Crypto financing is a form of Decentralized Finance in which investors lend borrowers cryptocurrencies in return for interest payments. It is one of the latest new developments in finance and blockchain. It’s close to peer-to-peer lending except that it entails three parties- an investor, a borrower, and a forum.
Crypto enthusiasts are quite often expected to keep their money hidden in a vault until the value of their preferred currency rises. But, just as you wouldn’t feel comfortable leaving your cash in a bank with low-interest rates, a popular concern is — How do you expand your digital currency?
One of the most difficult aspects of investing is managing cash flow. There’s nothing worse than trying to deplete the money due to a lack of liquidity that you’ve invested in reserves to cover short-term expenses. Crypto lending sites could be able to help in this situation.
In a nutshell, crypto financing is a form of alternative investing in which investors lend fiat money or cryptocurrencies to other borrowers in return for interest. As a result, there will be two primary parties in this loan. In payment for the loan, the lender may gain interest from the borrower — the creditor, who will protect the investor’s investment by depositing crypto-assets as collateral.
CASE STUDY –
Let’s look at a scenario to help you understand it better.
Tom, a painter, has 2 BTC. He doesn’t want to sell it all because he believes rates will rise significantly in the future.
Steve is also concerned that he will end up with less bitcoin if he sells his cryptocurrency. Steve will be able to use his bitcoin as leverage and gain a loan in stablecoins as a result.
Because of the volatility of crypto properties, he’ll almost always have to “overcollateralize,” which means he’ll have to hold more BTC than the total worth of the funds he’ll be getting. His crypto will be returned in full after he has repaid the loan, plus interest. Also, he will have made a tidy profit if BTC appreciates as he expected. Only if he fails to meet the loan’s terms or when the value of the bitcoin kept as leverage drop far below the loan’s value would his crypto be in danger.
Unocoin is one of the largest bitcoin exchanges in India. Their unwavering goal is to establish themselves as a leading global player in the digital currency and crypto assets space and contribute to the Indian and global economies. Unocoin also offers a loan against bitcoin.
How does Crypto Lending work?
In cryptocurrency lending, investors and borrowers are linked by a third party. In this situation, an online crypto-lending network serves as a trustworthy intermediary.
So, for this form of lending to take place, three parties must be present –
- Investors who are willing to lend money. This may be someone who keeps cryptocurrencies in anticipation of a price increase (HODL-ers) or just a crypto enthusiast trying to increase the production of his properties.
- The crypto lending portal handles lending and investing transactions. Decentralised systems, autonomous platforms, and centralised platforms with a group of individuals or organisations working behind the scenes are all available.
- Borrowers who are looking for money for a variety of reasons. This could be an individual or a company looking for funding, and they should use crypto or fiat assets as collateral.
Lenders can collect their bitcoin after the loan has been repaid. Unlike other forms of peer-to-peer lending, all loans on the site are secured through real-world properties such as real estate or intangible assets such as cryptocurrencies.
While the specifics of crypto lending vary from platform to platform, the basic idea remains the same. A lender will begin by agreeing to lend money from their holdings at a certain rate. A creditor will determine whether or not the loan’s terms appeal to them, and if so, they will have collateral, which will be escrowed on the website.
Cloud Contract is also used in cryptocurrency lending, making the entire borrowing and lending process trustless because the contract imposes the terms.
Cloud Contract- When a borrower finds the loan’s terms appealing, they will provide equity, which will be escrowed on the website. Since the terms of the deal are imposed, cloud providers are also used in cryptocurrency lending, allowing the entire borrowing and lending phase trustless.
What are Crypto Lending Platforms?
Cryptocurrency loans work in a similar way to traditional bank loans. The bank uses money from the fixed deposits and savings account and loans it to creditors. To make a return, the bank pays you interest in your bank account and then charges creditors a higher interest rate.
When it comes to crypto lending, these incredible interest rates are safe and risk-free — thanks to two blockchain-related innovations.
First, smart contracts ensure that crypto debts are repaid, even though the borrower’s credit isn’t verified. Smart contracts are blockchain-based codes that can carry out specific tasks, such as keeping debt collateral in an escrow account.
