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Crypto Lending Platform and How Does It Work?

December 6, 2022

Crypto Lending Platform and How Does It Work?

Cryptocurrencies have become a topic of discussion, with many people showing interest in the concept. Holders of these virtual currencies can delve into many business prospects, and one of them is crypto lending. To this effect, there are now crypto lending sites that users can easily use. The question is, “What is a crypto lending platform?”

A crypto lending platform acts as an intermediary where lenders and borrowers can connect and do business. Lending on this platform works similarly to getting a loan at a bank or other financial institution. Borrowers in need of these currencies visit these platforms and apply, after which someone else lends the crypto. They pay back the currency with interest.

Are you interested in learning more about crypto lending and borrowing? If yes, keep reading. This article covers the basics of crypto lending, including the pros and cons.

What is Crypto Lending?

As its name implies, crypto lending involves one party lending cryptocurrency to another party in return for interest payments. It is similar to lending or borrowing money from financial institutions, but there are a few key differences.

First, banks do not deal with cryptocurrency loans. Instead, decentralized finance (DeFi) protocols like AAVE or CeFi lending platforms like Binance let users borrow or lend crypto. However, the lender exchanges their assets in exchange for interest. The interest rates are usually between 1% and 20% APY/APR.

A typical crypto loan doesn’t need a middleman to keep track of the transaction. Instead, smart contracts automate the process. These contracts determine how long it takes to pay back the loan and with how much interest.

Another difference is that lending your cryptocurrency doesn’t require you to register with any government or regulatory agency. This means that you can lend or borrow money from anyone who has a Web3 wallet, no matter where they live.

Taking out a crypto loan typically does not necessitate going through any sort of know-your-customer (KYC) verification process. As a result, the lender might not even know who you are. So, you must provide some form of collateral to ensure that you won’t disappear without paying back your loan.

What is a Crypto Lending Platform?

Cryptocurrency lending platforms act as intermediaries that connect lenders to borrowers. Lenders put their cryptocurrency into high-interest lending accounts, and borrowers use the lending platform to get loans. The platform controls its net interest margins by setting the interest rates for both lending and borrowing.

Interest rates differ from one platform to the next and from one cryptocurrency to the next. Platforms may charge a fee for their services. Likewise, they give lenders who agree to lock up their cryptocurrency for a set period a better interest rate.

How to Lend/Borrow Crypto

Whether you intend to lend or borrow crypto on Coinbase, Binance, or other platforms, the steps remain the same.

As a lender, here are the steps to go through if you want to lend your crypto on these platforms:

  • Register on the site and choose an interest rate
  • The lender offers their crypto assets to borrowers and gets bonds in exchange
  • Lenders then use these bonds to get back their assets and the interest attached
  • Smart contracts facilitate sending and receiving of bonds in exchange for crypto

Here are the steps you go through to borrow these assets:

  • Register on the platform and share what you intend to borrow
  • The site will calculate your collateral and interest rate based on their lending rates
  • Borrowers then deposit the collateral on the platform when applying for the loan
  • The platform verifies the collateral
  • Once the lender approves the loan, you get the amount in your account

Important Things to Note Before Lending and Borrowing Crypto

Getting loans in crypto is similar to getting one in fiat currency. So, you need to be careful and consider a few factors before delving in. These factors include:

  • Know the risks of letting the platform manage your tokens as a lender: Once you send your tokens outside your wallet, you’ll have to trust a third party (or smart contract) to take care of them. Hacks and scams can happen to projects, and sometimes, you’ll find it impossible to withdraw your coins.
  • Think about how the market is doing before you lend your cryptocurrency: It’s also risky to lend or borrow on new platforms because of the volatility of these assets. So, be sure that the market is a bit stable before lending or borrowing.
  • As a borrower, look over the terms and conditions of the loan: Many platforms offer these loans. Ensure to do a crypto lending platform comparison to find sites with more practical loan conditions and interest rates.

How to Find the Best Lending Platform for Cryptocurrencies

If you want to have a positive experience with crypto lending, finding a reliable platform that suits your needs is essential. When deciding on a loan platform, it’s crucial to keep a few things in mind.

Interest Rates

The interest rate on a loan platform is a major consideration. Pick a service that offers a respectable rate of return on your crypto assets. As a borrower, low-interest crypto loans are readily available, sometimes going as low as 0%.

Platform risk

You should consider the safety of your assets as a lender. The number of cyber attacks aimed at cryptosystems has increased over the years. As a result, you should search for platforms that detail their safety measures on their site.

Cost and Collateral

This is one of the most important factors to consider as a borrower. Check out the rates and other terms and conditions of a cryptocurrency lending platform before proceeding with the application.

Pros and Cons of Borrowing or Lending on a Crypto Lending Platform

Pros and Cons of Borrowing or Lending on a Crypto Lending Platform
Pros and Cons of Borrowing or Lending on a Crypto Lending Platform

Pros

  • Rates: These platforms have low-interest rates compared to when borrowing with fiat.
  • Extra income: As a lender, you earn passive income without stressing yourself. All you need to do is let the platform handle it.
  • No need for KYC verification: Getting these loans is easy as there are no long verification processes to deal with.
  • Security: The transaction is recorded on the blockchain which increases transparency when lending or borrowing.

Cons

  • Inability to access the collateralized assets: The borrower cannot access the collateral until after repayment.
  • Margin calls: This happens when the value of the borrower’s collateral decreases to less than a certain amount. If so, the borrower increases the collateral amount to keep the loan.
  • Eligibility of assets: As a borrower, you must be sure that the assets you have qualify as collateral.
  • Lack of regulation: Cryptocurrency lending is unregulated. As a result, if a platform is exposed as a sophisticated Ponzi scam, you might lose your entire asset.

Crypto Lending vs Staking

Both staking and lending are ways to make money with cryptocurrency, but they are very different. When you stake, you add assets to a blockchain, and when you lend, you give money to borrowers.

When you place low or high stakes on a cryptocurrency trading platform, you need to lock up your assets. During this period, the value of the coin might drop, and you lose instead of earning. Lending also comes with its risks. The best one depends on how willing you are to take risks and how quickly you need your assets back.

Conclusion

Lending and borrowing virtual assets on a crypto lending platform is easy and comes with some benefits. However, there are also risk factors associated with both lending and borrowing. Consider these factors before deciding if crypto lending is for you.

Written by Darshan Kothari

Founder of Vardhaman Infotech - Blockchain & AI development Company. Developed world's first KALQ Keyboard. Thiel fellowship runner up. Love reading books.

October 10, 2022

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