What is crypto lending and how does it work? — Hometown Station | KHTS FM 98.1 & AM 1220 — Santa Clarita Radio
Decentralized blockchain lending is an emerging alternative to traditional banking and fiat currency. The crypto lending market is growing due to the rise of alternative assets such as DeFi and tokens. Although there are many decentralized cryptocurrency lending platforms, none offers a wide selection of altcoins from multiple countries. A crypto lending platform is a platform that offers investors the opportunity to borrow money in order to increase their profit potential. The main purpose of these platforms is to empower the cryptocurrency market while providing investors who cannot do so without leverage or fiat with something they can use.
Crypto lending refers to a type of decentralized finance that allows investors to lend their cryptocurrencies to different borrowers. They will receive interest payments in exchange, also known as “crypto dividends”. Interest rates may vary depending on the platform and the coin. You can verify why 2021 best year for bitcoin.
There are basically three parties involved in the crypto lending process, and they include the lender, the lending platform, and the borrower, which brings us to the crypto lending process.
The Crypto Lending Process
The borrower goes to a crypto lending platform and applies for a crypto loan. The borrower would need to be registered on the platform before the application can be accepted. Usually, as soon as you enter the amount you wish to borrow, the required stake will be revealed. For convenience, we would use the popular lending platform, Celsius, to make illustrations. There is a list of stablecoins you can borrow from and an option for USD. As soon as you enter the amount you wish to borrow, the amount of collateral that would be required for the request to be approved will be displayed in BTC by default. This can be changed to ETH, DASH, BCH, BSV, LTC, ZEC, XLM, OMG, TUSD, GUSD, PAX, PAXG, USDC, MCDAI, CEL, ZRX, USDT, ERC 20, EOS, X AUT, BAT, KNC , LINK, MATIC, SNX, UMA, UNI, MANA, COMP, AAVE, DOT, WDGLD, ADA, SUSHI, 1INCH, XTZ or WBTC. Until the borrower is able to repay the loan in full, the borrower will not have the option of recovering the collateral. Using the platform, lenders will automatically fund the loan, which is a process that lenders cannot see. Lenders receive regular interest in the form of payments, and when the borrower repays the entire loan, they get back the crypto collateral they have staked.
In summary, the lender participates in the crypto lending process by depositing their crypto-assets for a fixed or flexible term to earn passive income on their assets. Borrowers must use their crypto assets as collateral to obtain loans without selling them, and they must pay interest on the loans. The cryptocurrency lending platform acts as a means of regulation for the lending and borrowing process. The lending platform could be centralized or decentralized, which would determine the approach to the lending process, which could include matching orders, liquidity pools or codes.
There are, however, some risks involved with crypto lending.
Volatility risks. Many cryptocurrencies experience a wide range of price fluctuations. This risk can be easily avoided by investing in stablecoins in your savings account. Stablecoins are those that are tied to an underlying asset with a stable value and therefore have low volatility risk, such as USDT.
Insufficient legal certainty. Legal issues can arise, especially with DeFi providers, as they lack licenses, CEOs, and legal contracts, implying that you are not dealing with a legal entity. However, if CeFi platforms such as Celsius fail to meet their contractual obligations, you may be able to sue the platform provider.
Insolvency risks. Since crypto savings accounts are not protected by state deposit insurance, you could lose all your money if the platform provider goes bankrupt. You should always be aware of the economic health of your crypto lending platform provider and you should be wary of less established platforms.
Counterparty risks. Cryptocurrency lending platforms can use your cryptocurrencies whether you are a lender or a borrower; they mainly lend them to cryptocurrency exchanges, hedge funds, and other institutional investors. This means that if one of these counterparties fails to return the cryptocurrencies, your lending platform could go bankrupt.
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