Cryptocurrency Lending: The coming age for crypto landscape
All you need to know
Money has [from barter, metallic, paper, plastic to digital money], and will change the form, but its handling and managing would remain the same. The financial concept that birthed in olden days still hold good, with a seasoning of technology and glossy wrapping, to suit the tech-savvy millennials but nothing much has changed. If you believe it’s not true, read the post that would deliberate on the same age-old concept of Lending — the traditional way lending and the newly evolved model — Crypto Lending.
Let’s get started –
The Evolution of Lending
As the above diagram depicts, lending has a history of handholding money since ages. It has progressed with time as new commodities like Gold, Silver, Property, and finally, cryptos emerging as the new asset class.
So, if Gold, Silver, Property, and Cryptos serve the same purpose as assets/collaterals, why are we talking about Lending?
Because Crypto Lending works a bit differently and is inclined to change the role of participants and the system itself.
How is Crypto lending changing the system?
When Satoshi Nakamoto published his white paper for Bitcoin, he intended to create a decentralized payment system that works on a peer to peer network sharing protocol. This concept was the first step to design a trust-based system that moves away from the centralized authority and remove the middlemen targeting a trade/deal just between the two parties.
Then, Is the traditional lending flawed?
Not Really, it has its own advantages like backed up by regulatory authorities, non-volatile and risks are less compared to crypto-based lending.
What about Crypto Lending? Does it offer high risk-high returns?
Yes, absolutely! Crypto trend had influenced people in the past to mortgage their homes and pour money into the crypto world. Some made a fortune while some lost severely. In fact, as per a study, the number of cryptocurrency wallets in existence may reach up to 500 million by 2024.
Tell me more about it, Crypto Lending
Crypto Lending is a trade where you can lend out your Cryptocurrency and earn interest. The deal is facilitated by Crypto Lending Platforms that offer lending of different cryptocurrencies like Ether, Bitcoin, and Stable Coins. The same platform could also be used for borrowing or getting loan if you have provided cryptos as collateral. The concept then is termed as Crypto-backed loans.
It’s just the two parties of a trade for one[who is lending or investing] it is crypto-lending and for other [who is borrowing] it is crypto-backed loans.
What all options does a lender gets?
The lender can avail three different types of options to invest his funds and earn a passive income –
· Investing in individual loans
· Investing in automated lending bots
· Invest/lend to firms that perform crypto lending
CryptoLenders | The Lending Options
So what’s the difference between the three options available?
Lending to an individual would be similar to trade between two people in same/different part of the world. The lending platform would have borrowers and lenders with their request, and matching happens.
Examples — CoinLoan, LendingBlock
Lending to Automated Bots is a service offered by exchanges to optimize your crypto lending in the best possible interest rates. So say you/institution are the owner of multiple cryptos and although a simple rule is to sell an asset when it’s at a higher price and buy back when there is dip is applied, trading multiple coins could be a tough job. That’s where Automated bot or AI/ML-driven algorithm comes in the picture, that is fed with numerous parameters like history, news, market sentiments to make the best possible decision and execute it within seconds.
So you lend your multiple/single crypto to these Automated bots, and they make sure to make best decision of providing you with a passive income
Lending to Crypto Lending Firms is one of the most widely used lending methods that involve trade between an individual/institution with a crypto lending platform. The Lending platform than does the matching and dispatch the loans. Here there are two categories one which holds the custody of the lender’s cryptos or borrowers collateral and others that offer 100% non-custodial lending offering decentralization in real sense.
So with custodial lending, as an investor, I am sure that the crypto lending platform will keep my cryptos safe and assure that the borrowers pay back the loan on time, eliminating the counterparty risk.
On the other hand, with non-custodial lending, the lender trusts the technology; in this case, the smart contract that it will run without any technical glitches and eliminate risks and execute positively on the settlement.
Centralized, custodial lenders include companies like Genesis Capital, Nexo, BlockFi, and Celsius are some of the examples of centralized custodial lenders, centralized OTC desks like Galaxy, OSL and Cumberland and the centralized exchanges like Bitfinex, Liquid, and BitMEX
Decentralized, non-custodial credit protocols include Compound (decentralized money market protocol), Nuo.network (decentralized lending and borrowing platform)Dharma (P2P lending protocol), MakerDAO (decentralized credit facility) and Uniswap (a decentralized exchange that enables lenders to provide liquidity).
What is interesting to know that although the centralized, custodial lenders are the most significant crypto lenders, the decentralized protocols or non-custodial platforms are emerging slowly as competitors that differ mainly on lending rates & custody management.
Nuo.network is one of the crypto lending platforms that’s offers 100% non-custodial borrowing and lending.
Below diagram shows how Nuo.network has been one of the fastest-growing debt platforms globally. With 17.1%APR [highest across industry], the loans disbursed from February 2019 — August 2019 were 18.9 million and 19.62 million reserves were created.
Crypto Lending vs. Traditional Fiat Lending
Now that I know a lot about Crypto Lending, what are the advantages I get when compared to traditional lending?
Traditional Lending offers fixed rates, whereas, in CryptoLending, one could get the advantage of Floating rates like Nuo. The network provides rates that are algorithmic-based on available reserves on the platform. So how it works is say DAI tokens are in abundant supply, so the borrowing rates would be decreased that could attract more borrowers. With more borrowing the rates would rise again, attracting lenders. This type of model helps both participants, i.e. lenders and borrowers, to participate in the network.
The second advantage of Crypto Lending over Traditional lending is its decentralization, i.e. lending and borrowing open to all, you do not need to look for a credit score or credit history. If you have funds invest it, or you need additional sum, borrow it. Crypto Lending in its real sense offers financial freedom to one and all.
The third advantage of crypto lending is interoperability; you can take a DAI loan from a crypto lending platform convert it into Ether using UniSwap to gain leverage. Such features are not available in traditional lending.
Lastly is the security, traditional lending has been centrally guarded, and so a hack/theft would affect the whole system, this possibility is not seen with decentralized crypto lending making it the preferred way of lending in the future.
The Lending Ecosystem in Cryptos is evolving- centralized, decentralized, protocols, tokens, security, wallets and lot more. It’s interesting on how things are going to shape in the coming months… do keep a tab by following us.
Disclaimer: This is not financial advice. Nuo Network does not promote/demote any company or investments. Opinions, statements, estimates and projections in this message or other media are solely those of the individual author(s). For more details visit terms and conditions.