Everyone knows loans. They exist in a multitude of financial contexts, including the crypto space. But do we understand what the crypto loan is? This term is becoming popular, but it has some differences from traditional loans.
approximate, cryptocurrency lending involves borrowing certain digital assets from one user to give to another. This is an immediate service offered by major exchanges. Of course, the process involves fees, but it allows traders to trade without waiting.
How do cryptocurrency loans work?
Crypto asset lending connects three main players. On one side we have the borrower user. On the other hand, there is the borrowing user. Mediator, we find the DeFi exchange or the platform that manages the loan.
Crypto asset loan: loan request
As an applicant for a crypto loan, the most relevant aspect to consider in most cases is collateral. There are many strategies to guarantee payment. Among the most important options are real estate guarantees and loan guarantees typical of margin trading.
In the latter scenario, the collateral is the user’s account balance. If you borrow crypto to make Margin of negociation, the platform or exchange may close the trade if the market moves against you. Basically, you authorize the broker to liquidate your position.
Cryptocurrency loan: lender
For someone to receive a loan, there must be someone on the other side offering their assets. In the case of cryptocurrency lending, users typically use smart contracts or directly lock their digital assets into a pool managed by the exchange or mediation platform.
Lending with digital assets: the platform
Intermediaries can be both centralized exchanges and decentralized finance platforms. Either way, the lending operation is similar, ignoring each company’s terms of interest rates, loan terms, or variety of cryptos available.
crypto loan versus. traditional loans
One of the main differences between cryptocurrency loans and traditional loans is immediacy. A crypto loan is granted much faster. It is quite common that it only takes a few minutes to get the digital asset loan. This is virtually impossible in traditional finance.
Take the example of a financial entity granting a loan. As much as you try to speed up the process, you must comply with regulations that delay the receipt of capital by the applicant, especially in contexts involving commercial operations.
In this sense, we can talk about the issue of regulation and credit rating as two factors that make the difference. When applying for a loan in fiat currency, there is a whole international legal framework that supports the lender and protects the applicant.
In the case of crypto lending (really anything to do with the crypto space), regulation is in its infancy. This circumstance, as we have just seen, makes it possible to grant loans almost immediately. But this does not mean that DeFi platforms and exchanges do not value certain aspects of users before granting them.
Exchanges often just verify their users’ accounts through KYC procedures. In the case of DeFi platforms, user assessment is a bit more complex due to decentralization. The rating of other users who have interacted with the loan seeker may carry more weight.
Basic Loan Types
At this point, we can differentiate between two ways to access credit with crypto assets: through exchanges or through decentralized lending protocols. But when it comes to crypto lending or lending, beyond the environment, it may be more interesting to define two types of loans: with or without collateral.
When loans include collateral, the applicant is more likely to have more time to utilize the funds. It’s understandable. Several payment guarantees are offered. Instead, unsecured loans enabled by DeFi protocols (also known as loans glow) have a very short half-life.
Managed exclusively by smart contracts independent of any human intervention, this type of loan depends on a single blockchain. If the applicant cannot return the amount borrowed plus interest, the operation is canceled before the blocking is validated.
The advantages and disadvantages of cryptocurrency loans
Benefits of Crypto Loans
We have already seen that the main advantage of cryptocurrency loans is immediacy. The availability of funds at all times, especially in the case of secured loans, allows more operations to be carried out and more opportunities to be taken advantage of.
The automation of the process is another notable advantage, especially when it comes to loans glow. The efficiency of smart contracts makes crypto asset lending a trading tool with huge growth potential. Of course, automation also has a positive impact on generating passive income for lenders.
Disadvantages of Crypto Loans
The counterparty is in the high probability of suffering liquidations due to the use of unsubstantiated guarantees. Even with loans with strong collateral, the extreme volatility of digital assets can drive us out of the market if we don’t do thorough due diligence.
What about hackers? Yes, they have been slow to come, but it must be said that smart contracts are not a panacea. They are vulnerable to attacks from hackers who can take advantage of weak code or security vulnerabilities. And if so, you can consider your money lost. Luckily, most platforms and exchanges have some sort of compensation fund.
The most important lending platforms
Binance
This is perhaps the most popular option, with loans of up to three months and the widest variety of cryptos available: nearly fifty. Its annual interest rate reaches 7% for loans with stablecoins, being variable for loans with other cryptos. Regarding the minimum amount that can be borrowed, the value can be up to one dollar.
Crypto.com
It also offers crypto loans for up to three months, the list of available cryptos is slightly smaller than Binance’s: 35 different digital assets. This point is compensated by an annual interest of up to 12% for stable currencies and 6.5% in the rest of the cases. Of course, the contrast is huge if you look at the minimum you can borrow: $250.
BlockFi
If we get carried away by the minimum amount, the New Jersey platform has the particularity of not defining one. It also does not set time limits for loans. Offers a maximum APR of 9.3% on loans with stable currencies and 6.5% for other cryptos. It pales in variety, being limited to the dozen digital assets listed.
CoinLoan
The Estonian platform offers eight other cryptos to lend, but competes quite well in terms of maximum APR: 12.3% for loans with stable currencies and 7.2% in the rest of the cases. It requires users to borrow a minimum amount equivalent to $100, with loans lasting up to 3 years.
Celsius
Binance is closely followed in terms of the variety of cryptos to lend: 41 digital assets. Another point in its favor is the unlimited duration of the loans. The same goes for the minimum loan: how much the user wants. If we look at the annual interest rates, it’s not bad either: up to 13.3% or 17.7%, in the case of stablecoins, and just over 6% in the rest of the loans. .