The platforms that offer crypto lending and the people who use them are increasing day by day! Find out everything you need to know about the crypto lending : how crypto loans work, how to 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 lending system based on crypto-currencies (Bitcoin, Ethereum, XRP…) and which is done on specialized platforms. In other words, it is possible to borrow altcoins there and gradually pay them back, or deposit your cryptos there to lend them and receive interest.
This system looks a lot like the classic loan that we know in banks, using fiat currency. The only difference is that the transactions involve cryptocurrencies.
What is crypto lending used for in DeFi?
The crypto lending is one of the most concrete applications of DeFi (Decentralized Finance). As a reminder, DeFi brings together the various financial services, but carried out in a decentralized way, that is to say without an intermediary to manage and authorize transactions through a blockchain.
Borrowing, deposits, and interest rates from crypto lending are the very foundation of DeFi. Decentralized platforms serve as a means of contact between lenders and borrowers, and smart contracts (programs that run automatically when specific conditions are met) validate and verify transactions, making 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 wishing to borrow stablecoins or fiat currency, or vice versa, having stablecoins and fiat currency and wishing to borrow in cryptocurrencies. They then go place their assets as collateral and receive the assets they wish to borrow. The amount of collateral must be greater than that of the borrowed asset.
On the other hand, there is lenders or investors who make their money, coins and tokens available to potential borrowers. They will receive interest in exchange for this provision.
What are the crypto lending platforms?
There are many crypto lending platforms available in the market. They are true decentralized applications (dApps) that run on the blockchain. Among the most used lending platforms, we find in particular:
Read also Understand Airdrops in just 3 minutes
Note that lending platforms are very similar to banks in terms of operation. This is also reflected in their managementas with the new director of BlockFi, who is a specialist in traditional institutions.
Advantages and Disadvantages of Crypto Loans
The main advantages of crypto lending
- Of the attractive interest rates
- Protection against volatility
- Choice of token to borrow (cryptos, fiat currency, stablecoin…)
- Quick financing solution
- No long verification procedures like in banks
- Accessible to bank bans
- Increased security
Main Disadvantages of Crypto Lending
- Risk of platform default crypto lending
- Risk of network slowdown for large transactions (lack of scalability of blockchain networks)
Conclusion: crypto lending, a viable alternative to bank loans
To conclude, the world is gradually turning towards new technologies and Web 3.0. Crypto lending is a perfect illustration of switch to cryptocurrencies and blockchain. This attraction is above all linked to the ease and speed of borrowing procedures. The latter being less restrictive than those of traditional banks.
The crypto lending therefore makes it possible to easily finance a project, but also to make profitable the tokens which sleep on your wallet thanks to the interest rates paid to the lenders. To generate passive income, lending is therefore a great alternative to cryptocurrency staking.