Crypto Lending: Everything You Need to Know

The main advantage of crypto lending. You can save currency, and earn interest on your stash of the coin in question, and it also enables borrows to unlock the value of their digital assets by using it as collateral for taking up a loan.

If you ever decide to talk to someone who’s a crypto specialist, the chances are high that at some point they will give you genuine advice to “HODL” your assets. Now, HODL is a term that refers to an investment strategy, where you essentially do not sell your coins, even if the market plunges. This is done in the hopes that the market will grow in the future. 

However, if you are the kind of person that feels uneasy leaving your cryptocurrency lying around like that, you are faced with a genuine question and that question is how to get your digital asset currency to grow.

How Blockchain Supports Cryptocurrency

Ever since 2009 when Bitcoin released and made a name for itself, cryptocurrencies have been used as a form of decentralized finance.  Decentralized finance refers to the peer-to-peer money services that you would see at a bank or other centralized financial institution. As such, cryptocurrency lending platforms aim to change the way people borrow money and earn interest on their assets.

Cryptocurrency creates an alternative store of value that lets users not only pay for goods but also pay for other currencies. If cryptocurrency is liquid to other fiat currency, then these fiat currencies are liquid to each other.

The blockchain network itself is supported by miners, and these are computer systems that are offered for use in the specific networks that support each and every cryptocurrency out there. When it comes to the Bitcoin blockchain for example, the network is supported by literally thousands of individual computers that can help mine for the network.

Mining is the act of verifying, as well as encrypting and securing the transactions on each block. Each miner has a ledger of all of the past as well as current transactions which operate on the network. This in turn means that every new transaction can be recorded and verified in the ledger. If someone tries to create any counterfeit coins or steal coins, this is checked against the countless copies of the ledger. All of the legitimate copies of the ledger will return an invalid authentication on the fraudulent transaction and the coins will not be recorded as a result.

Miners are rewarded for participating in this verification process with a small portion of coins.

Differences Between Traditional Loans and Crypto Loans

When you want to make a standard loan, there is a bank between you as the borrower and the lender. In this case, the bank acts as the lender. Cryptocurrencies remove this third party and provide a blockchain-backed protocol for counterparties to negotiate loan terms and carry them out.

When you want to get a crypto loan, there are no credit checks involved, and they are not even a requirement at all. There are no checks of any kind required, apart from the standard KYC verification in some cases. In order to get a crypto loan, you have to put up cryptocurrency as collateral, and this is what allows this to be possible. In terms of traditional loans, you are, most of the time, given the option to make a risky uncollateralized loan.

In the crypto industry, however, you are required to even over-collateralize your loan in order to protect the lender’s assets and ensure that you have the financial standing to get a loan, to begin with. The best part about all of this is the fact that the time length through which you can get a crypto loan is typically instant, and the entire process is reliant on two main things, and these are the verification of your identity as well as the act of depositing the collateral.

Crypto Lending Detailed

When a person starts getting more and more into the world of investing, one of the biggest leaps that person needs to make is getting sufficient cash flow for doing so. Just imagine this for a moment, is there anything worse than having to raid all of the capital you have tied up in assets for short-term costs and lack liquidity? 

Ever since its inception, blockchain technology consistently attempts to disrupt the financial industry. One of the most recent trends that have been rising within the cryptocurrency world between enthusiasts is crypto lending. This is an alternative for hodlers that want to increase their asset productivity. As such, crypto lending can be seen as a pivotal instrument within the crypto ecosystem. Blockchain offers a unique economic system in the sense that the rules are defined by smart contracts and algorithms in order to ensure that the transactions are always autonomous as well as decentralized.

When it comes to crypto lending, the idea of it is to establish a business model that is not dependent on the relationship between lenders and borrowers.

Blockchain enables this and as such, the result of this is the disruption of peer-to-peer lending, banks, and other financial institutions in the way they lend and borrow money.

Crypto lending can be defined as the act of lending through crypto exchanges or various other lending platforms. An interest will incur at an agreed rate for the lending to start happening, and it is a type of crowdfunding where the lenders or individual investors are connected with the borrowers through an intermediary, or in the case of the aforementioned example, the crypto lending platforms that act as a trusted third party.

Now, in order for crypto lending to be possible, the individual investors or lenders who provide the funds are needed, and these can be HODL-ers, or crypto enthusiasts who want to grow their assets.  Next, you would need an online platform that has the ability to manage the transaction itself. There are many different kinds of crypto lending platforms, where some can be entirely autonomous and decentralized. Of course, there are also options that are centralized, with a company or a group of people that are running it. The borrowers can be businesses or individuals that are looking for funding, and this is usually through the usage of fiat or crypto assets as collateral in order to get the borrowed funds.

Now, let’s summarize the crypto lending process within a total of three steps.

  • You can sign up for one of the crypto lending platforms and deposit funds into your investment account.
  • You can choose your investment product and invest in secured loans.
  • The borrower, or the crypto lending platform, repays the principal with the accrued interest back to your account.

All of your investments are secured by crypto-assets, and the borrowers need to deposit cryptocurrencies that are worth more than the value of the loan. When it comes to the returns, some of the best crypto lending platforms do indeed promise annual yields of 8%. Many bitcoin lending platforms can also offer an interesting type of investment account, that gives you instant access to your investment.

Advantages of Crypto Lending

When it comes to crypto lending, it has an array of advantages that truly make it an appealing option for financial actors. Let’s compare it to bank lending for example, where you will get enabled in bureaucracies and lengthy verification processes, think along the lines of credit score, which can take a lot of time to start building up to a satisfactory point. Now, within the crypto-lending space, things can go a lot quicker due to the fact that you will not be needing any credit score in order to access the loan. Furthermore, crypto loans are a lot more accessible than bank loans that set the interest rates, amount, and loan period. Within this crypto-space, you can tailor all of this according to your specific needs.

