Cryptocurrency: All You Need to Know About How Crypto Lending Works

Blockchain has significantly revolutionized the traditional financial ecosystem. During the current cryptocurrency hype, investors are looking for options to earn dividends without liquidating their assets. Crypto lending has become a mainstream conversation for investors, allowing them to earn interest on their crypto while retaining their ownership.

Let’s learn what crypto lending is, how it works, and all you need to know about crypto lending.

What is cryptocurrency?

To learn about crypto lending, first, you need to know what cryptocurrency is.

Cryptocurrency is digital money that is based on blockchain technology and can be used to buy goods. It does not exist in physical form but uses the online ledger- blockchain- to record transactions.

Bitcoin was the first cryptocurrency created by Satoshi Nakamoto in 2009. According to CoinMarketCap, now there are 7812 total cryptocurrencies globally available (as of January 2021).

What is crypto lending?

If you have cryptos and want to earn money with them, one of the recommended methods is to hold them in a secure wallet and sell them when prices increase. Another method is to lend them to borrowers instead of selling them. When the borrower pays back the loan amount, you get your cryptos plus interest (dividends).

Crypto lending started in the recent COVID-19 pandemic and proved to be a reliable option. It allows easy and quick access to funds without no requirement of selling cryptos. Also, crypto holders can make their assets in use instead of holding them in wallets for years.

How does crypto lending work?

The following steps describe how does crypto lending works.

• Investor signup to a crypto lending platform and deposits his crypto in an investment account.
• He invests his assets in secured loans.
• A borrower borrows funds for a specific duration through a crypto lending platform by agreeing upon paying a fixed or variable interest rate up to 17% decided by the platform.
• The borrower must deposit some collateral in the form of cryptos, which he cannot use until he returns the entire loan amount.

Pros and Cons of crypto lending

Lending crypto is highly rewarding, allowing investors to earn returns on their investments without actually doing anything. Also, borrowers can get the loan instantly once the platform approves their loans without any credit check.

It is also associated with risks such as if a borrower fails to pay back the loan amount, the platform can immediately liquidate his collateral to help the investor recover his loss. The cryptocurrency market is highly volatile. If the collateral price becomes less than the loan amount, he has to deposit more collateral to compensate for the value.

Popular crypto lending platforms

The following are some of the most popular crypto lending platforms, along with their interest rates.

Obstacles in crypto lending

Other than the pros and cons, there are some obstacles to crypto lending.

Crypto lending involves collateral requirement which is always more than the value of the loan. For example, if you want a loan of $5,000, you need to deposit cryptos worth $10,000 in the form of collateral.

Over-collateralization is one of the barriers that crypto enthusiasts face or those who want to enter into the crypto space but could not because of not having initial capital to take a crypto loan.

Zero-collateral & Semi-collateralized loans

Some platforms in the crypto market are now offering zero-collateral and semi-collateral loans, recognizing the problems faced by borrowers.

The platform offering no-collateral loan use a protocol that allows borrowers to get a loan without requiring cryptocurrency as collateral. They work on the principle of a “trust through consensus” system involving collective assessment of participants instead of their cryptos.

Aave platform allows borrowers to take loans more than the value of their collateral, thereby functioning as a semi-collateralized loan. It can be assumed that the borrower is using the capital of a liquidity provider as collateral to get the loan.

These types of loans provide easy access to loans which keeps the market active and more chances to grow.

Final words

Cryptocurrency is here is to stay so does crypto lending. If you have decided to invest in crypto lending, consider investing low at the start. Because if, unfortunately, you have chosen the wrong platform, there are many chances that you may lose your investment.

Only you are responsible for all of your decisions. So, never be in a hurry and do proper research before making any investment.