The rising popularity of cryptocurrency has greatly contributed to its adoption across the globe. Crypto lending can be a good way of earning some passive income on cryptocurrency assets as opposed to holding them. Crypto lending is one of the outstanding trends in the DeFi landscape, especially during these tough times with the covid-19 pandemic outburst.
Foundations of cryptocurrency lending.
Understanding how the traditional lending mechanisms worked will give u a clear picture of how crypto lending works. With traditional lending people would approach financial institutions or banks for loans, which they would in turn pay with a specified amount of interest. The banks just work as middlemen between the lenders (the people who deposit savings into their bank accounts) and the borrowers. How? You may ask. The bank loans the borrowers using the cash that is in the customers’ accounts, and since the borrowers will pay back the loan with some interest, the banks make money through these interests.
When it comes to cryptocurrency lending, the same happens. Only that this time the middlemen are eliminated out of the picture. With crypto lending, one can invest their assets and can use them to lend cryptocurrencies or cash to borrowers. The interest earned goes to the lender and not to middlemen like in the case of banks. This interest acts as a source of income to the lender. That is just how cryptocurrency lending works.
Crypto lending is done on crypt exchange platforms or crypto lending platforms. The outstanding principal in crypto lending is the same as the one for auto loans or mortgage loans. One can easily pledge their crypto assets to acquire a loan at a specified interest and payback within a specified period.
In as much as the ownership of the cryptocurrency is in the hands of the borrowers he or she is not allowed to trade them or carry out any cryptocurrency transactions using them. Just in case the value of the collateral assets drops, then the borrower will have to pay way more than the loaned amount.
With crypto lending, there are only two well-districted parties. The borrower deposits crypto assets which act as collateral to secure the lenders’ investments. The lender then receives the interest paid by the borrower and he or she has assurance from the collateral. In case the borrower fails to repay the loan, the collateral acts as compensation.
What are the steps involved in crypto lending?
Regardless of the platform used to carry out the crypto lending, the steps involved are almost similar.
For borrowers.
They have to perform the following tasks.
- They have to register on a platform that avails crypto-backed loans and display the amount they are interested in.
- The crypto lending platform will leverage crypto lending rates to calculate the amount of crypto that will be used as collateral.
- Borrower will then deposit the estimated amount of collateral on the platform and then apply for the desired loan.
- Upon approval of the loan, the platform will deposit the fund into the borrower’s account after verifying the collateral.
For lenders.
- The lenders select a specific interest rate.
- They will then receive bonds in return after offering crypto assets to the borrowers. Bonds help to prove that the lender has lent crypto to the borrower.
- The lenders will receive additional bonds as interest.
- The lender can recover the funds after the agreed time by sending back the bonds. The lender could leverage the smart contracts to send back the bonds and also, in exchange for bonds, receive the crypto.
Crypto lending comes with its advantages. Lenders get to acquire more cryptocurrencies from the loaned amount. They get to earn the interests directly without the involvement of intermediaries. As a result, the lenders get to make more profit without any struggle. Crypto lending offers a better interest rate compared to banks or savings accounts.
Crypto owners can choose to use cryptocurrencies that do not fluctuate from time to time like the World Causecoin (CAUSE), to expand their assets without facing any volatility risks. One can basically have an estimation of the amount of crypto they would get in return.
One of the most important aspects that one needs before venturing into the crypto lending ecosystem is to do their due diligence. Doing your research will help one to identify the most stable platforms that offer crypto loans. Look out for platforms that are well audited and have a favorable track record.
Another important aspect to consider is to understand the implications that come with crypto lending. Get to know how safe it is to practice crypto lending and the possible consequences that come with locking your cryptocurrency in a lending platform. After understanding all these, take time to think over and make sound decisions when getting involved in crypto lending platforms. Beware of the many rising scams.
In as much as crypto lending is still in its developmental stage, it might take some time to gain traction. All the same crypto lending comes along with flexible approaches for borrowers to in return acquire money or cryptocurrency for their crypto assets.