Second, stablecoins allow you to earn rates of interest while avoiding Bitcoin’s high volatility. Stablecoins, such as DAI, Tether, and USDC, are cryptocurrencies worth the same amount of money via USD reserves, arbitrage, and dynamic code backed by cryptocurrencies, these cryptocurrencies can retain a secure valuation.
Today’s cryptocurrency lending networks are divided into two categories:
Centralised blockchain lending networks are the closest to banks in terms of operations. BlockFi, for example, allows you to gain interest in your cryptocurrency by saving it on their website. After that, BlockFi loans the capital to reputable retail and corporate investors.
The interest rate you collect is a floating rate, which means it fluctuates according to supply and demand. However, the APY for stablecoins on cryptocurrency lending platforms has stayed reasonably stable over the last year, hovering about 6% to 12%.
The interest rate you receive is influenced by the cryptocurrency you use to finance your account. For example, bitcoin offers a 6% annual interest rate, but if you finance your accounts with a stablecoin, you will gain 9.3 per cent annually.
Decentralized (DeFi) Platforms
DeFi is a relatively young sector that is gaining traction among cryptocurrency investors. DeFi uses smart contracts to replace centralised third parties in payments. DeFi, instead of letting banks handle loans, uses escrow systems and code to manage funds on its own.
Smart contracts are blockchain-based contracts. Since this code is added to a blockchain (typically Ethereum since Bitcoin does not accept smart contracts), it will keep cryptocurrencies in escrow before certain tasks are completed.
Smart contracts, for example, will help you get a loan without a credit check. If you want to pull out a cryptocurrency mortgage, all you have to do is apply leverage to the smart contract and select which cryptocurrency you want to borrow.
But, if you have to put up collateral to get a loan, what’s the way? Leverage is the solution for the majority of supermarket customers. When you put up cryptocurrency as insurance and get a loan in cryptocurrency, you’re effectively doubling the leverage. You would benefit from the value of the crypto you lent and the crypto you put up as leverage if you repay the loan.
How can you invest in Crypto Lending?
- Research thoroughly
This cannot be stressed enough — doing your homework can be very beneficial in c
ertain aspects of crypto. This is true in lending as well. You don’t want to put your confidence in a website that isn’t well-secured, or worse, a fraud. It’s better to use lending sites or smart contracts that have undergone thorough security audits and have a proven track record.
2. Recognise the Parameters
It is critical to comprehend the loan terms fully. You’ll want to know ahead of time when you’ll get your crypto back, as well as how much benefit you’ll get. More notably, you must have a strong contingency plan in place in case the creditor is unable to repay you. You’ll want to double-check that the network or smart contract you’re using will always refund the crypto, either by protection or collateral that the creditor has to put up.
3. Don’t rush into anything
Don’t lend out a cryptocurrency that you plan to sell soon. It goes without saying, but you can’t sell anything you’ve lent out to anyone else. Furthermore, keep in mind that even with the best safety auditing in the crypto environment, hacks will occur. Just in case the worst happens to the network you’re using, bear in mind that crypto can be volatile at times.
Pros and Cons of Crypto Lending
Crypto finance provides several benefits for both borrowers and investors as compared to other forms of lending.
- Since you don’t need to open an account, check your credit score, or need to be a salaried person, crypto lending is more available to all.
- It’s lightning-quick, with most platforms approving loans in under 24 hours. Borrowers would only be required to supply their ID.
- Ability to tailor lending terms to meet the needs of lenders. Both the lender and the borrower will tailor their loan terms to their own needs.
- Since highly liquid crypto funds back the loans, crypto lending is better than peer-to-peer lending.
There are a few disadvantages of using crypto lending as a form of finance.
- Cryptocurrency assets can be very unpredictable.
- Banks don’t support cryptocurrency directly.
- You must have a cryptocurrency asset worth more than the loan amount.
- Crypto lending platform security is becoming more of an issue, particularly as the number of cases of crypto theft rises.
Should you practice crypto lending?
There are several advantages of converting your crypto to fiat and lending it out, as well as obtaining a cash loan based on your crypto. Although lending platforms may provide loans to people with bad credit, they must pledge their cryptocurrency as collateral.
Furthermore, although credit background may not be important, most businesses conduct AML and KYC reviews on their clients. This at least provides some confidence that you will not be meeting with criminals looking to make off with the money.
