The summer of 2020 is known as the glorious time for DeFi as it witnessed an explosive rise while the whole world was quarantined in their homes. It was the time when the world’s biggest economies experienced a sudden halt with the onset of a once-in-a-century pandemic. Subsequently, the interest rates across the spectrum nose dived to the bottom of the sea, and investors were left orphaned by traditional financial institutions.
That’s where the concept of crypto lending emerged and offered an innovative solution for crypto holders to earn a yield on their assets. So how does it work and what are the benefits of crypto lending and things to keep in mind? Let’s find out.
What is Crypto Lending?
Crypto lending is basically a way to get a loan using your crypto assets as collateral. Let’s understand the working of crypto lending through an example. Let’s say Karamveer has been holding 2 ETH for a while now. Suddenly he’s in need of capital and doesn’t want to sell his crypto assets.
In this case, Karamveer can lend his 2 ETH to a crypto lending platform and get a loan in stablecoins without selling his crypto holdings. Once he manages to get the money back, he can easily pay back the loan and get his collateral back. Simple, isn’t it?
Things to Keep in Mind
There’s a huge difference when it comes to getting a traditional loan versus a crypto loan. First of all, crypto lending is often overcollateralized because of the underlying volatile nature of the crypto assets. Meaning, you can borrow only up to 75% of the value of your crypto assets.
In case, if the collateral drops below a certain threshold because of market movement, the users are reminded to increase their holding to avoid the margin call. Furthermore, the interest rates on crypto lending might fluctuate depending on the demand and supply on that given platform. Though some lending platforms offer fixed interest rates, they’re usually higher than the ones offering fluctuating interest rates.
On the other hand, crypto lending also offers various benefits over traditional banking loans. Let’s check them out.
Benefits of Crypto Lending
Here are the major benefits of crypto lending against traditional financial loans:
- Doesn’t require any credit score
- Works instantly
- No need to reveal your identity – Anonymous
- Non-custodial in nature
- Borderless and beyond
Well, that’s all you need to know to get a basic understanding of crypto lending. If you’re also interested in making your digital assets grow, check out various platforms that allow users to lend their crypto assets and borrow stablecoins.
Additionally, you can also check out how crypto lending works without collateral. These loans are called flash loans and work in a similar manner but without the need for collateral.