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Digital currency loan (Crypto Lending) is a process in which users are given crypto loans on digital currency lending or crypto lending platforms, without the need to trust the other party. In the digital currency loan process without collateral, the loan amount is deposited into the other party’s account and a repayment plan is determined to return the loan and its interest.
Getting crypto loans through lending sites or online digital currency loan platforms is much faster and easier than getting bank facilities, and it is not as time-consuming and troublesome as centralized systems such as banks. Today, taking a digital currency loan from an Iranian exchange and offering instant digital currency loans is one of the popular methods in the market, which in addition to solving the problems of borrowers, lenders will also earn money by receiving loan interest.
Users who have some crypto-currency can lend through online digital currency loan platforms, and on the other hand, other users will also have the possibility to receive digital currency loans without collateral or Crypto Lending from these platforms. In the rest of this article, I will teach digital currency lending or lending.
What is a digital currency loan (Crypto Lending)?
In the digital currency lending process, users can lend the cryptocurrency in their account on the online loan platform or lending sites, without the need to trust the other party. The digital currency loan amount will be deposited into the borrower’s account and will be returned based on a specific schedule with an interest rate.
The determined interest rate is also collected and paid to the lenders regularly. In traditional lending, people would borrow money through financial institutions or banks, but in the process of crypto lending, people lend their digital assets to other people in exchange for interest.
Interest and repayment are also based on a regular schedule and in the form of digital currency and will be deposited daily, weekly or monthly.
Digital currency loan (Crypto Lending) or crypto lending, as a decentralized financial service, provides the possibility for investors to lend to digital currency loan applicants through their digital assets. The interest paid by the borrower is collected by the lending platform and paid to the lenders.
In fact, crypto lending is the same as depositing or borrowing from traditional systems; With the difference that users will be able to pay loans to each other through decentralized finance (Defi) by eliminating intermediaries with blockchain.
As you know, holding digital currency in the long term is one of the activities strategies in the cryptocurrency market. But in this method, your property will remain unused for a long time.
While you can make a profit from holding digital currencies through a digital currency loan or crypto lending, or even receive a cryptocurrency amount as a digital currency loan. In fact, it can be said that digital currency loan is one of the newest ways to earn money through digital currency.
Read more: What is digital currency holding or HODL?
As you know, holding digital currency in the long term is one of the activities strategies in the cryptocurrency market. But in this method, your property will remain unused for a long time.
While you can make a profit from holding digital currencies by lending digital currency or crypto lending, or even receive an amount of cryptocurrency as a loan. In fact, it can be said that digital currency loan is one of the newest ways to earn money through digital currency.
How does the digital currency lending system or crypto lending work?
Let’s say you have bought some crypto currency with the intention of investing in digital currency and you don’t intend to sell it. But after this investment, you will find financial need. In this case, you should convert your currency into fiat currency and stop investing.
But the second solution is to use the digital currency loan system or crypto lending. To borrow digital currency, you put your assets such as Bitcoin, Ethereum and other cryptocurrencies as collateral and receive loans from the assets of other users.
This process is done on a peer-to-peer (P2P) basis and on the crypto online loan platform without any intermediaries. At the time of settlement, the borrower is required to pay the principal amount of the loan and deposit the amount of interest determined at the time of registration of the contract to the lender’s account. Lenders are usually users who have bought some digital currency for investment and earn money by lending their assets and receiving interest from their capital. The amount you deposit for collateral is generally several times higher than the amount of the loan received.
If you refuse to pay the principal of crypto lending and its interest, the collateral will remain in the lender’s account and you will no longer be able to access your cryptocurrencies (in this situation, the lender will not be able to sell this asset and only that amount will be in his account) It will remain blocked until full settlement).
Interest or interest rate of digital currency loan
Lending platforms and sites (often digital currency exchanges) are centralized or decentralized. The interest rate is also different in each of these lending sites. Interest rates with crypto loans range from 5% to 20% per year on different platforms. In general, the profit of crypto lending is determined by various factors, some of which I will mention below:
Type of online loan platform
Each lending platform has its own interest rate. Centralized platforms have a fixed interest rate and decentralized systems have a variable interest rate.
