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Crypto Lending and How it works

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Crypto lending and How it works

Have you gone to a traditional bank to access loans and you are met with conditions that put you off balance leaving you with little or no option to seek funding elsewhere or from a different type of institution other than the banks? Getting loans with cryptocurrency (crypto lending) can often be less complicated than getting traditional bank loans

Well, you’ve come to a special article that gives an insight on a whole new method of accessing loans coupled with seemingly high ROI (return of interest) compared with interest from that of the traditional bank.

Crypto lending is a new and cost-effective method for investors to lend and borrow crypto assets in form of loans that can give high ROI yields.

In this article, 36crypto will explain in detail the concept of crypto lending and how it works.

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crypto lending

Crypto Lending and How it works

If you are new to the concept of cryptocurrency, you should read up on What is Cryptocurrency? in other to have an in-depth knowledge of the topic.

Now that you have full knowledge of cryptocurrency, let’s dive in to understand what crypto lending means and how it works.

What is Crypto Lending?

Crypto lending is a process by which an investor (lender) lends out cryptocurrency in form of a loan to another investor (borrower) through an organized crypto lending platform in return for regular interest payments, also called “crypto dividends”.

For the borrower to have access to the cryptocurrency, he/she has to stake their cryptocurrency in form of collateral as guarantees of loan repayment or as security. This is done as a precautionary measure in other to have a hold of the borrower’s assets and sell them off to recover losses, should in case he/she fails to repay the loans granted.

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Platforms that specialize in lending crypto accept payments in the form of cryptocurrency with the inclusion of stablecoins.

Types of Crypto Loans

There are several types of crypto loans that investors can choose to access.

  1. Collateralized loans – These are crypto loans that require collateral in other to collect loans; most platforms apply this method of accessing loans, borrowers can access a certain percentage of the deposited collateral
  2. Uncollateralized loans – These are loans that require no collateral to access. The issue in this type of crypto loan is that lenders are exposed to a higher risk of loss as there is no available asset to liquidate in the event the borrower doesn’t pay back the loan.– 
  3. Flash loans – Flash loans are mainly available on centralized crypto exchanges. They are instant loans that are borrowed and repaid immediately in a transaction. Due to its high-risk nature, only certain investors use them to take advantage of arbitrage trading.

Crypto Lending Platforms

There are two main types of crypto lending platforms:

  1. Decentralized Crypto lenders
  2. Centralized Crypto lenders

The decentralized and centralized crypto lenders both offer loans with high-interest rates, which might reach 20%  in annual percentage yield (APY), and both typically require borrowers to deposit collateral to access a crypto loan.

The difference between both lenders is in the regulation of the loans given to borrowers.

How does Crypto Lending work?

Crypto lending works by taking crypto from one user and providing it to another for a fee. Some stages must be passed before crypto lending can be completed and the borrower gets the loan.

It involves three parties:

  1. The lender
  2. The borrower
  3. The Crypto lending platform – a Defi (Decentralized Finance) platform or CeFi (Centralized Finance.)

The lending process happens in a few steps:

  • Lenders automatically fund the loan on the platform by adding their crypto to a pool that manages the whole process; this process can not be seen by the investors
  • The borrower goes to a platform and requests a crypto loan
  • The borrower stakes the crypto as collateral immediately after the loan request is accepted by the platform. Until he can fund back the entire loan, the borrower will not have the opportunity to get back the stakes.
  • the Investors will receive regular interests as payments
    When the borrower manages to pay off the whole loan, he will get back the crypto collateral he wanted.

Every crypto lending platform has a specific method of lending crypto and managing the loans, but overall, this is how the process is done.

Advantages and disadvantages of crypto loans

In every system of a business transaction, there are a series of advantages and likewise disadvantages involved in using such services.

Advantages

1. Capitals are easily accessible
2. Smart contracts manage crypto loans.
3. Simple to earn passive income
Disadvantages
1. High risk of liquidation when there is a drop in the value of the crypto
2. Vulnerability of smart contracts to attacks
3. Borrowing and lending can increase the risk of your portfolio.

Conclusion

Crypto lending is a way to earn interest with cryptocurrency assets that are not used to trade. This way, your digital currencies can offer you some interest in return. In as much as one can earn passively from cryptocurrency lending, there is a high risk involved in it.

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Gozie Nwankwo is a content writer and cryptocurrency enthusiast. He loves researching about cryptocurrency and everything surrounding the cryptospace. Follow on all social platforms.

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