With the global recession continuing, we all need a helping hand. Fortunately, the blockchain is full of alternative lending solutions to the traditional banking system. Admittedly, the news from lending/lending platforms was lackluster last year with the Celsius and BlockFi debacles. However, more is needed to taint the innovations offered by the blockchain. Cryptocurrency lending and/or cryptocurrency lending is one of them. Like crypto lending, which consists of lending cryptoassets, this service has been on the rise in recent years. Indeed, it offers the advantage of being inclusive. Consequently, it is aimed at everyone, individuals or companies. Let’s explore together the working mechanisms of this service which is punctual in this bear market period.
The basics of decrypted cryptocurrency lending
Traditionally, lending services have been the preserve of financial institutions, mainly banks. With blockchain, especially in CeFi (Centralized Finance) and DeFi (Decentralized Finance), any holder of cryptocurrency can be a borrower. Far from classic lending, cryptocurrency lending innovates by allowing you to place your digital assets as collateral.
Let’s imagine that we have acquired crypto some time ago. You have this project close to your heart, but you’re out of luck, you don’t have enough funds to start it.
It could be that creperie you dream of opening, or even that clothing line you’ve always imagined launching, or more simply that latest generation computer that will give your performance a boost.
To make your dream come true, you are strongly thinking about selling your cryptocurrencies. However, you know that you may miss your chance because your assets may increase in value. Not surprisingly, in this bear market period, the tendency is rather to conservation while awaiting the return of sunny days.
Now, let’s go in case a project that requires an investment in USDT has caught your eye. To your chagrin, you only have bitcoins (BTC) and you definitely don’t want to lose them.
This is where crypto loans come in as the right solution for all these scenarios. In the first, they allow you to leverage your savings in cryptocurrencies. Indeed, they consist of the borrower obtaining a loan thanks to a pledge of his cryptocurrencies. Therefore, he keeps his assets instead of selling them.
For the second case, borrowed USDT with BTC as collateral allows you to invest in the project. After that, the return on your USDT investment guarantees repayment of your debt. At the end of your loan, you simply get your BTC back.
A simple loan process like cake
In TradFi (traditional finance), your creditworthiness determines your ability to borrow. As soon as the system considers you insolvent and all your hopes for funding go up in smoke. On the other hand, the story is very different when it comes to lending cryptocurrencies. It is your collateral that determines your loan options.
In addition to having attractive interest rates, cryptocurrency lending stands out for its ease of access. It is a streamlined process that does not know the limits of borders, nor the bureaucracy of TradFi.
Platform selection
When it comes to borrowing, you can choose centralized finance (CeFi) platforms like Binance, Crypto.com or Coinloan or decentralized finance (DeFi) platforms like Compound, MarkerDAO or Aave. These two types of platforms always connect lenders and borrowers. It is their degree of involvement in the lending process that differentiates them.
Centralized platforms act like banks. They are responsible for managing loan terms and monitoring collateral.
Find a crypto loan explainer video inside Binance:
Decentralized platforms, on the other hand, don’t have a trusted third party. Everything is managed there through smart contracts. They therefore correspond better to an audience more savvy in the use of cryptocurrencies.
YouTuber Hasher sheds some light on DeFi loans and lending:
Loan request
Once the choice of platform is made, the borrower fills in the required information through the loan. For CeFi platforms it is essential to have an account. In other words, you will need to bring all the necessary information to the KYC. Conversely, DeFi platforms do not have this requirement.
Presentation of the guarantee
The essential variable in this context is the Loan To Value (LTV). It is the collateralisation ratio that allows you to determine how much you can borrow under the collateral. Concretely, it is the ratio between the borrowed amount and the guarantee in the same currency.
This is a decisive rate, because the higher it is, the more you can borrow. However, the risk is even greater. In general, all LTVs are less than 100%. This means that your collateral will always be greater than the borrowed amount.
Receipt of funds
Funds can be available within hours or even minutes. Some platforms allow you to receive the borrowed amounts almost instantly.
Payment of interest and repayment of capital
By locking up your digital assets, you receive fiat currency or cryptocurrencies. They remain inaccessible until the repayment of interest and principal. Also, in case of default, your cryptocurrencies will not be returned to you.
Cryptocurrency lending in the face of risk
It should be borne in mind that crypto loans are not without risk. From volatility to safety to default, borrowers must be vigilant to ensure they get their collateral back.
Volatility risk
Not all cryptocurrencies are accepted as collateral. Secure values ââlike bitcoin (BTC) or ether (ETH) are popular. Furthermore, to protect yourself from the risks associated with volatility, it is always preferable to borrow crypto on stablecoins.
For good reason, if cryptocurrencies as collateral drop dramatically, the platform may be forced to sell your cryptocurrencies to repay your debt unless you increase the value of your collateral.
Risk of insolvency
It concerns the platform on which the loan is made. In the event of a platform insolvency, as happened with Celsius and many others, you lose your cryptoassets. Furthermore, the selection of the platform must be rigorous and take into account the most recent credit reports of the selected intermediary.
Security risk
Cryptocurrency lending is not immune to security vulnerabilities, not just at the level of the borrowing intermediaries, but more particularly at the protocol level. This risk is inherent in DeFi platforms, as lending is managed through smart contracts where some malicious developers can compromise the security of the operations.
To conclude
No more pay slips or lengthy formalities to obtain the loan. Whether you choose a CeFi or DeFi platform, you will always benefit from improved accessibility and speed compared to traditional finance. Cryptocurrency lending is open to everyone as long as you have dormant cryptocurrency savings. Each platform sets its own lending rates. It is therefore not surprising to find a broad spectrum of interest rates ranging from 3 to 20%. Thereby, the price of money it’s relative. The big winners of this service are those excluded from the traditional banking system. With the growing adoption of cryptocurrencies, it will therefore come as no surprise to see this mode of funding become popular.
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As a finance professional I consider the blockchain a real revolution thanks to all its innovations that have a global impact. It is with passion that I participate in this new digital era through my articles.