Cryptocurrencies are now an integral part of the daily life of modern man. After cryptocurrency exchange platforms, applications that allow you to make purchases with crypto assets and crypto trading, a new trend is developing in the cryptosphere: crypto lending. What is it about ? How does it works ? What are the advantages of borrowing crypto compared to traditional bank loans?
As its name suggests, crypto lending is a loan service based primarily on crypto currencies. In fact this is a loan which is contracted only on specialized platforms. In practice, you borrow altcoins and then repay them with monthly installments paid in crypto currencies. Similarly, you can also deposit some amount in crypto to borrow from third parties and receive interest in return.
On the one hand, crypto lending works exactly like a traditional loan. However, this loan service differs from traditional bank loans in that it exclusively involves crypto currencies (Ethereum, Bitcoin, Dogecoin, etc.)
DeFi (Decentralized Finance) is a basic system that brings together several types of financial services, most of which are carried out in a decentralized manner. In concrete terms, all the financial operations that take place within the DéFi are done directly, without an intermediary, whether in terms of management or authorization of transactions carried out on the blockchain. Crypto lending is one of the most concrete applications of this structure.
In practice, the very foundation of the DeFi rests on the deposits, loans and interest rates generated by crypto lending. The two main parties involved in a loan, i.e. the borrower and the lender, use the decentralized platforms to materialize a loan. The transactions are then validated and verified by the smart contracts which execute automatically once the required conditions have been met. This means that all the operations that take place within the DéFi are carried out autonomously.
To borrow stablecoins or fiat currency via crypto lending, you must be in possession of cryptocurrency. Conversely, as soon as you own crypto currencies, you can also borrow stablecoins or fiat currency from third-party borrowers. To do this, simply deposit your assets as collateral in order to receive all the crypto assets you wish to borrow. In the same way as for a traditional bank loan, your assets must be high enough to cover your entire loan.
Similarly, if you make your crypto currencies available to borrowers, you receive interest in exchange.
The current market offers several decentralized applications (dApps) as well as platforms specialized in the loan of crypto currencies (crypto lending). The most popular platforms for doing crypto lending are:
Crypto lending has many advantages, such as:
But similarly to other types of conventional loans, crypto lending also has certain limits which are mainly related to the risk of default by specialized platforms and network failures during large transactions.