Crypto Lending: All You Need To Know In One Place

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Highlights

  • Crypto lending, like borrowing, allows users to lend or borrow crypto assets but with an interest or fee.
  • Crypto loans are part of Decentralised Finance (De-Fi).
  • It is easy to access and is a reliable source of a credit line in the emerging De-Fi landscape.
  • Crypto lending has made getting access to credit lines simpler through automation.

Loans are what people take from a borrower, and then they return them at interest against collaterals like a house, car, or more. Apply the same rule, but with crypto coins as collateral, people get a basic understanding of crypto lending. Unlike traditional loans, crypto loans have lower interest rates and quick funding without a credit score.

Sounds fantastic, right? One can also start lending cryptos with Unocoin — Crypto Ka Super App: one of the best apps to trade crypto. But before diving in, let’s have a quick look at the concept of crypto lending to get started.

Crypto Lending: All You Need To Know In One Place

What is Crypto Lending?

Crypto lending can be explained simply through this example — Let’s say that someone has two bitcoin and doesn’t want to sell them. They want to hold on to it till its price goes up. But they also have current liquidity needs. And to deal with this precarity of sorts, crypto lending platforms and exchanges like Unocoin, one of the best websites to trade crypto, can come to everyone’s rescue.

Crypto lending, a part of decentralized finance (De-Fi), shined its way through since 2020, with an estimated value of over $78 billion since May 2020, which is about ten times the growth. The total value also represents De-Fi protocols’ present value, including crypto lending.

Crypto Lending

Through crypto lending, one can use their bitcoin as collateral and secure a loan that they will pay back in parts. And, if they fail to repay, the lender will cash out the bitcoin that has been offered as security.

Key Points To Remember:

  • Once the loan is repaid with interest, the bitcoin will be returned, but the borrower will have a chance to profit if the bitcoin price increases.
  • The borrower can liquidate the assets without paying taxes for them, similar to investments done through personal loans.
  • They will also see lower interest rates, unlike traditional loans.

But individuals don’t necessarily have to be a borrower here. They can earn passively, too, through interests if they lock up their crypto in a pool. To become a lender, individuals can try using some of the best crypto apps, decentralized or otherwise. Choosing platforms like Unocoin can ensure little room for loss of their funds because they’ll be managing the pool.

Crypto lending has also been touted as the future of finance. Being part of De-Fi protocols, it runs on an open-source code where rates are set in real-time. Hence, it provides a more realistic, accessible, and efficient way of getting a credit line.

How Does Crypto Lending Work?

Crypto lending happens with the lender, borrowers, and a third party (crypto trading platform or exchanges like Unocoin) that connects both.

Steps:

  • The borrower requests a crypto loan on a platform.
  • They pledge collateral once the loan request is approved.
  • The loan is then funded automatically through the platform by the lenders.
  • The borrower will pay off the balance with interests within a mutually agreed upon tenure.

What Are The Types Of Crypto Loans?

There are two main types of crypto loans — Flash Loans and Collateralized Loans.

Flash Loans: This type of crypto loan does not need collateral. These loans rely on smart contracts encoded, forcing the borrower to return the money in a single block. So, the borrower needs to pay back before the transaction expires. Else, the transaction is reversed immediately, as if the loan never existed.

Let’s break down an instance where flash loans are helpful.

  • The borrower has an arbitrage opportunity — platform one sells a token for $2.00 while platform two sells it for $2.50. But they don’t want to make money out of their pocket to purchase from the first platform.
  • So, they take a flash loan that is uncollateralized and instant.
  • Buy some amount of a token with a flash loan. Sell them on platform two, where the token prices are higher.
  • So they can earn some profit without having to invest from scratch.
  • They can then transfer back the borrowed amount with interest in the same smart contract.

Not just arbitrage, flash loans can be used for collateral swaps too.

Collateralized Loans: This loan gives the borrower a fixed time to use the borrowed amount in return for pledging collateral. The loan is approved through a centralized platform where they take over the collateral. Suppose the borrower’s collateral pledged is bitcoin. If they cannot pay the loan amount on the due date, the platform will have the authority to sell or liquidate the collateral.

Let’s break it down further:

  • The borrower has taken a loan of $100 with a collateral deposit of $200 worth of any token. But the token’s value falls below $200, which means they have to add more to the collateral or pledge more tokens.
  • But suppose they cannot add more funds. In that case, the platform will liquidate the tokens for them to meet the original security amount.
  • The loan-to-value ratio (LTV) for this type of loan is low. But if they are high, borrowers might have to pay fines.

Planning To Engage In Crypto Lending? Here’s What Everyone Should Consider:

There are many benefits and disadvantages to getting a secure crypto loan. But here are some things people should consider –

  • These loans are very similar to traditional loans paid in installments. Otherwise, there’s flexibility to create a repayment schedule. But there’s always a risk of losing the collateralized asset if the price dips or borrowers can’t afford the payment.
  • Borrowers first need to choose an app that is the best crypto app for lending. Once that’s figured out, they will know the assets that can be pledged as collateral. Their asset needs to be eligible as collateral on the platform they choose.
  • If borrowers are lending their assets, the interest rate isn’t always insured because of the volatile nature of these assets. But if they choose reliable platforms like Unocoin, they would not have to worry about fluctuating interest rates.
  • The coins are going to be frozen for a while. So, the borrowers won’t be able to move them around if there are downturns.
  • Flash loans had made headlines earlier for being vulnerable to hacks and scams. So, borrowers also need to factor this in unless they already use a platform like Unocoin.

The Advantages of Crypto Lending

  • Crypto loans are accessible to those with no prior credit history. All individuals need to ensure that they provide collateral (or none in case of a flash loan). Hence, no need to worry about their CIBIL score.
  • Smart contracts make the borrowers’ life better, making the lending process transparent and scalable.
  • Lenders can generate passive income by dropping their crypto-as
    set in a pool of any of the best crypto trading platforms. If they use Unocoin for crypto lending, they would not even need to manage their assets in the pool once the asset is put as collateral.

How To Start Crypto Lending?

First of all, people should choose a platform where they can start lending. Unocoin — Crypto Ka Super App lets users buy, sell, trade and exchange more than eighty digital currencies. Check if the crypto it is planning to lend is available with you, and check how much the yearly returns are. Crypto volatility also determines the return, and so do taxes which are flat at 30% on any gains coming out of digital assets like crypto.

Conclusion:

Can people reap the benefits of crypto lending as a borrower or a lender? Yes would be the answer, and all they need to keep in mind is the time, context of the market, exchange platform, and confidence in repayability. Whether they go for centralized or decentralized projects, everyone must understand the loan conditions better to prioritize their finances. Crypto lending is usually the most accessible choice for anyone. Especially for those who have assets for collateral and know that they can liquidate them without paying taxes against them.

Please find the list of authentic Unocoin accounts for all your queries below:

Disclaimer:

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).

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