what is crypto lending? getting loans with
cryptocurrency can often be less complicated than getting traditional bank loans. but what
exactly are crypto loans? crypto enthusiasts are often encouraged to huddle their assets keeping
them safe in a wallet until the price of their chosen currency appreciates. but just like
you'd feel uneasy about leaving your cash sitting around in a bank with a low interest rate
a common question is this how can you get your digital currency to grow, this is where crypto
lending comes in.
Not only can it enable servers to receive interest on their stash of bitcoin
but it enables borrowers to unlock the value of their digital assets by using it as collateral
for a loan. when investing one of the biggest challenges can be cash flow. and there's nothing
worse than having to raid the capital you've got tied up in assets for short-term costs and
lack liquidity bitcoin loan. let's imagine that steve has two bitcoins. he doesn't want
to sell any of this because he's confident that prices are going to appreciate substantially.
steve's also worried that if he does end up offloading his crypto there's a risk that he'll
end up with less bitcoin when he buys it back at a later date. crypto lending platforms can come
to the rescue here. typically steve will be given the opportunity to use his bitcoin as collateral
and receive a loan in stable coins owing to the volatility of digital assets he'll normally have
to over collateralize meaning he'll have to lock up more bitcoin than the overall value of the
funds he's receiving.
Once he's repaid the loan plus interest his crypto will be returned in full
and he'll make a handsome profit if bitcoin ended up appreciating as he predicted. his crypto would
only be at risk if he failed to keep up with the loans terms or if the value of the bitcoin held
as collateral fell below the value of the loan he received. benefits of taking on a crypto loan:
one of the major bonuses many see in crypto loans is that unlike traditional banking you won't
be subject to your credit score being assessed. this means that lending is much more accessible
to people who don't have a financial history under banked consumers, who don't have a bank
account and self-employed workers who struggle to access credit because their fluctuating earnings
don't meet a bank's strict lending criteria. repayments can also be much more flexible.
and whereas it can take several days for loans to clear in the old fashioned financial world
bitcoin loans can be practically instant you'll also be able to make your assets liquid without
triggering a taxable event and you can adjust the loan to suit your needs.
Users can also switch
between crypto assets so you can deposit ether and borrow tether all on the same platform. if you
like the sound of a bitcoin loan but you're not sure where to begin, you have two main options:
centralized and decentralized lending platforms. centralized ecosystems have to follow certain
rules and procedures to be compliant. you'll have to create an account by signing up for your
chosen platform and go through the kyc know your customer procedures that are in place to prevent
fraud and money laundering. these platforms typically have protocols in place to ensure that
your collateral is safe. some protect crypto assets via insurance or keep the majority of the
digital assets in their custody in cold storage, meaning they're away from an internet connection.
centralized crypto lending platforms still record all deposits and withdrawals using blockchain
technology visible to anyone and offer a great way to earn interest on bitcoin alongside many
other cryptocurrencies and stable coins like usdc and die.
To put it into perspective your best usd
savings account bank rates barely scrape past the one percent apy mark, yet many platforms offer up
to eight percent on crypto interest rates. it's worth doing your homework to get the best deal
and avoid paying above average fees. there's more paperwork involved in getting a loan through a c5
platform. but the fact that there's a regulated environment and a customer service representative
who's just a click or phone call away could make these platforms more appealing to traditional
investors. what is decentralized finance defy lending? defy lending platforms are completely
decentralized and transactions are handled by code rather than people. smart contracts use algorithms
and protocols to automate loan payouts anyone can access the protocols on a decentralized finance
platform which makes them completely transparent as nothing can be hidden on the blockchain.
Unlike
c5 platforms there's no middleman or financial regulator which means you don't have to go through
a verification process like kyc. however defy interest rates for crypto lending often pale in
comparison to what centralized rivals can provide. getting a bitcoin or eth loan or any other type
of crypto loans on a d5 platform is very quick as you won't need to pass any kind of due diligence.
thanks to smart contracts all a user will need to do is apply for the loan and then send the crypto
they want to use as the collateral to a specified wallet associated with the lending platform.
the users of decentralized lending platforms can apply for a loan of any size without having to
confirm their identity to a third party.
Loans can be supported in stable coins such as usdc, fiat
currencies or cryptocurrencies such as ethereum or bitcoin. so should you get a crypto loan? not on many
centralized and decentralized landing platforms you'll have the option to open up a savings
account using your crypto as well as trade tokens or take out loans. with both types of landing
platforms still in their early stages it's clear that this is an exciting space to watch. there's a
lot of room for growth and the potential to access borrowing without the usual formalities could be a
game changer for both the people and the financial services industry.
and this has been another cmc
explainer video. if you want more of these be sure to subscribe to our youtube channel and check
out coinmarketcap.com for the latest in crypto.
