Cryptocurrency and crypto assets have shown significant growth in the past years. Majority of the currencies — Bitcoin, Ethereum, Monero, Litecoin market capitalization chart dictates their growing popularity among the masses and trust in the evolving crypto assets over traditional money system.
An exciting fact to highlight is that even though individuals are adapting to digital money, its not widely accepted mode of payment. However, a survey reveals that 40% of US citizens who know about BItcoin are open to using it for everyday transactions. And also, some of the leading brands like Expedia, Overstock, and Shopify have started accepting cryptos as payments.
But the growth of cryptos has been more fascinating as an asset than a currency, that’s one of the reasons that miners, investors, traders are holding their crypto assets and use it for credit model, that helps them in raising funds with cryptos acting as collaterals.
Our post of today would focus on how to borrow against Ethereum and raise capital for your new business, education loan, or home renovation.
Why are Crypto-backed loans getting popular?
The above diagram shows how cryptos could be used by merchants, retailers and individuals, but if these individuals/businesses need immediate cash, could crypto loan help them?
Crypto loans can help both the retail investors and businesses to meet their immediate cash needs without losing the ownership of the crypto asset. Most of the crypto investors formulate a long term investment portfolio that they do not wish to sell in the near future, but the immediate need of cash/liquidity push investor to divest their crypto-investment and meet immediate liquidity needs.
This is precisely the point where crypto-backed loans come into the picture –
1. Investors do not wish to sell their assets
2. Investors can use them as collaterals
3. Investors can get funds in fiat/cryptos based on their need
4. The investors do not have to worry about credit score/ratings.
Apart from that Crypto-backed loans are
3. Meet diverse financial needs
When compared to traditional bank loans, making it a better choice for investors.
Ethereum is one of the leading cryptocurrency globally. As per the market capitalization, it is second to Bitcoin and growing in popularity. Ethereum’s USP [unique selling point] has been its ability to fit in real sense onto a blockchain technology framework, i.e. decentralization. The Ethereum network has also offered countless tokens that live on its blockchain assisting int growth of the crypto economy. Lastly, over 90% of projects that are tokenized today are based on ERC 20 platform
One of the advantage offered by Ethereum over Bitcoin is “smart contract development” that is the powerhouse of the network. And while other decentralized networks are trying to catch up, they need to push their limits to a greater extent.
What are Different types of Ethereum based Crypto Loan?
The crypto-backed loan could be utilized in two ways
· Interest Only Loan — the borrower would pay only the interest monthly, and the principal could be paid at the end of the loan period. Best suited for start-ups, freelancers, or SMB’s as there is the uncertainty of cash flow and businesses are not yet profitable.
· Amortized Loan — the borrower not only pays the interest but a part of the principal. These work best for individuals and businesses that have liquidity and can meet out the requirement of paying principal amount on a monthly basis.
However, one of the most exciting techniques of borrowing is Leveraging or Margin Trading. Leverage is an investment strategy, where the borrower is using the borrowed capital to intensify the potential ROI. It’s quite similar to the traditional stock/debt market.
Let’s pick an example –
Say a borrower pledges 24.80USDC (USD Coin) as a collateral @0.7 leverage.
He can receive a 0.10 Ethereum loan worth $17.34. If a trader foresees a rise in the pricing and goes long for Ethereum, however, if the market sentiments suggest a drop in price would be beneficial.
How Ethereum-based Crypto Loan works?
Many platforms are providing an option for decentralized lending that is also called as collateralized lending. The protocol uses Ethereum ERC-20 token, stable coins, and cryptocurrency ETH as collaterals.
A borrower would initiate the protocol by creating a request specifying the principal amount, interest rate, and other details. Backed by collateral in the smart contract, the platform is customizable. You can borrow long & short term loans at a preferred rate of interest & tenure.
Once the allotted time to repay the debt has passed, the smart contract is fired triggering two actions –
1. In cases where the borrower has fully repaid the loan, the collateralized token would be returned to the borrower
2. Or else, the contract would transfer the token to the lender.
Nuo.Network offers Non-Custodial Margin Trading enabling users to Long or Short Bitcoin, Ether, Maker and few select ERC20 tokens with up to 3x leverage using smart contracts, without taking custody of your funds.
Nuo.network offers two types of loans one is under collateralized (leverage loans) and the other is over collateralized loan where the user has to put in at least 1.3x of his crypto assets as collateral and then take the loan
Disclaimer: This is not financial advice or solicitation — merely a demonstration of the crypto assets and the probable investment strategies’ in the crypto market. The views mentioned in this article are solely of the writers.