The ultimate guide to crypto borrowing

The ultimate guide to crypto borrowing

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Mike
Mike

An editor at Coincrop


10 Feb 2022 | 10 min read
33,983 views

O

ne of the first thing that comes to your mind when you think of buying your chosen Crypto is the holding of it (Hodling).  It’s the assumption of many people that ownership of crypto is like that of stocks and shares. According to such assumptions, you must buy and hold your crypto until you see a substantial growth in the asset’s pricing. However, on the other hand, many people are turning towards the most popular crypto lending platforms, looking for earning interest on their crypto assets. 

The good news is that lending has emerged prominently in recent times with expanding levels of attention towards the DeFi movement. 

In this guide:

Disclaimer: All of the information written on Coincrop is without influence and based on our analysis. No guarantee is offered concerning the accuracy of this information and therefore, any individual following up on it does as such completely at their own risk. Rates are correct at time of publication.

Cryptocurrency lending

It is important that you understand crypto lending, Crypto lending is the method for lending crypto assets or fiat currency to borrowers in accordance with a specific interest rate. Crypto lending is very similar to the process of lending in traditional Fiat banking systems.

There are two elements in the process of crypto lending which are similar to traditional banking. Here you have the lenders who generally have more cryptocurrency and are looking for opportunities to achieve passive income. And you also have the borrowers, who are generally individuals who require loans against crypto assets in their possession. 

What is very difference between crypto lending and traditional fiat lending is evident in the cryptocurrency lending platform. The lending platform is the primary facilitator of loans in crypto lending and is a noteworthy element.

Types of crypto lending platforms

Now you know are clearer on what is a crypto lending platform, you now need to identify types of crypto lending platforms. There are two distinct categories of platforms for lending cryptos, such as CeFi and DeFi platforms. 

    • CeFi Platforms 

CeFi or centralized finance platforms generally serve as intermediaries for the execution of the crypto lending process. A centralized cryptocurrency lending platform would take control of the assets of lenders and collateral of borrowers for the period of the loan. In addition, a centralized crypto lending platform would also require a KYC process, thereby excluding anonymity. 

    • DeFi Platforms

DeFi or decentralized finance platforms, present a decentralized approach for crypto lending. DeFi platforms use smart contracts for the execution of lending procedures. And most important of all, DeFi lending platforms could ensure complete automation of the lending process alongside the execution of the contract upon fulfilment of specific conditions. 

How crypto lending works

With a little homework you can identify the largest crypto lending platforms. However, you will need to identify the workings of crypto lending platforms to choose the requirements that suits you. The simplest way to understand the working of a top crypto lending platform is to review the role of the individual components. 

    • Lenders play a significant role as contributors to the crypto lending process. They deposit their crypto assets for a fixed or flexible term to achieve passive income on their assets. 

    • Borrowers have to place their crypto assets as collateral and obtain loans on the assets without selling them. In addition, borrowers must also pay interest on the borrowed loans to recover back their collateral.

    • A cryptocurrency lending platform serves as a mechanism for the regulation of the lending and borrowing process. A platform could be centralized or decentralized. Based on the type of platform, the approach for regulation of the lending process could involve matching orders or liquidity pools or codes. 

Selecting a crypto lending platform

What you need to do is draw up a list of the important factor from a crypto lender, below are a few factors to consider when selecting a crypto lending platform. 

    • Interest Rate

This is one of the most important considerations selecting a crypto lending platform, you must refer to the interest rate offered by the platform. Choose a lending platform that offers a favourable interest rate for the crypto assets in your possession. But remember that these rates change often, so double check before you commit.

    • Cost

When selecting a lending platform also carefully study the costs involved as each lender has different costs associated with its crypto assets. 

    • Platform Risks

Separately to, what will it return, and cost are involved, you must also do due diligence on the lender, take a good look at them, and understand your possible risks before choosing a crypto lending platform. 

    • Loan Duration

Also pay attention to the lending term, you must verify whether the lending duration is fixed or flexible and make the decision according to your requirements. 

    • Collateral Amount

Also carefully consider the collateral you need for borrowing a particular amount, as each lender may stipulate different requirement based on minimum amounts. 

    • Minimum Deposit Limit

You need to be clear on choosing a crypto lending platform based upon the deposit limit. You need to check whether the platform has any specific requirements for a minimum deposit amount. 

Most popular crypto lending platforms 

    • Celsius

    • Compound

    • Binance

    • Alchemix

    • CoinLoan

    • Blockfi

    • AAVE

    • YouHodler

    • MakerDAO

    • MoneyToken

Summary

When you start to look at lending platforms you will see that they are not really that different from traditional Fiat lending, albeit with a couple of differences.  Crypto lending platforms will offer you the independence from banks and centralized institutions from the traditional lending process. With a big upside of potential lucrative interest rates., remember to do your homework first and go into it with your eyes wide open.


Mike

Mike

An editor at Coincrop
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Mike is a Crop Crop staff writer based in the UK, covering the best rates for cryptocurrency earning and borrowing products. When not at work, he's likely putting his latest car project back together.


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