All About Crypto Lending | CoinGabbar Blogs

You must have heard and experienced money lending so many times in your life.

 But have you ever been familiar with the word crypto lending? You might have heard the word, but you likely need to learn more about this term. Well, you are not just one person, for sure. Many more people around you must have no idea about it. 

So usually, when you need money, you head to the bank and lend money following a loan application procedure. After that, you sign a lending contract and agree on the repayment terms provided by the bank. After these procedures, the bank may allow you o lend money for you. And in this way, you get the money from the bank. 

However, crypto lending involves investing and funding. Crypto lending is investing bitcoin for later lending to borrowers in exchange for recurring interest payments. Payments are made using cryptocurrency, often deposited and compounded daily, weekly, or monthly.

It has two components; deposits that earn interest and cryptocurrency loans. The deposit account functions identically to how your bank account works. Here you deposit the cryptocurrencies the lending platform accepts, and the user can pay interest of up to 8% APY (depending on the platform and the cryptocurrency). The platform may use deposited funds to make loans to borrowers or for other investments.

To borrow cryptocurrency, borrowers typically need to deposit at least 100% (sometimes up to 150%, depending on the lender) as collateral. 

You have to pay interest on the loan, which differs for different banks; similarly, the interest rate here also varies depending on the different platforms. You need to pay the interest every month.

Crypto Lending Platforms

What is the role of the bank in leading physical money? The same is the role of the crypto lending platform. These platforms allow you to access cash without even withdrawing your bitcoin. Not only this, but these platforms also give you loans with attractive interest rates. The following are the most reliable platform for you to lend cryptocurrency:

● Nexo

● Bakera 

● SALT

● Lendroid 

● ETHlend 

● Celcius Network

● BockFi

● Unchained Capital

● YouHodler

● CoinLoan

Components Involved in Crypto Lending

In most cases, there are three components involved which are:

Borrowers who need money for various reasons should put up crypto or fiat assets as collateral.

The crypto lending platform is a third-party platform that handles these transactions and links borrowers and lenders.

The lender is willing to lend the crypto loan in the form of stablecoins or cash and earn passive income from their crypto investments.

Pros and Cons of Crypto Lending

What makes it similar to traditional bank loans

There are two types of cryptocurrency lending platforms; Centralized and Decentralized cryptocurrency lending platforms.

The centralized cryptocurrency lending platforms are very much similar to traditional bank loans. Because when platforms are centralized, the soldiers of the platforms assume full responsibility for tasks like user onboarding, KYC verification, offering custody solutions, and managing payments, much like a bank institution does.

Centralized cryptocurrency lending platforms are, most of the time, businesses that mitigate the risk of crypto lending on a large scale. 

Types of crypto loans

There are four major types of crypto loans which are:

Collateralized loans

This type of loan is the most prominent kind of crypto loan. It requires the user to deposit the cryptocurrency, which they can use as collateral for the loan. At the same time, many of the platforms have the condition of over-collateralization. Over-collateralization means using only certain deposited collateral (typically below a 90% loan-to-value). The interest rate is lower, and there is less of a chance of being called on by the margin, the lower the loan-to-value (LTV).

Crypto line of credit

Unlike providing a loan with a fixed term as a prerequisite, this kind of loan provides for a cryptocurrency line of credit. In other words, it is a collateralized loan. That means the user can borrow cryptocurrency up to a certain collateral deposit decided by the platform, provided there is no pre-determined fixed term. The users are only charged interest on funds withdrawn.

Uncollateralized loans

Though these loans are not very familiar to many, they are similar to that personal loans. This lending involves a procedure as follows:

The borrower must fill out a loan application, go through an identification test, pass the same, and complete a creditworthiness review to get approval. Because no collateral may be sold off in the case of a loan default, these loans carry a larger risk of loss for the lenders.

Flash loans

As the name suggests, this lending process is very rapid. It is so instant that the borrower has to take the loan and repay it in the same chain of transactions. This lending method is risky since it can lead to hackers taking advantage of market exploitation potential, such as buying bitcoin for less money in one market and immediately selling it for more money in another, all inside the same transaction. Therefore, experts advise people to avoid this method of crypto lending. 

Conclusion

When done with the presence of mind, crypto lending becomes very sound. 

The process becomes smooth if you know the exact procedure, which type of crypto lending is beneficial, and which platform is reliable enough for you to lend the cryptocurrencies.