Crypto Lending in brief: principles, rates, security

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“To the Moon!” is a common saying among crypto enthusiasts who buy and hold their digital assets in the hope that the price will do just that – shoot the moon. However, if you keep your crypto assets intact for a long time, your profit will only come as they grow. Crypto lending offers another way in which your digital assets can work for you.

Whether you want to earn interest on bitcoin tokens or use them as collateral to get more coins, there are several crypto lending platforms that offer a wide range of different offers.

It takes an exhausting process to get a classic loan from a bank. Credit is essential: the bank will check your credit history. Cryptocurrency backed loans are different – you can take the loan instantly regardless of your credit history because the crypto loan is secured.

Crypto lending is relatively new. Despite the potential to be a handy tool for getting money or interest quickly, little information is available online.

The principles of crypto lending

Suppose you have some ETH in your wallet which will definitely be worth more in a few months. If the price increases dramatically, you take your profit. But with a crypto loan, you can receive higher payouts on your ETH tokens. Let’s take a look at how crypto loans work and provide better returns.

Unsecured loans

When you take out a traditional loan, the bank guarantees that you will repay the loan by looking at your credit history and income. After applying for the loan, you have to wait several days or even weeks to receive the rejection or approval. These are usually unsecured loans with a high rate of interest. Unsecured crypto loans aren’t as common, but they do exist. But don’t forget to do your own research and choose a reliable platform.

Secured loans

Most crypto loans require collateral as a guarantee for their repayment. The collateral is often more than the value of the loan, which makes the lending process safer for the lender. At the same time, the borrower enjoys a lower interest rate than traditional loans. Plus, you can get instant loan approval.

Imagine you have 3 ETH in your wallet. If you take out a loan with a loan to value ratio (LTV) of 70%, you will receive 2.1 ETH in exchange for your collateral of 3 ETH. However, many collateral-based loans require the borrower to stick to the chosen LTV ratio, which makes them vulnerable to volatility and exposes funds to under-collateral risk.

Secured loans are much more flexible than traditional loans. Crypto lending platforms like Celsius and CoinLoan offer loans at less than 5% APR. For example, the latter also gives you instant approval and the ability to repay the loans in a digital asset of your choice without prepayment penalties.

Lending platforms

You can get your cryptocurrency-backed loan from centralized (CeFi) or decentralized (DeFi) lending platforms. Both use blockchain, but an entity oversees the centralized platforms. In contrast, decentralized platforms make loans through smart contracts.

Centralized lending platforms (CeFi)

Crypto is the new way to invest your money, and traditional investors are taking notes. Although decentralization is the cornerstone of crypto, many mainstream investors feel more comfortable with a centralized solution. These platforms typically require users to pass a KYC procedure to start lending and borrowing crypto.

However, with centralization comes good customer service and asset insurance. Nexo and CoinLoan both offer $ 375,000,000 and $ 100,000,000, respectively, to cover digital assets through BitGo. This can make an investor wary of crypto more secure.

Centralized platforms also tend to offer more freedom when it comes to assets. You can use many different tokens as collateral, up to 20 different cryptos in some cases. Many also have fiat options such as receiving a loan in a fiat currency of your choice.

Decentralized lending platforms (DeFi)

The other option for a cryptocurrency backed loan is Decentralized Funding Platforms (DeFi). Instead of leaving the lending and borrowing process to a controlled entity, DeFi crypto lending platforms like Aave and Compound use smart contracts to automatically distribute crypto loans and interest rate payments.

DeFi lending platforms do not have a KYC procedure which, provided you have enough collateral, means instant loan repayment. Confidence is taken out of the equation – to understand whether a rig is reliable, you can analyze its protocols for build quality.

Decentralized lending platforms also offer interest rates, but the returns are usually lower than centralized platforms. Since you don’t leave your money with a company, many offer crypto solutions without any fiat options.

The CeFi and DeFi lending platforms offer interest rates on your crypto, the ability to borrow and lend it, as well as the ability to open a crypto savings account, which we’ll cover in the next section.

Crypto loan rate

On most crypto lending platforms, you have the option to earn interest on crypto by depositing your assets into a crypto savings account. When looking for a better deal, pay attention to the interest rates offered by each platform. A little research can go a long way – and you can find the best rate for your needs.

Pricing on crypto savings accounts

Throughout the article, we’ve outlined ways to gain interest in the crypto you currently own. You can do this by opening a crypto savings account and depositing your crypto there. Each platform has a different rate which depends on the digital asset deposited.

Platforms like Nexo allow you to earn up to 12% APY, but on stable coins. Most other cryptos offer an 8% return. Celsius pays 8.88% APY for most stablecoins, but rates for other cryptos are much lower, below 6% in some cases. CoinLoan has some of the highest rates in the market, offering 12.3% interest on stablecoins and escrows.

DeFi crypto lending rates are a bit more complicated because they are totally different from CeFi platforms in their genesis. When it comes to DeFi, the main source of cash here is the funds users deposit. The interest rate they get depends on several factors like the total amount of funds available on the platform, real-time market rate monitoring algorithms, etc. more stable and higher.

Another advantage available to customers of crypto lending platforms, compared to those who borrow from traditional banks, is that they do not need to prove their credit history. Once you can provide the collateral amount as a guarantee for future money back, you can get the desired amount of crypto.

Security

The biggest question an investor asks is, is the crypto loan safe? Even with a centralized lending platform, your assets can never be 100% secure. However, the platforms vary, with some even being licensed and regulated. When it comes to the security of digital assets, there are generally two main issues related to the type of platform.

DeFi loan and security

The main security problem with decentralized platforms is in the code. Since the entire lending and borrowing process is completely based on built-in protocols, bugs can create a problem for users. And while the code may be available for free on Github, many regular investors don’t have sufficient coding experience to understand what they are reading.

Then there is also the issue of smart contracts. If there is a hack, the smart contract may fail, and since there is no entity controlling the platform, no one will come for help.

CeFi loan and security

Traditional problems prevail when it comes to centralized platforms, with scams being one of the most prevalent. You can easily receive a fake email or click on a fake link and accidentally give your money away.

DeFi exists because many people have lost faith in the traditional centralized system – the platform could easily take your money or scam you with fees. In addition, if you have registered on a centralized platform, your identity is known. In the event of a hack, sensitive information could fall into the hands of the wrong people.

When choosing a centralized platform, it’s important to do your research and trust only licensed and regulated companies. Analyze how your digital assets are stored or insurance coverage – there are many CeFi platforms that are trustworthy market players in the long run.

Crypto lending, on the whole, is a young industry. Whether you choose centralized or decentralized lending, we are likely to see them evolve in the future as digital assets have become popular recently. But one thing remains undeniable – the crypto loan gives holders of digital assets a chance to earn more on the assets they hold and provides much-needed liquidity to investors who want money. Whatever your goals, crypto lending is an innovative way to earn more on your crypto.

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