established guilds as well as smaller guilds with the potential for explosive growth can apply for a credit line from Kyoko to borrow cryptocurrencies or in-game assets. Applicants that pass Kyoko’s credit risk evaluation process will be approved for unsecured credit loans with the potential for higher credit lines through collateralized loans. And, while Kyoko has its roots in GameFi, its DAO-to-DAO lending platform is not limited to guilds. DAOs across various industries that need additional liquidity can come to Kyoko’s DAO-to-DAO lending platform to apply for credit loans.

P2P NFT Lending

Kyoko’s P2P NFT lending protocol allows users to create liquidity from their idle NFT resources. The platform encourages this by allowing borrowers to post NFTs as collateral in order to take out a cryptocurrency loan. Lenders define the specific terms of the loan, including the loan amount, interest rate, duration, and more. Lenders are incentivized to set competitive market values, otherwise borrowers will not accept the listing.

If the loan is accepted, Kyoko will hold the collateralized NFT until the loan principal is repaid with interest. Should the borrower default, the platform will automatically transfer the NFT to the lender and the loan will be completed. Let’s take a look at an example.

Steve needs to borrow some cryptocurrency to get in early on a new game, but he doesn’t want to sell his NFTs because he believes that they will have a higher value in the future. Instead, Steve goes to Kyoko and posts one of his CryptoPunk NFTs as collateral to receive a loan. He values his NFT at around 50 ETH and asks for a 1-month loan of 20 ETH with an interest rate of 10%. Lily comes along and sees that Steve is looking for a loan. She sees that the value of the NFT is over double of the total loan amount and is satisfied with the interest rate, so she accepts the listing confident that she will gain from the exchange one way or another.

Lily decides to loan Steve the 20 ETH for one month at a rate of 10% interest. Lily’s 20 ETH is transferred to Steve, while Steve’s NFT is stored in the Kyoko Vault. At the end of one month, Steve repays the loan plus the 10% interest to Lily. Kyoko releases Steve’s CryptoPunk NFT back to him, and the exchange is complete. Though, if Steve were to fail to pay off his loan, his CryptoPunk NFT would be transferred to Lily.

Kyoko’s lending model has two unique advantages over traditional cryptocurrency lending. First, users evaluate their own NFTs and can ask to borrow as much as they see fit. While that does not necessarily mean a lender will accept their loan — particularly if the values are not in line with market expectations — it does provide borrowers with more flexibility than the traditional LTV ratio model. Second, because the borrowers value their own collateralized NFTs and lenders accept these valuations, broader crypto market volatility will never lead to NFT liquidation on the Kyoko P2P NFT lending platform. Instead, Kyoko is simply the executor of the transaction.

Changing the Crypto Loan Game

Kyoko’s DAO-to-DAO lending enables DAOs across the blockchain industry to access additional opportunities for much-needed liquidity through credit loans. Whitelisted DAOs can choose from lower levels of unsecured loans or higher levels of collateralized loans, and they can use ERC-20 tokens or NFTs as collateral. Additionally, Kyoko’s P2P lending provides a new opportunity for both borrowers and lenders to benefit. Borrowers that have financial obligations but do not care to lose ownership of their valuable NFTs can now collateralize their digital assets for access to the liquidity they need, while lenders can earn additional interest on their idle resources.

With its credit loans for DAOs and ability to collateralize P2P loans with NFTs, Kyoko is chipping away at the limitations of lending in crypto. Blockchain is an industry of unprecedented innovation and opportunity, and we think it only suitable to match it with novel solutions to industry challenges.

About Kyoko

Kyoko.Finance is a DAO-to-DAO and cross-chain GameFi NFT lending market for guilds and players. Kyoko’s DAO-to-DAO lending offers liquidity to promote web3 development, while its guild-to-guild lending, P2P NFT lending, and cross-chain asset lending platforms aim to solve the most pressing issues challenging the GameFi market, including the rising cost of entry and siloed in-game assets across different blockchains. Kyoko’s metaverse will also allow Guilds to display their history, progress, and other accomplishments, while players can connect with others in a world that can be built in, developed, and sold off.

Follow Kyoko at the links below to stay up to date on upcoming events, releases, and news.