You must have heard about crypto lending at least once in a lifetime unless you have been living under a rock of purely traditional finance. Crypto lending became the trend opening up opportunities for big and small crypto players, and is supplying the decentralized finance ecosystem of Ethereum to more than 1 billion USD in locked value.
Crypto Lending – the Concept
The concept of crypto lending is basically quite less complicated. The ones borrowing are capable of making the use of their crypto assets as collateral to gain a fiat or stablecoin loan. On the other hand, lenders are providing the assets needed for a loan at a settled interest rate. This can also operate in a reverse manner where the ones to borrow fiat or stablecoins as collateral for leasing crypto assets.
The best method to learn how these platforms operate is to run through the various ways in which users can join them, starting from the most basic and progressing to the most developed.
- A single platform that is helpful to check rates throughout platforms with a tracker like CoinMarketCap’s interest rate tool to detect the best returns for the asset you desire to lend.
- Non-taxable dollar-denominated liquidity
- Rate Arbitrage
- Margin leverage or trading
- Flash loans
Crypto Lending – The Ultimate Killer App – Is It?
The complete credit goes to crypto lending when it comes to using digital assets to earn yields and making it plausible to borrow capital. Crypto lending is one of the most rapidly expanding sectors in the crypto ecosystem.
The application has become the fastest spreading industry in the blockchain realm. Borrowing capital using digital assets and earning yields is viable for this app. Research company Credmark has made a report that the amount of crypto-backed loans raised seven-fold in 2019, finally touching $8 billion. Many experts say theories that crypto lending will captivate more investors into the crypto trade by raising its liquidity.
The CEO of Credmark, Paul Murphy, said that you could have been lending this amazing grease that just pushes everything forward at a much quicker pace.
The Risk Involved
Borrowing and lending is a work full of risks.
- Digital currencies are highly volatile. If truth be told, a particular quantity of crypto-backed loans is utilized for margin trading operations.
- Brock Pierce, a highlighted cryptocurrency entrepreneur, had to point out that when the market drops by more than 50 percent and you are in a collateralized margin type of trade, you may lose all of your capital sums.
- While most crypto lending businesses depend on concentrated custodians to control their customers’ funds, DeFi lending platforms encourage P2P lending and borrowing operations without the interference of any middlemen.
Nonetheless, we’re in the primary stages of this technology, signifying that these platforms may pose many usability downsides.
The Future of Crypto Lending
It is important to understand that liquidations are a primary part of the crypto lending environment and critical to the system’s efficiency. Crypto works as incredible collateral for its simplicity of sale and liquidity.
Compared to a mortgage, where foreclosure and liquidation is quite a lengthy procedure, crypto liquidations take only a few seconds. With the expansion of the crypto industry, the crypto lending app will be vital in its success story.