Crypto lending is an analogue of the traditional blockchain-based financial lending system. It gives us an opportunity to borrow tokens for interest rate or commission. Crypto loans are usually taken by entrepreneurs to make quick investments, for example, in the wave of a bullish trend.
To get a loan, an investor can apply to a cryptocurrency exchange with its terms or use a special DeFi application. As in ordinary lending, collateral is required here. Since the crypto market is highly volatile, the value of the collateral is not fixed. If it falls below the set value, an additional amount of tokens will need to be deposited in order to avoid the liquidation of the collateral. After the completion of the transaction, the entire deposit is returned to the investor in full.
Another type of cryptocurrency loans is flash loans. These are tax-free transactions, the repayment of which must be made within the ongoing transaction. It means that the percentage for lending is deducted from the profit when the transaction is completed. If at the end of the process it turns out that there are not enough funds to pay the collateral, the transaction would be reset. Flash loans are useful for earning on APY (Annual Percentage Yield) on crypto holdings.
Pros and cons of the crypto lending
The benefits of using crypto loans are:
- low interest rates;
- easy access to obtaining finance (no credit history data is needed to get a loan – any user can have it);
- the possibility of passive income for lenders (depositing your funds in the pool and providing access to it allows to receive a percentage of the use);
- the use of smart contracts (makes the lending process efficient and scalable);
- the speed of transactions (digital transactions are usually carried out much faster, as they go directly from the seller to the buyer without intermediaries).
Despite the undeniable benefits, users point out few disadvantages of crypto loans:
- high financial risks because of token’s volatility;
- chance of hacking smart contracts;
- high risk of cancellation of the transaction because of the falling value of the collateral;
- decreased liquidity of funds.
In 2019, the Creditcoin project was launched to support the idea of crypto lending. It has its own token called CTC. The main goal of the project was to establish communication between banking and non-banking systems by maintaining a record of the history of lending transactions in a public blockchain.
Due to the fact that the Creditcoin lending infrastructure works according to the laws of the decentralization, it has a number of advantages over its traditional counterparts:
- free access to capital for financial technology providers;
- instant recalculations for lenders;
- smart contracts created on its basis are used for monitoring compliance with contracts in the ecosystem.
Crypto lending projects of 2022
Let’s take a look at some interesting lending platforms.
This platform supports more than a hundred cryptocurrencies and provides its users with interest rates ranging from 6% to 14%. Clients point out a flexible loan repayment system with the possibility of freezing a digital asset for up to 3 months. Also, the advantages of the platform include the reliability of the service, the user-friendly interface of the website and mobile app, where it is easy for a new user to navigate, and the issuance of their own cryptocurrency cards for online purchases.
This is a DeFi protocol based on Ethereum technologies, a system for issuing cryptocurrency loans within the Ethereum network. The service is distinguished by its anonymity – lenders do not know anything about borrowers, but they have access to all transactions. This is the main feature of the platform: lenders become liquidity providers, providing their Aave tokens to a common pool and receiving income without controlling transactions (this is done by the system). borrowers, in turn, receive instant loans at relatively low interest rates.
The Nexo platform converts a huge number of popular tokens and supports several global fiat currencies. Also, users note that there are the lowest interest rates on cryptocurrency loans in the digital market and the lowest commission. The system of daily payments creates convenient conditions for working with cryptocurrency. The main advantage of the project was the insurance of user accounts - the protection of finances in case of hacking or a hacker attack.
This major cryptocurrency platform is not only engaged in trading, but also includes a wide range of financial features, including crypto lending. You can get a loan on the Binance platform by following a few simple steps:
- register and go to the "crypto loans" section on the main panel;
- on the sidebar on the right side, select a cryptocurrency from the list of available ones and indicate the desired loan amount;
- select the amount of collateral (check with the minimum amount of collateral, which is indicated below);
- specify the term of the loan;
- confirm the operation.
The new decentralized financial reality is attracting more and more users. Blockchain technologies are expanding the boundaries of opportunities for entrepreneurs, but so far it is necessary to conduct crypto business based on traditional models. The crypto lending system is based on the classic credit system, but in its better version without intermediaries. However, don’t forget that there are some risks in taking crypto loans, so be careful.