The platforms offering crypto loans and the people using them are increasing day by day! Find out everything you need to know about the lending crypto : how do crypto loans work, how do you take out a crypto loan, or what are the advantages and disadvantages compared to traditional bank loans.
What is crypto lending: definition
Crypto lending is a cryptocurrency-based lending system (Bitcoin, Ethereum, XRP…) and that happens on specialized platforms. In other words, it is possible to borrow altcoins there and pay them back gradually, or deposit your cryptos there to lend them out and receive interest.
This system looks a lot like the classic loan that we know from banks, using fiat currency. The only difference is that the transactions are related to cryptocurrencies.
What is crypto lending used for in DeFi?
The crypto loans are: one of the most concrete applications of DeFi (Decentralized Finance). As a reminder, DeFi brings together the various financial services, but executed in a decentralized manner, i.e. without an intermediary to manage and authorize transactions via a blockchain.
Loans, deposits and interest rates from crypto loans are the foundation of DeFi. Decentralized platforms serve as contact between lenders and borrowers, and smart contracts (programs that run automatically when specific conditions are met) validate and verify transactions, make operations fully autonomous.
How does crypto lending work?
As we mentioned above, the operation is quite similar to the classic loan system.
On the one hand, there are borrowers with cryptocurrencies and who want to borrow stablecoins or fiat currency, or vice versa, have stablecoins and fiat currency and want to borrow in cryptocurrencies. They go then place their assets as collateral and receive the assets they want to borrow. The amount of collateral must be greater than that of the asset borrowed.
On the other hand there is lenders or investors who make their money, coins and tokens available to potential borrowers. She will receive interest in exchange for this provision.
What are the crypto lending platforms?
There are many crypto lending platforms in the market. They are true decentralized applications (dApps) that run on the blockchain. In particular, among the most used lending platforms we find:
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Note that lending platforms are: very similar to banks in terms of operation. This is also reflected in their managementsuch as with the new director of BlockFi, who is a specialist in traditional institutions.
Advantages and disadvantages of crypto loans
The main advantages of crypto loans
- Of the attractive interest rates
- Volatility Protection
- Choice of token borrow (cryptos, fiat currency, stablecoin…)
- Fast financing solution
- No long verification procedures like with banks
- Accessible to bank bans
- Increased security
Key Disadvantages of Crypto Loans
- Default platform risk lending crypto
- Risk of network delay for large transactions (lack of scalability of blockchain networks)
Conclusion: crypto loans, a viable alternative to bank loans
In short, the world is gradually turning to new technologies and Web 3.0. Crypto Lending is a perfect illustration of switch to cryptocurrencies and blockchain. This appeal is mainly related to the ease and speed of loan procedures. The latter is less restrictive than that of traditional banks.
The crypto loans thus make it possible to: easily finance a project, but also to make the tokens sleeping on your wallet profitable thanks to the interest rates paid to the lenders. To generate passive income, borrowing is therefore a great alternative to staking cryptocurrency.