3 Ways to Identify Responsible Lenders to Manage Digital Assets

At Ledn, here are the questions we suggest investors ask when assessing if a potential lender can manage investment risks and maintain respectable returns. 

1. How is the lender generating yield on my assets?

Some lenders will always be tempted to take big risks to try to earn more money and drive more profitability. But generating large yields often comes with the sacrifice of taking outsized risk of losing invested assets.   

If the market for US dollar stablecoin is 8-10% and someone else is paying 20%, investors must ask hard questions about how they can do that. When yields appear too good to be true, they usually are.  

Right now, prudent lenders still see opportunities in the market where they could seek higher yield for clients. However, they’re making a conscious effort to assess those opportunities and choose not to invest where the risk of losing client assets is too high. At Ledn, we have been fortunate to have zero loan losses since our inception, because we build such skepticism into our risk assessments.  

2. Who are the lender’s counterparties?

Next, ask about their approach to diversification. Counterparty diversification has long been a hallmark of sound risk management. Spreading the risk is a sign a potential lender is adopting a conservative approach to wealth-building, especially when others are taking larger risks.  

Right now, any digital asset business issuing loans to a single counterparty is facing a great deal of ‘concentration risk’. When a borrower gets into some sort of financial trouble and is unable to repay all assets back in this scenario, lenders can soon discover the amount of cash within the company is less than the unpaid loan.  

It’s also important to ask the types of  borrowers your assets are being loaned to in order to generate the yield you are receiving. Some lenders, like Ledn, will only issue loans to high-quality institutions and credit-worthy borrowers that don’t take a directional view of the market. Be sure any potential lender safeguards assets, through strong underwriting and ongoing monitoring of counterparties.   

3. Can I access my assets quickly?

Above all, seek out comfort about the return of the assets, not just the promised return on those assets. Ask this when assessing any lending partner to manage digital assets: how are they managing the risk associated with those assets? Borrowers can be assured a lender is engaged in responsible risk management if the assets remain secure, and they can be pulled back from that institution whenever they are needed. 

Risk and reward trade-offs will always drive an investor’s decision-making when pursuing long-term goals like growing generational wealth. But to generate yield, risks need to be relative to the market environment. And the assets need to remain accessible — always. 

This post is commissioned by Ledn and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.