Well, the concept of cryptocurrency loans points out to supporting a loan with crypto collateral. Cryptocurrencies have served as a vital tool in DeFi as you can use them for peer-to-peer financial services without centralized financial institutions or banks. The following post offers you a detailed guide on cryptocurrency loans and the implications associated with them.
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What Are Crypto Loans?
The first thing you need to note about cryptocurrency loans is the definition. Many people who hold crypto assets generally look for options to lock their assets for a longer duration until they achieve price improvements. However, what if you can generate more value from your crypto assets rather than letting them sit idle in wallets? In such cases, you need to look for the best practices and strategies, such as crypto lending, for expanding the value of your crypto assets.
Now, you can understand the basic definition of crypto loans as a form of decentralized finance wherein investors can lend their crypto assets to multiple borrowers. The loans can help investors earn interest payments in return, and you can also term them ‘crypto dividends.’ Various platforms specializing in crypto-backed loans also support the use of stablecoins.
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Why Should I Consider Crypto Loans?
Cryptocurrency is one of the most popular instruments for financial exchanges. In addition, it also opens up many investment opportunities with the possibility of cryptocurrency loans that can add value to your crypto assets. Cryptocurrency-backed loans can help in adding more value to crypto assets without selling off the assets. You can think of a practical example to find out why the crypto loan is a suitable proposition in the present times.
Imagine that you have 10 Bitcoins, and you plan on obtaining a steady passive income. Therefore, you can deposit them in a crypto lending platform and receive interest. Remember that the interest rates would vary from platform to platform.
Many of you must be worried about the implications of “Are crypto loans safe?” especially considering the volatility of crypto assets. However, you should also take note of the fact that crypto lending platforms offer higher chances of recovery. If borrowers fail to pay off the loans, the lending platform can guarantee to back for the investors. How? Well, the crypto lending platforms impose a 25% to 50% collateral of the loan on the borrowers. The collateral deposits by borrowers can boost the possibilities of recovery of crypto loans, thereby ensuring safety for investors.
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Working of Crypto Loans
The next important aspect in any discussion on crypto loans would point at their working. Interestingly, the answer to ‘how do crypto loans work’ does not require any elaborate explanations. You can understand how crypto lending works in a few simple steps. Imagine that the crypto lending platform is the intermediary between the borrowers and lenders. The lenders in the process are the representatives of the first party in crypto lending. Lenders are generally crypto enthusiasts seeking new ways to boost the value of their crypto assets. People holding to their crypto assets for a long term in the hope of a rise in value can also be lenders.
The second party involved in crypto loans is the crypto lending platform which takes care of the lending and borrowing transactions. Finally, you have the borrowers as the third party in the process, and they would receive the funds in the process. The borrowers can be people or institutions who need funding. Here are some of the simple steps you can follow in the crypto lending process.
- Borrowers choose a lending platform and request a crypto loan from the platform.
- The borrower must deposit crypto collateral as stakes in the lending platform. Borrowers must return the complete loan to recover their stakes.
- The lenders can fund the loan automatically through a process not visible to investors.
- Subsequently, investors can receive their regular interest payments from the lending platform.
- If the borrower pays off the whole loan, they can recover their collateral.
The detailed and simplified explanation for how crypto loans work delivers a subtle impression of their functionality. You must note that all crypto lending platforms come with their unique approach to crypto lending, albeit with an emphasis on following the basic steps outlined here.
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You must also have some doubts regarding the interest rates with crypto lending as they can determine whether the loan is suitable for you or not. As a lender, you must check out how many returns you can get for your investment. You would have a specific ROI on each cryptocurrency loans platform along with individual risks.
One of the best practices suggested by experts for crypto lending points to the selection of diverse investment portfolios. You can expect a usual yearly yield, which varies from platform to platform. In addition, the type of the crypto asset also defines the lending rates for the cryptocurrencies. Therefore, you must choose the crypto lending platforms which can help you earn the best returns on the crypto assets in your possession.
Collateral for Cryptocurrency Loan
The most significant highlight in crypto loans focuses on the collateral. Crypto lending platforms remove intermediaries and facilitate crypto loan facilities in a blockchain-based environment. In addition, you don’t need any verification checks in the case of a crypto loan. The primary reason for this is that you cannot get crypto loans without collateral, which must be a cryptocurrency.
