How to Lend or Borrow cryptocurrency without the involvement of Banks?

For the last few months, cryptocurrency trading has gained massive adoption, causing a drastic boost in the investor’s count. As per the blockchain expert team, increasing interest in cryptocurrency trading has led people to gain basic blockchain education. Moreover, these decentralized advancements are bringing innovative changes in the traditional financial industry.

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Furthermore, due to ease of access and overall working procedure, crypto borrowing and lending are gaining remarkable momentum. Today, the millennials and Gen Z are both willing to learn and leverage the technology to become financially savvy. So, if you think that you should know about this economic transformation, then keep reading further to get more insights into crypto-based financing.

Table of contents

• The working mechanism of crypto lending
• Understanding the process of crypto lending and borrowing
• Example to understand the concept
• Closing thoughts

The working mechanism of crypto lending

In the space of cryptocurrency financing, borrowers and lenders connect via third-party platforms. In general, these are cryptocurrency lending platforms. Hence, only three entities are crucial for performing crypto trading: Lending platforms, lenders, and borrowers. Unlike traditional financing systems, the need for the involvement of established financial institutions like banks isn’t a requirement.

Here, lenders refer to ones who loan cryptocurrencies, cash or stable coins to other users and gain passive income in the form of dividends. Next, the crypto lending platforms refer to third-party spaces that connect lenders and borrowers and help them perform transactions. These platforms can be decentralized, autonomous or centralized (A group of companies or individuals run the platform). At last, a borrower refers to entities that need funding for a variety of purposes. Here, they use fiat or crypto assets in the form of collateral in exchange for funding. Thus, blockchain for financial professionals can be advantageous.

Understanding the process of crypto lending and borrowing

Borrowing in cryptocurrency is quite simple. Investors can easily borrow required loans in cryptos or cash with cryptocurrency financing. Here, investors need to put a few of their crypto holdings as collateral in order to borrow funds. Due to the special provision of crypto lending, lenders become the owner of collated cryptocurrency assets. But, the collateral crypto holding can not be utilized for any kind of transactions or trading.

This provision is advantageous for crypto investors who want to use their crypto-asset for HODL, a cryptocurrency term that stands for “Hold On For Dear Life. Doing so also enables them to earn good interest for holding their assets for that period. Here, the interest gained is known as cryptocurrency dividends. Hence, crypto investors can efficiently earn passive income just by holding and loaning their cryptocurrencies assets.

In simple words, a cryptocurrency loan is a form of collateralized loan that users can obtain from crypto-lending platforms or crypto exchanges. And it works similar to a car loan or a mortgage where you utilize crypto coins for loaning funds. However, you can connect with a highly-knowledgeable blockchain expert through crypto communities to learn more about its functions and underlying technology. Or you can opt for blockchain certifications that cover overall coursework and projects regarding blockchain applications and cryptocurrencies.

Example to understand the concept

Let us look into the following example to understand the concept of crypto lending and borrowing better. Suppose you have around 10 bitcoins and want to gain a stable passive income by investing in them. Here, put all these 10 bitcoins in your digital wallet that’s compatible with the lending platform you are using. Then you can start earning weekly or monthly interest simply for your holdings.

Usually, bitcoin provides interest rates within the range between 3 to 7%. However, you can also earn up to 17% interest for a more stable crypto asset.

What makes it different from the traditional lending and borrowing system is its peer-to-peer approach. Also, as mentioned earlier, borrowers have the advantage of using their assets as collateral to obtain funds, which makes the procedure non-repayment loans. Here, investors have the right to sell the crypto assets to cover the loss. Also, note that such investment platforms usually need a stake of 25 to 50% of the crypto loan. Hence, it enables the recovery of a major portion of loss and protects investors from losing their valuable money.

More so, crypto financing lets you even borrow physical money such as USD, CAD, EUR. Thus, users can sell their assets in scenarios where they need emergency financial help.

Closing Thoughts

Blockchain technology provides users freedom to control their finances and trading decisions by placing a permissionless setting to perform transactions. Moreover, there are a number of blockchain certifications for users to learn about the technology better. One of the reliable resources is the BLOCKCHAIN COUNCIL, where you can learn directly from the blockchain expert.