As such, lenders can gain a tremendous benefit by simply borrowing from a crypto lending platform when compared to most traditional methods. The collateral is a lot more liquid, and borrowers need to collateralize over 100% or more of the amount they want to borrow. The high loan ratio is due to the high volatility of the cryptocurrency market.

A lot of times you do not require too much paperwork or processing time when it comes to lending in terms of cryptocurrency. Everything is digital, and as such, can be completed in just a few minutes up to an hour at the most. This is one of the most appealing aspects of a lot of people, as they genuinely do not want to go physically to a bank, wait in line, and have to deal with lengthy contracts, paperwork, and a lot of other things before they can even start the discussion when it comes to the terms.

The variety of cryptocurrencies also prompted a lot of crypto lending platforms to allow users to switch between assets.

This means that a user can deposit in Bitcoin, and borrow in another crypto asset on the same platform in the future, which makes things convenient for that user as that person does not need to re-register for another platform and have to re-do everything just to get up and running again.

Even channels such as Trader University are embracing the future of lending in Bitcoin.

Safety of Crypto Lending

There are plenty of crypto lending platforms out there that make investors believe that they cannot lose, however, most of the time when something looks too good to be true, it generally is.

To put it more abruptly, there’s a lack of transparency when it comes to the information that crypto lending platforms share. You do not even know the CEOs of many of these platforms, and they do not list their corporate addresses or their licenses.

That being said, the investments are secured by overcollateralized assets, which means that the collateral is worth more than the amount of money you are lending to the borrower. This means that if the borrower does not manage to repay their debt, the assets are then sold and your loan principal is repaid. There is always enough collateral to be able to cover the outstanding debt, and if the value of the collateral drops, the borrower still needs to repay their debt or increase the number of crypto-assets in order to maintain the loan to value ratio, which is typically given by the platform itself.

Centralized Crypto Lending

When we discuss centralized crypto lending, we need to look at Centralized Finance also known as CeFi. CeFi platforms are companies or a group of individuals that can handle the user’s onboarding process. This process involves KYC verification. They act as the middleman, and as such, are responsible for exchanging cryptocurrencies as well as FIAT money through the usage of a custodial system that mirrors decentralized protocols in order to protect the asset. One thing we need to note here is the fact that CeFi platforms use margin lending in an attempt to attract new users, and as such they are also able to offer higher interest rates as well as flexible terms to both the lenders as well as the borrowers when compared to the decentralized platforms.

Centralized platforms such as Nexo, BlockFi, and Binance are required to follow rules as well as procedures in order to be fully compliant. You will have to create an account and sign up for the chosen platform, and go through the Know Your Customer or KYC procedure which is there for a reason, and this reason is for fraud prevention as well as anti-money-laundering measurements.

Binance Savings - Crypto Lending Platform
Source: Binance Savings – Crypto Lending Platform

These platforms have protocols in place that ensure that your collateral is safe, and some project crypto assets through insurance in order to keep the majority of the digital assets in their custody in cold storage. In other words, this means that they are offline and not connected to an internet connection.

Centralized platforms will still record all of the deposits and withdrawals through the usage of blockchain technology that is visible to everyone, and they can offer a great way to earn interest in Bitcoin for example, as well as many altcoins. The best USD saving account rates hardly get past the 1% APY mark, while many crypto platforms offer up to 8% on interest rates. Now, in order to get the best possible outcome and deal, you will need to do a bit of research so you can avoid paying high fees, however, the odds are highly stacked in your favor when compared to traditional lending platforms.

If you are a type of person that is used to traditional lending platforms and are entering the world of cryptocurrency lending platforms for the very first time in your life, CeFi platform can be an ideal option for you, as you can still get support and can negotiate the terms to grow the digital assets easily and securely. The deposits, as well as the withdrawals, are still recorded on the public blockchain this way and anyone can view them.

Decentralized Crypto Lending

When we discuss decentralized crypto lending, we need to look at Decentralized Finance also known as DeFi. DeFi platforms are fully decentralized as well as autonomous. In DeFi, financial transactions, such as lending as well as the borrowing of currency are handled by code instead of by real people. Users need to trust and depend on these algorithmic protocols that are in the form of smart contracts that can automate the distribution of crypto loans as well as payments.

The DeFi platform is a lot more transparent than CeFi due to the fact that just about anyone can access the protocols, and due to the fact that all of the transactions, borrowing as well as lending are recorded on the public Blockchain. As such, nothing is hidden from users, and this includes interest payments and other transaction-related fees. De-Fi platforms do not require KYC verification and are non-custodial, which means that they are fully trustless. DeFi platforms can also offer users interest rates on crypto loans, which depend on the market supply as well as the demand, however, they are lower in comparison.

You will notice that on services such as dYdX, Compound, and Aave, smart contracts use algorithms and protocols in order to automate these loan payouts. Getting a BTC, ETH or any other kind of crypto loan on DeFi platforms is extremely quick and thanks to smart contracts, all you really need to do is apply for the loan and then send the crypto you want to use as collateral to a specified wallet that is associated with the lending platform.

The users of decentralized lending platforms can apply for a loan of any size without even needing to confirm their identity to a third party, and loans can be supported in stablecoins, fiat currencies, or cryptocurrencies. On many of these platforms, you will find that you also have the option to open up a savings account through the usage of your crypto as well as trade tokens or take out loans.

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