Cryptocurrency holders have multiple opportunities to grow their savings and boost investments. Crypto lending has only been around for a couple of years, and it is making waves. In the past, users could only trade their coins or HODL (buy and hold) to profit. Now, crypto lending platforms let them borrow and lend cryptocurrencies with or without collateral.
This does not only work for Bitcoin — but the Ripple cash loan is also increasingly popular. Lending platforms streamline the process, and some of them offer a substantial rate of return — up to 8% on some options. This is eight times higher than the top rate on a bank savings account!
How It Works
Lending is available on both centralized and decentralized platforms. In the first case, the user usually borrows fiat currency (e.g., USD) against their coins, which serve as collateral. The common requirement of 50% LTV means that your collateral must constitute 50% of the borrowed amount.
After the debt is repaid by the due date, the collateral is released. Otherwise, it is liquidated. Interest rates vary — for example, you may pay 4.5% plus the origination fee. As a lender, you earn interest by depositing your coins into the platform.
On decentralized platforms, the process is based on smart contracts, and the distribution of loans and repayments is automated. Usually, no collateral is required, and the absence of KYC data collection guarantees faster processing with lower transaction fees.
The Advantages of Crypto Lending
This format gives multiple advantages to individuals and institutions. Loans are more easily accessible in comparison with conventional banking services. Holders gain interest on their assets and more:
- attractive interest rates,
- low transaction fees,
- no need for a bank account,
- simplified and faster procedures,
- access to a diversified loan portfolio,
- absence of geographic limitations.
The Disadvantages of Crypto Lending
Conventional loans are often insured by the state. In comparison, crypto loans come with a higher probability of default. The platforms are not insured, at least to the same degree as ordinary loans. Besides, as all operations are conducted through the Internet, hacking and other cyber attacks are a possibility on some platforms.
For lenders, the biggest drawback is volatility. If the rate of the currency they provide goes down, their losses may be greater than their earnings from interest. Finally, as these are innovative technologies, taxing these platforms is an area of particular attention in many jurisdictions.
To Sum up
Users of crypto lending platforms can borrow and lend cryptocurrencies using smart contracts or a collateral-based system. This innovative environment allows them to capitalize on their deposits, but it also comes with a higher probability of defaults.
Lending is another reflection of crypto proliferation. The industry is developing at breakneck speed, giving investors and enthusiasts new opportunities to grow their assets, gain liquidity and earn interest.