In the world of crypto loans, borrowers have to over-collateralize their loans to safeguard the lender’s assets. As a matter of fact, the requirement itself shows that the borrower is financially capable of borrowing a loan. The collateral is actually an important highlight in answers to “Are crypto loans safe?”, especially for the safety of both sides. On top of it, the model also ensures the flexible exclusion of third-party authorities from the complete loan arrangement.
Will Market Volatility Affect Crypto Loan Collateral?
Borrowers can obtain loans by depositing crypto assets as collateral. They can stay in the market and also put the assets into use for cash liquidity. When the value of crypto collateral falls down, the Loan to Value ratio comes to play. The LTV ratio basically implies the ratio between collateral and the loan amount.
Many crypto lending platforms have a 50% LTV ratio, thereby suggesting that it is impossible to get crypto loans without collateral today. So, you must deposit at least two times the loan amount as collateral. If the price of the collateral increases, you can take out the additional value or move out of the loan completely on a profit. On the other hand, if the value of the collateral falls, you have to deposit more collateral. If you fail to deposit collateral, then the platform would liquidate the collateral in a margin call for safeguarding lenders.
Can I Use Physical Assets as Collateral for Crypto Loans?
Many people many think of the possibility of avoiding crypto as a choice of collateral. Crypto loans without crypto collateral generally revolve around apprehensions pertaining to the volatility of crypto. Some borrowers don’t have crypto assets and want to take crypto loans, while some borrowers want to deposit other collateral.
In such cases, you can get a cryptocurrency loan without adding crypto as collateral. How? The answer might lead you to blockchain oracles which can communicate with off-chain data sources. As a result, borrowers can use blockchain oracles for collateralization of their loans with real estate, automobile, and off-chain assets.
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How Can I Borrow Cryptocurrency?
The information about cryptocurrency loans offers substantial highlights for borrowing cryptocurrency. Anyone can go ahead and choose their favorite crypto lending platform for obtaining crypto-backed loans. However, you must be careful in choosing the crypto lending platform which complies with all standards of safety. Check whether the platform has the cryptocurrencies you want to borrow.
Interestingly, you don’t have to go through any complex processes like traditional loans. Borrowers can receive the crypto loan according to the amount of collateral they can deposit. As a matter of fact, the whole process of crypto lending depends on the verification of identity and collateral deposit. Therefore, you have a faster process.
The process of borrowing definitely shows how lenders can use crypto loans to earn additional interest. You must choose a reliable platform that supports the cryptocurrencies you plan on lending. In addition, lenders must also consider other factors such as market conditions, risk tolerance, and desired returns.
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Types of Crypto Lending Platforms
The two most common types of platforms for cryptocurrency loans refer to the decentralized and semi-centralized platforms. Decentralized crypto lending platforms rely completely on smart contracts and blockchain technology. On the other hand, the semi-centralized platforms use blockchain or smart contracts on the technical level. However, semi-centralized platforms follow the structure of a conventional centralized organization with a similar leadership hierarchy. Here are some of the top examples of notable variants of crypto lending platforms.
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Decentralized Crypto Loan Platforms
The two most popular examples of decentralized crypto loan platforms refer to Compound and Aave. Both the platforms have earned a hefty reputation in the DeFi space for their unique functionalities. The compound serves as a money market that allows users to deposit crypto and earn interest contributed by borrowers. On the other hand, Aave helps in earning interest on crypto assets through crypto loans.
Semi-Centralized Lending Platforms
The semi-centralized lending platforms in crypto follow a centralized management structure. For example, Nebeus and YouHodler are examples of semi-centralized lending platforms. For example, YouHodler uses a custodian for the loans. However, they offer the advantages of better possibilities of recovery and security for crypto assets.
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The final overview regarding cryptocurrency lending is that it is an innovative option in comparison to traditional lending. Removing banks from the equation definitely introduces the possibility of many benefits. However, cryptocurrency loans are not just new methods for anyone to get their hands on crypto-assets.
On the contrary, they also offer a promising tool for increasing the value of crypto assets rather than letting them sit in the wallet. The popularity of crypto lending has gained momentum with the DeFi revolution and will continue to soar in the future. Start discovering more about crypto-backed loans and how they can change the world of finance.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!