Your small business needs cash to grow and oftentimes entrepreneurs seek out loans There’s a new type of financing option: cryptocurrency lending.
Crypto lending is similar to traditional small business lending in that the process involves taking Crypto from one person and lending it to another with an interest rate. However, the exact method of managing Crypto lending varies from platform to platform.
You can find Crypto lending on both centralized and decentralized platforms. In fact, the core principle also remains the same – you just have to be a borrower, either way.
Crypto lending opens a new method for Crypto investors to earn passively. Depending on the reliability of the smart contract, there is hardly any risk of losing your funds.
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How Does Crypto Lending Work?
Crypto lending usually has three components: Lender, Borrower, and DeFi platform. When someone is asking for a Crypto loan, they must put up collateral in exchange for borrowing any Crypto. If there are no collaterals, the person can move forward with Flash Loan. We have talked about the Flash loan below.
On the other side of the loan, you have smart contracts. These smart contracts help lenders to mint out Stablecoins or a platform lending out funds to other users. In this method, lenders add their Crypto to the pool. The Crypto pool is now responsible for managing all the processes and awarding interest to the lenders.
Types Of Crypto Lending
When we are talking about Crypto lending or Crypto Loans, there are two types of Crypto Loans.
Flash Loan
Flash loans are the type of Crypto loans given without any collateral. The reason why this loan is called a Flash loan is that every transaction takes place within a single block. That means the movement of Crypto happens is all connected.
The process involves:
- A borrower applies for the loan
- He/She gets the loan
- The loan is repaid by the borrower
In case the loan is not repaid, the transaction on the network is flagged, and the Crypto amount is traced and deposited by the network.
Collateral Loan
In this type of loan, the borrower gets the loan on the basis of collateral. While this is one of the best practices methods to get Crypto loans, the flip side of this method is that if the collateral amount gets below the loan amount, the Crypto platform has full authority to sell the collateral.
Crypto Lending: Pros & Cons
Cryptocurrency lending is risky, but that is not the only thing it has to offer. However, if one is mindful, they can reap its benefits.
Pros
- Low-Interest Rate: Crypto loans look more viable compared to the traditional loans. This is because, generally, a Crypto loan has a rate of interest below 10%.
- Loan Is Based On The Value Of The Assets: Loans are mostly based on the assets of the borrower. Most platforms offer a loan amount of 50% of what they have in the form of assets.
- No Credit Check: Traditional loans require a certain level of credit score. Below the redline, you can’t even apply for it. However, there are no such things in Crypto loans. This makes the loaning process easier.
- No Intermediaries: Crypto loans don’t require any intermediaries. These loans are executed with the help of smart contracts.
- Easy To Acquire: Crypto loans are easy to acquire. Anyone can ask for a loan as long as they have collateral to offer.
- Excellent Source Of Passive Income: With Crypto loans, investors can create new sources of passive income.
Cons
- Carries Risk Liquidation: Even though the Crypto loans are backed with collaterals, the volatility of the market makes it impossible to be certain about getting the loan amount back.
- Technical Shortcoming: If the Crypto investment platform is compromised, there is a possibility your funds might get compromised.
Future of Crypto Lending
If we go with the Celer Price Prediction, we can say that the future of Crypto lending is bright – provided Cryptocurrencies become popular and well regulated.
Crypto lending provides value to both lenders and borrowers. In fact, HODLers have found another way to boost their passive income.
That being said, whether it is a DeFi or DeFi, understand the market situation and prioritize using only a trusted platform.