The basic fact for the creditor is that they keep the entire amount of their crypto collateral, which can range from 9 to 22 per cent, depending on the network. And in the worst-case situation, if the creditor vanishes or fails, the lender has digital currency as recourse and the expectation that it will increase in value in the future.
- What is Flash Loan Crypto?
Flash Loans are DeFi’s first and only uncollateralised loan opportunity! Flash Loans are designed for developers and allow you to borrow money quickly and conveniently with no leverage, as long as the money is returned to the system in one transaction block.
If this does not occur, the entire transaction is undone, potentially undoing all actions taken up to that moment. This ensures that the funds in the reserve pool are secure. Arbitrage, collateral swapping, self-liquidation, and other applications are only a few examples. Here are some more concepts:
- Futures trading — Traders can profit from searching for price differences across a variety of different exchanges.
- Collateral switches — Changing the collateral backing a user’s debt to a certain form of collateral quickly.
- Lower transaction costs — In a way, flash loans combine several transactions into a single transaction. There is a charge for each purchase, so flash loans probe fewer transaction fees.
2. What is Blockchain Lending?
Blockchain lending combines conventional lending with the peer-to-peer paradigm of blockchain to establish a time-saving, seamless framework. Traditional banking is made redundant by blockchain credit, which eliminates the need for third-party intermediaries.
This decentralised, electronic method eliminates operating costs while still expediting the loan process. Blockchain eliminates the need for intermediaries, providing lenders with attractive loan deals and stable transfers. Smart contracts built on the blockchain guarantee that all lenders and borrowers agree on equal and practicable conditions for items like proof-of-funds and payment planning.
Unocoin is India’s first and the most secure bitcoin trading app. This exchange app was founded in 2013. You can buy and sell bitcoin instantly using the Instant Buy and Sell feature. Not just this, you can also buy ETH and Sell ETH in no time. With more than eighty-seven coins listed on this best cryptocurrency exchange in India, you can also accept bitcoin from your friends from any location. You can also know which cryptocurrency works best for you with the price ticker and notifications. The most popular cryptocurrencies like Bitcoin (BTC), Ether (ETH), USDT (Tether), BNB, Ripple (XRP), Cardano (ADA), Solana (SOL), Binance USD (BUSD), Dogecoin (DOGE), Polkadot (DOT) and other popular altcoins can be traded on the go. The new Android and iOS applications make Unocoin the best cryptocurrency app. With the unique feature of the Systematic Buying Plan, you can buy and sell bitcoin and Ether periodically. What more? You can start your crypto journey using SBP for as little as INR 10. With another exciting feature called Crypto Basket, you can diversify your crypto portfolio based on market capitalisation (Market Cap) or Volume. These two excellent features make Unocoin the best cryptocurrency platform.
Love Crypto Coins. Love Unocoin.
Please find the list of authentic Unocoin accounts for all your queries below:
- YouTube Channel: https://www.youtube.com/c/Unocoin/videos
- Newsletter: https://medium.com/subscribe/@Unocoin_growth
- Blogs: https://blog.unocoin.com
- Instagram: https://www.instagram.com/unocoin/
- Twitter: https://twitter.com/Unocoin
- Facebook: https://www.facebook.com/unocoin/
- LinkedIn: https://in.linkedin.com/company/unocoin
- Telegram Group: https://t.me/Unocoin_Group
- Telegram Channel: https://t.me/+fasQhTKBsfA5N2Zl
- Telegram: https://t.me/UnocoinSupport_Bot
- E-mail id: [email protected]
- Contact details: 7788978910 (09:30 AM IST — 06:30 PM, Mon — Sat)
- App store link: https://apps.apple.com/us/app/unocoin/id1030422972?ls=1
- Playstore link: https://play.google.com/store/apps/details?id=com.unocoin.unocoinwallet
Crypto products are unregulated as of this date in India. They could be highly volatile. At Unocoin, we understand that there is a need to protect consumer interests as this form of trading and investment has risks that consumers may not be aware of. To ensure that consumers who deal in crypto products are not misled, they are advised to DYOR (Do Your Own Research).
Reading your article helped me a lot and I agree with you. But I still have some doubts, can you clarify for me? I’ll keep an eye out for your answers.