San Francisco-based lender Divine Research has issued approximately 30,000 unbacked short-term crypto loans since December, leveraging World ID, the iris-scanning platform founded by Sam Altman of OpenAI, for borrower verification. The loans, offered in USDC stablecoins, primarily target underserved borrowers globally, who are often overlooked by traditional financial systems.
Divine aims to provide loans under $1,000 to individuals who might not typically have access to financial products. By using World ID, the platform ensures that borrowers cannot open multiple accounts after defaulting, providing a layer of security to prevent fraudulent activities. Diego Estevez, the founder of Divine, explained, This is microfinance on steroids, as the platform brings access to credit to people like high school teachers and fruit vendors.
High interest rates to compensate for default risk
Divine sets interest rates for its loans between 20% to 30%, which compensates for its reported 40% default rate on first loans. While this default rate is high, the interest rates are structured to offset the losses, making it a viable option for both borrowers and lenders. Additionally, World tokens issued to borrowers may be reclaimed partially to help mitigate the risk.
Divine’s model offers an opportunity for everyday investors to fund high-risk loans and earn returns. Estevez said that anyone can provide liquidity to the platform, and after accounting for default rates and interest rates, lenders are guaranteed to make a profit. This open model allows a broader range of individuals to participate in the crypto lending space, which has traditionally been dominated by larger institutional players.
Growing market for uncollateralized crypto loans
Divine is part of a growing group of high-risk crypto lenders, alongside startups like 3Jane and Wildcat, which are capitalizing on the renewed market momentum. 3Jane offers uncollateralized credit lines on Ethereum, while Wildcat caters to market makers and trading firms. Though these platforms have different approaches, they share the aim of offering unsecured loans with innovative terms.
Though still a small segment of the crypto market, crypto lending is attracting renewed interest, especially from institutional players. Reports suggest that JPMorgan Chase is exploring crypto-backed loans, planning to lend directly against assets like Bitcoin and Ether. However, the crypto lending space is still grappling with the aftermath of major collapses in 2022, such as Celsius and Genesis, which serves as a cautionary tale in the sector.