How Does Crypto Lending Work?

By April 19, 2022May 4th, 20225 minute read
How Does Crypto Lending Work?

Would you consider it when someone told you that you could get a loan with a low-interest rate of 5-15% without any paperwork, processing fees, or even collateral in your home or car? Yes, this is possible if you have sufficient cryptocurrencies in your digital wallet.

Let’s understand the working of crypto lending and other related information.

Understanding Crypto Lending

Crypto lending functions by acquiring Crypto from one individual and lending it to another for a charge. From platform to platform, the basic technique of administering the debt varies. Crypto loan services are available on controlled and decentralized platforms, but the fundamental concepts are the same.

You don’t have to be a borrower to participate. You may receive a passive income and earn interest by depositing your cryptocurrency in a pool that handles your funds. There is typically little chance of losing your cash, depending on the stability of the smart contract you choose.

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Example to Understand Crypto Lending Better

Assume you have ten bitcoins and want to get a stable passive income from your Bitcoin investments. You may put these 10 Bitcoins in your crypto lending platform wallet and earn interest on them monthly or weekly. Interest rates on Bitcoin loans range from 3% to 7%, but they can go as high as 17% for more stable assets like USD Coin, Binance USD, and other regular currencies.

The difference between crypto lending and other forms of peer-to-peer lending is that borrowers use their CryptoCrypto as collateral. As a result, if a loan is not repaid, investors might sell bitcoin assets to offset the loss. However, investment platforms often require 25-50% of the loan to be staked in cryptocurrency and can usually recoup most of the losses and prevent investors from losing money.

Crypto financing lets you borrow real money (such as CAD, EUR, or USD) without having to sell your cryptocurrency in the event of an emergency.

Practical Example:

Alex has one Bitcoin worth USD 15,000 and requires a USD 5,000 loan at an annual interest rate of 8%.

Ben has USD 5,000 in stable coins and is willing to lend it to Alex at an interest rate of 8% in exchange for 1 Bitcoin.

Ben will return the Bitcoin to Alex once Alex has paid off Ben’s USD 5,000 plus interest. The LTV (loan to value) for this transaction is 33.33%, or USD 5,000/USD 15,000.

If Alex does not return the loan amount, Ben can liquidate the Bitcoin and refund the remaining balance.

Crypto lending is constantly over-collateralized, making it safer than other types of lending, such as peer-to-peer.

How does CryptoCrypto lending work?

Lenders and borrowers are linked through a third party that facilitates crypto lending. The lenders are the first parties to participate in crypto lending. They might be crypto enthusiasts who wish to increase the assets’ output or folks holding onto cryptocurrencies in the hopes of a price increase.

The crypto lending platform is the second party, and it is here that the lending and borrowing transactions occur. Finally, the borrowers are the process’s third party, and they are the ones who will get the monies. For example, they might be enterprises needing cash or individuals looking for funding.

There are a few phases to the crypto loan process:

  • As soon as the platform accepts the loan request, the borrower bets the crypto collateral. The borrower will not be able to recover the stakes until he can pay back the total debt.
  • Lenders will instantly finance the loan through the platform, which is a procedure that investors will not observe.
  • Regular interest payments will be made to investors.
  • When the borrower repays the entire loan, he will receive the requested crypto collateral.

Every site has its distinct method of lending cryptocurrency, but this is how the process works.

Pros of Crypto Lending

Below is a list of pros of Crypto lending:

  1. Procedures are quick and straightforward.

Borrowers can quickly obtain a loan until they can offer collateral. That’s all there is to it. In addition, the technique is less time-consuming than traditional banking and does not need lengthy processes.

  1. Lenders might expect a high ROI.

Savings accounts at banks do not pay significant rates of interest. If you keep your money in a bank for an extended period, it will depreciate due to inflation. On the other hand, Crypto lending provides a similar savings option with more excellent interest rates than banks.

  1. Transaction fees are low.

A one-time service fee is frequently charged for lending and borrowing activities. However, it is typically less expensive than fees levied by regular banks.

  1. There is no credit check.

Typically, cryptocurrency sites make loans without doing credit checks. To receive a loan, you merely need collateral. You have the loan once you can provide that.

Cons of Crypto Lending

Even while cryptocurrency has the potential to be rewarding, there are specific cons to be aware of. We’ll go through a few of them below:

  1. Hackers’ Activities

Your asset is vulnerable to the operations of hackers and cybercriminals since lending and borrowing take place online. Hackers can access a smart contract or take advantage of poorly designed code, resulting in money being lost.

  1. Liquidation

Liquidation occurs when the value of your collateral diminishes to the point that it can no longer pay your debt. Because the crypto market is so unpredictable, the value of your collateral might decrease dramatically, forcing you to liquidate the asset.

  1. Crypto market volatility

One of the disadvantages for lenders is volatility. The valuation of the cryptocurrency you give out may drop, resulting in losses that outweigh the interest revenues.

Final thoughts

If you need money but don’t want to sell your crypto assets, crypto lending may be a suitable option. Crypto loans are frequently low-cost and quick because they don’t need a credit check. If you have digital assets that you want to keep for a long time, leasing them out through a crypto interest account might be an excellent method to increase their worth.

However, before you become involved in either side of crypto lending, you should be aware of the risks, mainly what could happen if the valuation of your cryptocurrency decreases dramatically. Therefore, if you’re thinking about crypto lending in any form, make sure you evaluate the advantages and disadvantages and all of your other choices before making a decision.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Harshita Shrivastava

Harshita Shrivastava

Harshita Shrivastava is an Associate Content Writer with WazirX. She did her graduation in E-Commerce and loved the concept of Digital Marketing. With knowledge of SEO and Content Writing, she knows how to win her content game!

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