What is Crypto Lending and How Does it Work?

(Last Updated On: November 3, 2022)

If you are a holder of crypto assets and don’t want to sell them, but you need money here and now — then it’s worth using a platform that gives out crypto loans. Cryptocurrency loans differ from a loan with a regular bank for the better and will bring additional funds. How it all works — let’s figure it out in this article.

What Is Crypto Lending?

With crypto lending, you can borrow the currency you need or lend your own and profit from it. Crypto loans are popular with holders of crypto assets who do not plan to sell their assets. Nevertheless, just lying in your wallet, these assets won’t make your life any better. But using your investments as a collateral, you can get additional funds, if you are a borrower, you can spend the loan for any purpose, whether it is usual purchases or trading on the exchange.

How does crypto lending work?

So how do crypto loans work? You can use DeFi or CeFi platforms to get a crypto loan. For example, in DeFi lending there will always be a middleman when applying for a loan to connect the lenders and the borrowers. Lenders may include individuals who are averse to selling their crypto assets or want to benefit from them. On another hand, CeFi lending is regulated only by the lending platform and has no need in the third person.

Let’s say you have 30 bitcoins. You want to keep them for the future growth, but also you want to enjoy your investments now, so you go to the crypto loan site to get the funds for your purposes. There you can use your bitcoins as collateral to get the loan into your digital wallet.

You can take a loan in some stablecoins or whatever currency you need and spend the loan on your choice. Many crypto lending platforms offer low interest rates, which is very advantageous compared to, for example, a regular bank.

Types of crypto loans

Now, when you understand what crypto lending is, let’s talk about different types of loans that can be most advantageous depending on your original goal.

Collateralized loans

This is one of the most popular types of loans and probably the most convenient. Most platforms require loan collateral, in which the loan-to-value (LTV) ratio usually is set on your choice, as the volatility of the cryptocurrency is high, you can control your own risks with this setting. For example, if the ratio is 50%, meaning that the collateral is twice as much as the loan itself. In the event that the collateral becomes below the value of the loan or a certain set value, it can be liquidated, if you missed the margin call notifications.

The main advantage of secured loans is that often you do not need to provide personal information, which speeds up the process of obtaining a loan.

Flash loans

If you wonder how to borrow against crypto and don’t pay the deposit, there are other options. For example, a flash loan. Such loans are issued and repaid within a single block. That is:

  1. You take a loan.
  2. You buy cryptocurrency with it.
  3. Sell it.
  4. Repay the loan immediately.

There are risks with this type of loan because the lending process is controlled by a smart contract and does not require human involvement. If you fail to repay the loan in time, the transaction will be canceled.

Uncollateralized loans

As opposed to collateralized loans, uncollateralized loans will require other guarantees. That means you’ll need to fill out an application, submit documents, and undergo a personality and credit check before you’ll be approved.

Crypto Lending Rates

Each platform has different lending rates. Regular rates you can expect are start from 8% to 18%. So when choosing which platform you are going to borrow from or want to invest on, you need to consider what specific conditions you are planning to obtain.

DeFI and CeFi lending

Wondering how to lend crypto, you’ll need to choose a platform that belongs to one or the other type — DeFi or CeFi.

DeFi is decentralized finance. On such a platform, there will be no intermediaries between the investor and the borrower. The services are based on publicly available blockchain platforms and are completely transparent. You can manage your own money without relying on banks or other financial institutions. However, you’ll have full responsibility for what happens to your assets.

CeFi, centralized finance, offers more guarantees. That said, most platforms will not require you to go through the KYC process. There are strict security measures, so you can be assured of the safety of your asset. Loan is borrowed exactly from the platform itself. The borrowers pay an interest rate to a central supplier, who then transfers the loan right to your wallet.

Other CeFi benefits:

  • More flexibility in conversions
  • Confidentiality and transparency
  • Risk sharing.

How to Borrow Cryptocurrency

When you wonder how to get a crypto loan, all you have to do is decide on the amount you require and select a secure site. Verify the website’s availability of the tokens you require and that the minimum yearly interest rate is acceptable to you.

Next, decide on the type of loan to collect — whether a collateralized loan will work for you, or you can use a flash loan to get a quick profit on the sale.

How to Lend Your Cryptocurrency

You can keep your cryptocurrency as an investment and receive interest from it, which will be paid by the platform. You could compare such an investment to a savings account. You simply leave the money, and in return you get interest from other people.

You must choose a solid platform in order to accomplish this. Decide if you want a fixed or flexible exchange after that, and then choose the coins you’ll lend. You must compare risks taken into saving accounts market conditions, and your expected returns in order to achieve the planned benefits.

When you provide a loan, you must wait for the borrower to appear and for the investors to fund the loan.

Is Crypto Lending Safe?

If you’ve never taken out a crypto-loan before, there’s no escaping your doubts and think — is crypto lending safe. However, there are now many secure platforms you can use. If you want more guarantees, choose CeFi.

If the collateral’s price collapses, the collateral can reach the margin call and then be liquidated, that is also a disadvantage for the borrower, but you always have the option to increase the collateral in the event of a change in the exchange rate.

Risks of Crypto Lending

Nevertheless, crypto loans have their own risks. This is mainly due to the volatility of the cryptocurrency market. Any changes there will affect both invested assets and borrowers’ collateral.

It is important for borrowers to consider margin call, which is a situation where the LTV of your loan has become lower than the agreed upon rate. In that case, the collateral will be written off. However, platforms warn their users when LTV levels go down. You can always increase your pledge to prevent liquidation.

There is more with DeFi than with CeFi because the loan tracking is almost entirely up to the borrower.

Now, when you understand how crypto lending works, you can choose any safe platform.

Closing thoughts

If you want your assets not to idle, but to bring you avail, then pay attention to cryptocurrency platforms. Whether you’re an investor or a borrower. In addition to being able to use the loan for the required purposes as a borrower, you’ll be able to create passive income as investors. Don’t ignore the risks, though, and select only secure platforms.

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