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If you want liquidity for your crypto assets in the short term without letting the benefits of a long-term investment go away, try to get a crypto loan. To answer why it is beneficial, read the article!

Crypto lending is based on a rather simple concept: borrowers can use their crypto assets as collateral to obtain a loan in fiat or stable currency, while lenders provide the assets needed to obtain the loan amount at an agreed interest rate. It can also work in reverse where borrowers use fiat or stablecoins as collateral to borrow crypto assets. 

It takes three agents for crypto lending to occur, such as: 

  1. The private owners or lenders who are providing the fund. These may be HODL-ers (people who keep cryptocurrency and are waiting to understand the value) or crypto enthusiasts who are keen on increasing the productivity of their properties. 
  2. An online payment tool. There are several distinct kinds of networks for crypto lending; others are fully independent and decentralized. For a corporation or a community of individuals running behind the scenes, others are organized.
  3. Those borrowers. It may be corporations or entities looking for financing, usually using fiat or crypto assets to get the borrowed funds as leverage.

How important is lending in the markets?

At a fundamental level, credit markets increase productive wages by redistributing them between those who have no direct use and those who have them. This increases the usefulness of this money to all parties, giving borrowers access to the capital and income of lenders.

This is a huge opportunity for crypto markets and users who have traditionally had two options for using cryptocurrency: hodl or trade. For the most part, cryptocurrency has one function – to sit in their wallets. While some may argue that this serves the purpose of limiting the supply of the market, we can generally agree that this is not a particularly productive use of fixed capital. Now you can lend it too. 

With the advent of crypto lending platforms, the usefulness of these assets has increased significantly. Static investments can now generate passive income for lenders and borrowers can either receive fiat money without having to initiate a taxable sale event, or receive digital assets for trading, arbitrage, or market creation. These are significant improvements for both individuals and large institutional investors.

In addition to these utility enhancements, this is also one of the few cases where digital currency provides an improved direct analog of the financial system when comparing the profitability of loans in savings accounts. At the time of this writing, most cryptocurrency platforms provide an interest rate of around 8% for stablecoin lending; by comparison, most savings accounts in the United States provide less than 1% return per dollar.

While this is a significant improvement to the crypto ecosystem, it does not offer the full benefits of true credit – as, as it stands, all crypto loans are overly secured. This means that to receive a loan, you must already have capital, which means that the crypto lending market is not “growing the pie”. This is especially disappointing when it comes to the world’s underpopulated and unbanked populations, who most need to be expanded financial access.

Types of lending platforms: centralized and decentralized

Since 2018, several lending platforms have emerged in the crypto industry, which can be divided into centralized and decentralized platforms. At the heart of the differences lies who or what is involved in the process of lending and borrowing: business or protocol.

Centralized lending platforms act more like traditional fintech companies that deal with cryptocurrency – they fulfill Know Your Customer (KYC) requirements, have a storage system to protect their assets, and can form traditional business partnerships with institutions such as specific credit agreements. These platforms tend to offer company-defined interest rates, which often include noticeably higher returns for lenders of crypto assets such as Ether (ETH) and Bitcoin (BTC) than their decentralized finance counterparts.

What are the risks of crypto lending?

While crypto lending is often compared to traditional financial services or interest-bearing bank accounts, it is important to recognize that they are much newer and riskier platforms than traditional highly regulated banks. None of these, including the centralized players, are federally insured institutions. And, of course, we are dealing with new technologies.

Borrowers take on the built-in risk of providing liquidity if their collateral value falls below the required value to ensure that lenders are always safe. This means that borrowers must closely monitor the collateral ratio to keep it within a safe range. So far, liquidation systems have proven to be reliable and lenders have not lost their investments, but this is not guaranteed in the future.

Within the decentralized space, there are also technological risks associated with smart contracts. Since computer code in the form of smart contracts manages the movement of capital in the system, it is theoretically possible for a hacker to attack the platform with a bug or exploit.

Also, for decentralized options, there is sometimes a problem of low liquidity so that rates can change dramatically if a large amount of capital enters or exits the system. In general, interest rate functions are designed to stimulate a fairly stable equilibrium, but volatility does exist.

Finally, there are tax and regulatory risks associated with using these platforms, especially as one of the main borrowings is directly related to avoiding a taxable event. In general, many jurisdictions lack clear guidance on the nature of many of these assets, including stablecoins. This makes it difficult for a person to know the exact tax implications of their crypto lending activities, and users are encouraged to speak with a tax advisor. Besides, many decentralized platforms operate without a license and without KYC disclosure, which means their regulatory future is unpredictable.

What is the future of cryptocurrency lending?

While liquidation is the last to remain due to limited capacity, it is important to recognize that liquidation is a key part of the crypto lending ecosystem and is critical to the effectiveness of the system. Cryptocurrency functions as fantastic collateral due to its ease of sale and liquidity. Compared to mortgages, where foreclosures and liquidations are an extremely time-consuming process, crypto liquidations only take a few seconds. As the crypto industry continues to grow, the credit ecosystem will remain a critical part of its success story.

In the short term, this blockchain ecosystem will offer several unique opportunities for crypto participants to generate income, increase liquidity and improve the performance of their assets.

To sum up

The borrower needs to remember that the value of tokens is determined by market demand and quotes on exchanges. Therefore, when issuing a loan, lenders usually insure against a possible fall in the value of the collateral. A typical option is a requirement to urgently pay off the loan or part of it, increase the amount of the collateral, or the parties agree in advance on the automatic sale of tokens in the event of a rapid decrease in their price.

Today, crypto loans are a full-fledged financial activity based on blockchain technology. Like other transactions with valuable assets, it is subject to licensing, and you need to take out a loan only from an authorized company that works under the control of the regulator.

Gradually, crypto loans are entering the financial services industry in many countries around the world. Due to their flexibility and speed of processing applications, crypto loans represent a popular alternative to traditional loans.

By pledging tokens, anyone can quickly and efficiently close current issues with money without losing the right to own their cryptocurrency. We suppose that using cryptocurrencies as collateral for a loan is a real revolution in the world of lending. It will be much faster and easier to arrange loans without worrying about the mysterious credit rating in banking systems. 

Thanks to CoinRabbit, it makes it possible to get a loan without collateral in the form of cars, precious metals, real estate, or other assets. Moreover, you can get your collateral back anytime. To do that, you have to make your loan repayment. It consists of the amount loaned and the accumulated APR counted monthly during your loan period. 

CoinRabbit allows users to get instant crypto loans in exchange for their BTC, ETH, BCH, or NANO as collaterals. With CoinRabbit, you won’t have to sell your idle BTC or ETH holdings. Instead, you can use them to borrow stablecoins at a rate of 5% APR for an unlimited loan term on CoinRabbit.

Post Author: Diana Kelley

Hey! I'm Diana, CoinRabbit's blog manager. I want our blog to be the most useful and interesting!
Also, I love rabbits.