Is it possibly conceivable to extend credit with no credit screening, all authorized and handed out in minutes to several hours? This is the realm of crypto lending, a revolutionary means of granting credit lines by utilizing bitcoins as collateral rather than regular unsecured loans.
Of course, if you want to lend cryptocurrency, you’ll need to choose the best lending platform available. For the ordinary Joe, the universe of digital money is still rather perplexing. As a result, the purpose of this article is to simplify crypto lending and, finally, to create a framework for selecting the best platforms in this field.
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What is Crypto Lending?
In simpler terms, it is the deployment of cryptocurrency as collateral for loans. As opposed to traditional loans, this sort of financing does not require any pre-qualified authentication process such as credit checks.
As a result of the pseudonymous and incredibly productive aspects of smart contracts and blockchain technology for managing loan agreements and capital, it is among the primary benefits of crypto lending.
Borrowers must set up substantial collateral in an approved currency or digital crypto in return for another fiat or digital currency.
A crypto-backed loan involves three parties:
- crypto lending exchanges
- lenders acting as go-betweens
Lenders basically “stake” their dormant investments with lending portals in exchange for income. On average, stablecoin deposits earn 7% to 11% annual percentage yield (APY), whereas crypto deposits earn 3% to 6%.
Naturally, platforms handle the backend and collect interest (and occasionally other charges) for their offerings. Crypto lending firms provide extended, even infinite, loan periods with customizable repayment arrangements.
Crypto Lending Platform Considerations & Selections
We have detailed the key factors to explore when selecting a crypto loan network below to ensure you make informed decisions.
Lending Platform Types
Is it decentralized or centralized, ungoverned or governed? Some people favor Defi systems since they keep exposure to their secret credentials, which are considered personal data by most people. Additionally, there is no need for identity authentication with such solutions, which is equally highly confidential information.
For registering users, a centralized cryptocurrency lending system takes possession of the encryption key and executes a KYC (Know-Your-Customer) approach. In this sense, your decision between the two is determined by your degree of comfort with private information and security posture.
There are downsides to incorporating either of these services when lending bitcoin. There is also a misconception that decentralized systems are more vulnerable to large-scale hacking incidents than their centralized equivalents.
Furthermore, most individuals feel decentralized systems are far less accessible and user-friendly, appealing to more experienced users. Nevertheless, DeFi services provide unique goods (interest rate flipping, flash loans, and so forth) that their competitors do not.
Ultimately, here is a few things to think about before diving into the specifics.
Security / Safety
The stability of any financial instrument is crucial. CeFi systems often outperform in this regard. Anti-money laundering regulations, cold wallet storage, proof of reserves, Insurance, additional platform verification, customer care, service, and support, and so on are all security elements to consider.
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Before making a decision, consider how you will traverse the platform to provide the most protected customer experience.
Lending Amount / Minimum Borrowing
Is it $1000, $100, or anything more? Borrowers should select a crypto lending provider that requires the smallest deposit feasible. While certain networks, like as BlockFi, are respectable and well-known, borrowing requires at least $10,000.
Lenders should feel the same way; the lower the interest rate, the better.
The Rate of Interest
This element suffices to say; that lenders favor crypto loan facilities with the maximum feasible interest rates, while borrowers want solutions with the cheapest possible rates. In practice, most institutions reward customers more when they lend with a stablecoin such as DAI, USDC (USD Coin), USDT (Tether), and so on.
Interest rates are expected to be cheaper when borrowing a stable virtual currency instead of a digital currency or a fiat.
Bitcoin Standing Upfront on a Shiny Floor:
This is likely the most important component in terms of borrowing. To put it simply, the greater the LTV proportion, the safer for the borrower since it reduces the level of over-collateralization.
The accepted practice appears to be 50%, although some applications may give higher considerations up to 90%. However, the bigger the LTV proportion, the lower the credit period, normally a month (maximum).
Furthermore, crypto lending sites provide greater LTV percentages for stablecoins than conventional crypto because the latter offers stable prices.
Lending Duration & Flexibility
Users must evaluate their payback periodicity as well as the length of time they intend to borrow. Some platforms allow for an indefinite loan period and use a pay-as-you-go model rather than requiring precise monthly payments.
Many may have a time limit on borrowing. What about early or late payment penalties? Is it possible to make many crypto loans at the same time on the platform? This is one of the issues to consider.
It is best to select crypto lending services that provide greater flexibility and an infinite lending length. However, most of this will be determined by the amount borrowed, the LTV ratio, and other factors.
Supported Loan Currencies & Collateral
The more the better in this case. If a cryptocurrency lending service has a restricted range, consumers must perform a few adjustments through some other facilities before utilizing the permitted digital asset, or they must seek other facilities or protocols.
As a result, the far more digital assets that are accessible for the deposit (for collateral and lending), the better. The decision is also important for the currencies that borrowers get. The more the merrier, once again.
Crypto lending services do not support customers from all countries, which is especially difficult if you are an American citizen due to the country’s hostile position on cryptocurrency use.
As expected, ensure that the cryptocurrency lending business you are contemplating is authorized to serve consumers in your location.
If you want funds but do not want to liquidate your crypto assets, crypto lending may be an option worth investigating. Crypto loans may be cheap and quick, and they sometimes do not demand a credit background check. Furthermore, if you have digital products and crypto certificates that you intend to keep for many years, lending them out through a crypto interest portfolio might be a great approach to optimise their worth.
However, before you become involved in any aspect of crypto lending, it’s critical to understand the hazards, particularly what may transpire if the worth of your crypto decreases quickly and drastically. If you’re thinking about crypto lending in any manner, ensure you weigh the pros and downsides, as well as all of your other choices, before making a decision.