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ALL ABOUT CRYPTO LOANS

People have multiple options to invest, trade, lend or Hold On for Dear Life(HODL), a cryptocurrency. HODL is a long-term strategy for certain crypto owners, which means buying and holding on to the cryptocurrencies unfazed by short-term disruptions. Though people HODL crypto assets to avoid losing them, it is not a wise method as it cannot generate any revenue. Investing or trading cryptocurrencies can produce income, but it has its risk elements. However, lending it to people who need it comes with the least risk and is an effective way to raise income.

What is a Crypto Loan?

As the name suggests, a crypto loan is the lending and borrowing of cryptocurrencies. Unlike a traditional loan, you can collateralize your crypto assets in exchange for digital or fiat currency in a crypto loan. The interest payment that the lenders get is known as crypto dividends. The collateral paid in the form of cryptocurrencies acts as securities if the borrower cannot pay them back.

Once the loan tenure starts, the borrower cannot trade the cryptocurrencies used as collateral. The borrower needs to pay back the amount as EMIs within the repayment period with interest. Once the total amount is paid, the borrower can withdraw the collateralized cryptocurrencies.

Similarly, another option is available where a client can borrow cryptocurrencies and keep fiat money as collateral.

The benefits of crypto loans include:

  • Permissionless exchanges
  • No physical bank account
  • No geographic limitations
  • Low transaction fees and good interest rates
  • Passive income for the lenders
  • Diversified loan portfolio
  • No credit checks are needed
  • Borrowers do not lose ownership of their crypto loans

Different Types of Crypto Loans

Crypto loans are divided into two types, based on who or what handles the loan, which are

1.CeFi crypto loans

CeFi is the acronym for Centralized Finance crypto loans. An authority or a business handles CeFi crypto loans. CeFi loans adopt some of the benefits of DeFi loans but work more like a traditional loan with fewer complications. When a client wants to borrow money, the authority implements the Know Your Client (KYC), and both parties exchange the crypto asset and fiat money. The client will also have to collateralize their crypto assets until the repayment period is over.

It barely needs any paperwork and is easy to process. CeFi loans also offer attractive interest rates and agreements with crypto lenders.

2. DeFi crypto loans

Decentralized Finance or DeFi crypto loans do not have central authority but instead, work with a smart contract. Smart contracts are self-executing contracts that are activated when the lender and the client meet all the criteria for the deal. The transaction details get recorded into the underlying technology, which cannot be altered even by the lender or the borrower.

DeFi aims to provide an open-source, transparent and permissionless financial service environment.

How does DeFi Work?

DeFi works without a third party’s intervention but uses a peer-to-peer network to enable transactions. It is powered by Blockchain technology that acts as a digital ledger wherein a network of computers works together to register the transaction details. The records of these transactions are copied into and verified by all the computers in the network, owing to transparency and accuracy.

Anyone can lend their money or crypto assets to a client after creating an account in a DeFi platform and depositing their assets. Often several users pool their assets for lending. When the lender and the borrower reach a consensus, the smart contract is initiated, which is immutable.

The borrowers can search for loans with interests that suit them and then provide the collateral.

Benefits

DeFi loans have the following advantages,

  • Transparency

Since DeFi is built on Blockchain technology and triggered by smart contracts, all the transaction details are recorded, copied and verified by all the computers in the network. All the participants in the network can see the transaction details leaving no room for secrecy.

  • Liquidity

Several users can pool their assets together in a DeFi platform and use it profitably to give more sums as loans.

  • Democracy

Users vote on loan protocol modifications in the absence of a central authority. Many such protocols provide the users with financial holdings governance tokens that give them voting rights.

  • Efficiency

DeFi lending needs no complicated procedures and paperwork, unlike traditional loans. Since no third parties are required, the borrowing speed also increases.

  • Immutability

The database recorded in the Blockchain can never be altered even by the lender and the borrower.

  • Permissionless

Anyone from anywhere can take part in crypto lending without any permission.

  • Trustless

The lenders do not have to take caution against the borrowers in lending the money as the smart contracts take necessary actions if any breach occurs.

Popular DeFi Lending and Borrowing Platforms/Protocols

Maker

Maker is a permissionless DeFi lending platform where the users can borrow DAI tokens, the first decentralized stable coin built on Ethereum. Any users can take a loan on the platform by staking digital assets such as Ether (ETH) as collateral. No KYC requirements are needed to get started.

Aave

Aave is an open-source digital exchange platform. It was launched in 2020 and offered stable and variable interest rates. It enables users to earn interest on deposits and borrow assets. The interest rates are algorithmically calculated and adjusted based on the demand and supply. The more the users hold a token, the more the interest amount.

Compound

This DeFi protocol runs on the Ethereum blockchain using Smart Contracts. It is a permissionless platform where anyone with a crypto wallet and an internet connection can access it. In 2020, it launched its governance token, COMP. Each COMP token reflects voting rights in the organization.

Conclusion

Crypto loans have changed the perspectives of people about loans. People had to wait for days and even months, fill out many forms and go from one office to another to get a loan sanctioned. It is a very tiresome process. But the introduction of crypto loans, especially DeFi lending, has brought about many positive outcomes for this financial service. People opting for crypto loans do not have to do very complicated procedures and paperwork but instead can sit in the comfort of their homes and apply for a loan.

Moreover, DeFi lending is more secure with less effort. Given time, it can transform the financial sector.

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LeewayHertz

LeewayHertz

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Fullstack software and web3 development company building custom software solutions, dApps, metaverse platforms, etc. https://www.leewayhertz.com