As the global recession continues, we all need a helping hand. Fortunately, the blockchain is full of alternative borrowing solutions to the traditional banking system. Admittedly, news from the lending/borrowing platforms was lackluster last year with the debacle of Celsius and BlockFi. However, more is needed to discredit the innovations offered by the blockchain. Borrowing cryptocurrency and/or borrowing cryptocurrency is one of them. Like crypto lending, which consists of lending crypto assets, this service has been on the rise in recent years. In fact, it offers the advantage of being comprehensive. As a result, they target everyone, individuals or businesses. Let’s explore together the operating mechanisms of this timely service in this bear market period.
Deciphering the basics of cryptocurrency borrowing
Traditionally, lending services have been the preserve of financial institutions, primarily banks. With the use of blockchain, especially in CeFi (centralized finance) and DeFi (decentralized finance), any cryptocurrency holder can be a borrower. Far from classic borrowing, cryptoborrowing innovates by allowing you to put your digital assets as collateral.
Let’s imagine that you acquired cryptocurrency some time ago. You have this project close to your heart, but lucky you, you don’t have enough funds to start it.
It could be that creperie you dream of opening, or even the clothing line you’ve always fantasized about launching, or more simply that newer computer that will boost your performance.
In order to realize your dream, you are strongly considering selling your cryptocurrency. However, you know that you may miss your chance because your assets may appreciate in value. For a good reason, in this period of the bear market, the trend is to save while waiting for the return of sunny days.
Now, let’s go in case a project that requires an investment in USDT catches your eye. Unfortunately for you, you only have bitcoins (BTC) and you definitely don’t want to lose them.
This is where cryptocurrency loans present themselves as a suitable solution for all such scenarios. In the beginning, they allow you to cash in on your crypto savings. In fact, it consists in the borrower obtaining a loan thanks to a pledge of his cryptocurrency. Therefore, he keeps his assets instead of selling them.
For the second case, USDT borrowed with BTC as collateral allows you to invest in the project. Then, the return on your investment in USDT guarantees that your debt will be paid off. At the end of the loan, you simply get your BTC back.
The loan process is as simple as pie
In TradFi (traditional financing), your creditworthiness determines your ability to borrow. It is enough for the system to consider you insolvent and all your hopes of financing vanished. On the other hand, the story is completely different when it comes to crypto borrowing. It is your collateral that determines your borrowing options.
In addition to offering attractive interest rates, crypto borrowing is easy to access. It is a streamlined process that knows neither the boundaries nor the red tape of TradFi.
Platform selection
When it comes to borrowing, you can choose either centralized finance (CeFi) platforms like Binance, Crypto.com, or Coinloan, or decentralized finance (DeFi) platforms like Compound, MarkerDAO, or Aave. These two types of platforms always connect lenders and borrowers. It is the degree of their involvement in the borrowing process that sets them apart.
Centralized platforms work like banks. They are responsible for managing the terms of the loan and monitoring the collateral.
Find a demo video for a crypto loan within Binance:
On the other hand, decentralized platforms do not have a trusted third party. Everything there is managed through smart contracts. So it aligns better with the more crypto-savvy audience.
A YouTuber crams some light on DeFi borrowing and lending:
loan request
Once the platform is selected, the borrower fills in the required information through the loan. For CeFi platforms, it is necessary to have an account. In other words, you will have to bring all the necessary information to KYC. On the contrary, DeFi platforms do not have this requirement.
Provide guarantee
The primary variable in this context is loan-to-value (LTV). It is the collateral ratio that makes it possible to determine the amount that one can borrow thanks to the collateral. Concretely, it is the ratio between the amount borrowed and the collateral in the same currency.
This is a crucial rate, because the higher it is, the more you can borrow. However, the risk is also higher. In general, all LTV values are less than 100%. Which means that your collateral will always be greater than the amount borrowed.
Receipt of funds
Funds can be available within hours or even minutes. Some platforms allow you to receive borrowed amounts almost instantly.
Interest payments and repayment of principal
By locking your digital assets, you receive fiat currencies or cryptocurrencies. It remains inaccessible until the interest and principal are paid off. Additionally, in the event of default, your crypto will not be returned to you.
Cryptocurrency borrowing risks
It should be borne in mind that cryptocurrency loans are not without risks. From volatility to security to insolvency, borrowers need to be careful to ensure they get their collateral back.
volatility risk
Not all cryptocurrencies are accepted as collateral. Safe values such as bitcoin (BTC) or ether (ETH) are popular. In addition, in order to protect against risks associated with volatility, it is always preferable to borrow cryptocurrencies over stablecoins.
With good reason, if cryptocurrencies as collateral fall sharply, the platform may have to sell your cryptocurrencies to pay off your debts unless you increase the value of your collateral.
Bankruptcy risk
It has to do with the platform through which you are providing the loan. In the event of a platform bankruptcy, as happened with Celsius and many others, you lose your crypto assets. Also, the choice of the platform must be rigorous and take into account the latest credit reports of the chosen broker.
security risk
Cryptocurrency borrowing is not immune to vulnerabilities, not only at the level of borrowing brokers, but especially at the level of protocols. This risk is inherent to DeFi platforms, because borrowing is managed through smart contracts where some malicious developers can compromise the security of operations.
to conclude
There is no need for a payment receipt or lengthy procedures to obtain financing. Whether you choose a CeFi or DeFi platform, you will always benefit from better access and speed than traditional finance. Cryptocurrency borrowing is for everyone, as long as you have idle savings in cryptocurrency. Each platform sets its own borrowing rates. So it is not surprising to find a wide range of interest rates ranging from 3 to 20%. And therefore , money price relative. The big winners in this service are those who are excluded from the traditional banking system. With the increasing adoption of cryptocurrencies, it wouldn’t be surprising to see this style of financing become popular.
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As a financial expert, I consider the blockchain to be a real revolution thanks to all its innovations that have a global impact. I have eagerly participated in this new digital age through my articles.
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