One of the oldest instruments in finance, the letter of credit, is getting fully rebuilt with smart contracts.
Maximilian Schwartz, CEO of Anvil Research Labs, told TheStreet Roundtable how an on-chain promise can back a Bitcoin loan, a conference sponsorship or buy now, pay later (BNPL) plan without the collateral ever changing hands.
Anvil is an Ethereum protocol that issues fully collateralized digital letters of credit. At the Blockchain Futurist conference in Toronto, six sponsors secured their packages with Anvil letters of credit rather than an upfront payment.
“The concept of a promise goes way beyond just lending. It’s a fully guaranteed IOU that doesn’t exist in the traditional world,” Schwartz said.
A hold that can’t be reversed
There isn’t a single product in traditional finance (TradFi) that can make this type of lending possible.
“There’s no way to do this in traditional finance. There’s no way to say, hey, that $50,000 in your bank, hold on to that and don’t give that to anyone else. But you can do that with smart contracts, because they’re just technical conditions,” Schwartz explained.
On Anvil’s platform, instead of handing collateral to a lender, an Anvil user locks it in place while retaining custody.
“I’ve got wrapped Bitcoin, I’m gonna put a provable hold on this,” he said. “Think like a credit card hold, but one that’s permanent, that you can’t reverse during the course of the term of the letter of credit. And I’m gonna promise you something based off of this — and I can’t rug you, I can’t take that out. That’s how it’s fully secured. It doesn’t get rehypothecated.”
This means that borrowers can also keep the trade. If the Bitcoin appreciates in value, they get all the upside.
What happens if the collateral crashes? Because this is a decentralized platform, liquidations are hard-coded into the smart contracts, which Schwartz says eliminates default risk.
“Most lending that happens, there’s risk of default. But here there is no default risk, because we’ve over-collateralized it with an asset that, if it were to plummet in value, permissionless liquidations — like you see in Aave or Compound — will literally transform the form of that collateral,” Schwartz said. The wrapped Bitcoin converts into the $USDC owed, automatically, with no collections department involved,” he said.
The wrapped Bitcoin converts into $USDC automatically, with no collections department involved.
The biggest risk for this model are the same as most crypto products: smart contract bugs, oracle failures, and gap risk.
For whoever accepts the promise, the experience is deliberately boring.
“You don’t need to worry about how it’s collateralized. You just go: there’s a promise out here for 10,000 $USDC, and I can claim it at any point during this term if I need to,” Schwartz said. “You basically have the equivalent of a bank check — anytime I need it, I can cash it.”
Conference booths on credit
Schwartz explained that this was no longer just an idea.
“There are six different companies that use this BNPL model, with Anvil digital letters of credit, to secure their sponsorship here,” he said of the Blockchain Futurist Conference. “We did the same thing at Consensus in Miami, where they accepted letters of credit in lieu of paying up front for sponsorship.”
The logic from the conference’s side is that sponsorship receivables can become a major headache for organizers, who have to manually track all accounts, make sure payments are received, and much more.
On the sponsor’s side, the benefit goes further.
“(Let’s say the) conference is a year from now. If I want to reserve my spot, I’m gonna put up a hundred thousand $USDC promise,” he said. “What happens when you part with your assets early is you forfeit the ability to earn during that period. So instead, I can use existing collateral — that might appreciate — to make that $100,000 promise. A year from now, I might make 10% on my money — I made $10,000 by simply making a promise. And then right before the conference, I pay them the hundred thousand dollars they need, and they release my collateral back to me.“
A full year of capital efficiency that is reclaimed from a booth deposit. Deliverables are all tracked on-chain: “verifiable proof,” as Schwartz called it.
Undercutting the credit market
His biggest claim is about what fully secured promises do to the price of credit itself.
“When you get in a lending market, the price of interest rates that consumers get offered — it’s baked in that a certain amount of people are gonna default on those promises,” he said. “It gets passed on to everyone. Everyone has to pay higher interest rates, and the BNPLs are doing super risky bets on that stuff.”
Removing the risk of default fundamentally shifts that math. It allows you to undercut competing lenders. The insight that undergirds Anvil is that most of finance isn’t really lending, it’s proving you’re good for it.
In most models, that means trillions of dollars sit idle every year as evidence. An irreversible on-chain hold turns that evidence into something a counterparty can verify in seconds, from anywhere, at any time, without a collections call.
It is important to note that this model only works when the borrower already has assets ready to lock. It has yet to offer something to the borrower that BNPL was created for: the one with no collateral at all. That doesn’t mean that Anvil can’t undercut a significant portion of the credit markets, especially for larger loans for wealthy individuals or entities.
