Lending on Kadena: Automating Loan Syndication with Blockchain Smart Contracts

Traditional financial lending is the backbone of an economy as it stimulates consumption, investments, and economic growth. Lending is essential for retail consumers and businesses to buy goods and services or grow and invest in means they otherwise cannot afford. The 2024 global lending market has grown to over $11T in 2024 and is expected to reach over $15T by 2028, showcasing the demand for loans and other lending products (Lending Global Market Report 2024).

Given the necessity and demand for lending infrastructure, blockchain-based lending protocols have begun to appear as a means to provide a borderless and transparent way for consumers to invest and borrow funds with little to no restrictions. Decentralized lending applications serve as a window into how the qualities of blockchain technology can help enhance the existing global lending infrastructure. Financial products such as syndicated loans will benefit from lower costs and improved efficiency, security, and speed.

Benefits and challenges of syndicated lending

Syndicated loans are one of many different types of lending products. They are beneficial for financial institutions and borrowers by enabling large loans to be issued and sourced from multiple parties, for situations like capital expenditures, refinancing, and acquisitions. For financial institutions like banks, syndicated loans help disperse the risk and exposure among several lenders. For borrowers, syndicated loans allow for borrowing of larger amounts than otherwise possible from a single lender; rather than taking out several loans, a syndicated loan is consolidated into one loan note.

While the syndicated loan process works at present and provides benefits to lenders and borrowers, there are several challenges along the way that if addressed with the proper technology could enhance overall efficiency.

To begin, the verification process for lenders to form a syndicate to issue a loan is labor- and time-intensive, requiring the collation of information and documentation from several sources for each party. Financial institutions currently rely on manual, inefficient processes to share and verify information between members of the syndicate to structure complex loan agreements.

The process of forming the syndicate is burdensome and complex: underwriting the loan, disbursing funds such as principal and interest payments, and managing the ongoing loan servicing. All these steps require a significant reliance on third parties leading to long wait times and mounting costs.

Given these limitations, the introduction of blockchain technology and the formation of decentralized finance provides users, retail or business, the ability to access financial products by reducing scalability barriers.

DeFi is quickly transforming lending

The rise of decentralized finance (DeFi) and peer-to-peer lending provides unmatched speed, accessibility, security, and convenience that only blockchain-based lending solutions can offer.

DeFi automates the loan process by utilizing smart contracts to handle the execution of loan terms, including loan duration, interest rates, and repayment conditions. Lenders access liquidity by depositing their digital assets into a lending protocol to earn interest, while borrowers deposit collateral into a smart contract to secure their loans. Web3 lending protocols implement risk management processes such as over-collateralization and liquidation mechanisms. Often, borrowers can take out loans without having to pay any interest, offering a cheaper way to access funds.

While DeFi lending has been largely presented as an alternative to traditional lending, there’s room for both old and new moving forward. Financial institutions can leverage the same underlying technology as DeFi protocols.

Kadena’s smart contracts can securely scale traditional lending

Kadena’s blockchain infrastructure and Pact smart contracts enable financial institutions to build secure and scalable lending solutions into their existing workflows, helping them boost their own operational efficiencies while competing with emerging DeFi lending protocols.

Automation

Financial institutions can leverage the same technology as DeFi on Kadena to enhance their own processes while maintaining their dominant legacy role in the lending market. By implementing smart (self-executing) contracts into existing lending processes to automate them, banks can reduce their own overhead costs and mitigate delays associated with highly manual processes. Pact smart contracts are tamper-proof and transparent, which helps mitigate the risk of fraud and the need for disputes. With smart contracts streamlining the loan syndication process, the service can potentially be extended to more borrowers and provide opportunities for larger profits for financial institutions.

Lower Costs

Kadena offers next-to-zero transaction fees, enabling cost-effective transactions at scale. Intermediary processes can be eliminated by implementing self-executing smart contracts, reducing the time and resources required while still driving effective risk underwriting. Back office and operational costs are also significantly reduced due to automatic record-keeping.

Increased Efficiency and Speed

By leveraging Kadena’s distributed, immutable ledger, all parties involved in the syndicated loan are able to compile, share, and access real-time, up-to-date information across systems, reducing the presence of data silos. Transactions and settlements on the Kadena network happen almost instantaneously, significantly speeding up the process of loan signing and documentation processing, which typically takes several days to weeks.

Opportunity to innovate and grow

The lending market is expected to continue to grow year over year, providing more opportunities for lenders to diversify risk and limit exposure while building existing and new client relationships. With the emergence and adoption of DeFi lending, which appeals to both lenders and borrowers, traditional lending institutions will have a chance to digitize processes and improve efficiency, lower costs, and increase speed.

To learn more about leveraging smart contracts for lending and adopting the technology for your business use case, get in touch with Kadena here.