Type of digital currency
There are different types of digital currencies in the cryptocurrency market, each of which has a different loan interest rate. For example, digital currencies with stability and high volume of transactions, such as Bitcoin and Ethereum, have a lower interest rate.
Payback time model
The loan interest rate varies based on the repayment period.
loan amount
The loan interest rate is determined based on your requested loan amount. This means that the higher the amount of the asset, the higher the interest rate will be.
Steps of borrowing digital currency or Crypto Lending
Below I mention the steps of borrowing digital currency:
- First, the borrower chooses an online crypto loan platform and requests the amount of cryptocurrency he needs. Unlike taking a loan from a bank, this process will be very quick and hassle-free.
- In the next step, the platform calculates how much digital currency is required as collateral based on the desired loan amount and LTV ratio.
- Then the borrower provides cryptocurrency collateral.
- A lending investor provides the loan amount through the investment platform.
- The borrower is required to pay the principal amount and interest within the specified period.
- Investors regularly receive interest payments from their share.
- At the end, the borrower will get back his collateral after repaying the loan principal.
Note that the profit rate is different for each platform and cryptocurrency. Platforms are also likely to charge fees for their services or offer higher rates to lenders willing to lock up their currencies for a certain period of time.
Differences between digital currency lending system and bank loans
Although a digital currency loan can be considered somewhat similar to a bank loan, there are many differences that I will discuss below:
- The first step to get a loan from the bank is to provide identification and authentication documents in the bank. While to borrow digital currency from decentralized platforms, there is no need to provide identification and authentication documents.
- After taking a loan from the bank, you have to wait for a certain period of time for the money to be deposited into your account. But in the digital currency lending system or crypto lending, the instant loan is deposited into your digital currency wallet account at the time of approval.
- In order to provide a loan, the bank asks you for guarantees such as a legal slip or a house deed, and if you do not have these guarantees, you will not be granted a loan. But in the digital currency lending system or crypto lending, you can easily use the assets in your cryptocurrency account as collateral.
- It is not possible to give bank loans to people under the age of 18 and people who do not have a fixed job with a certain income. But borrowing digital currency or Crypto Lending does not have this limitation, and all people who have cryptocurrency assets can use these loans.
Types of digital currency loans
Like bank loans, digital currency loans have different types, each of which has its own advantages and disadvantages. Normal users and different businesses can choose one of them based on their needs to receive the desired amount. Below I will review the types of crypto loans:
Collateralized Loan
In the collateral loan method, as mentioned earlier, borrowers need a collateral in order to benefit from the facility. People who intend to receive a loan must deposit a certain amount of their cryptocurrencies to the online crypto loan platform. Of course, most platforms offer loans to users for an amount higher than the collateral required to get a loan, which is called overcollateralization.
In fact, the borrower can only borrow a certain percentage of the deposit amount. This type of digital currency loan is a suitable option for those who are not in a hurry to get a loan.
Digital currency loan without collateral (Uncollateralized Loan)
In digital currency loans without collateral, the borrower is required to authenticate to receive the loan. Due to the fact that in the digital currency loan without collateral, no collateral is received from the borrower, lenders’ funds are at risk. Therefore, digital currency loans without collateral are not very common and popular.
Flash Loan
Flash loan is another type of digital currency loan without collateral, which is also known as instant digital currency loan. This type of loan was introduced for the first time in 2018 by Marble’s DiFi protocol. As its name suggests, this digital currency loan is done without collateral in a short period of time. Also, instant loan receipt and repayment will be done in one block on the blockchain network.
Taking advantage of arbitrage opportunities is one of the important applications of Flash Loan. For example, buying Ethereum at a lower price in one market and instantly selling it at a higher price in another market. Of course, keep in mind that these digital currency loans have a high risk due to fast repayment.
Crypto Credit Loan (Crypto Line of Credit)
A credit loan is one type of digital currency loan with collateral. In this type of loan, users will be able to borrow a certain percentage of the deposited collateral. Considering that certain repayment conditions are not defined in this loan and the interest is determined only by the amount of the loan received and the remaining collateral is free to withdraw;
Users will be able to withdraw their deposit.
Advantages of using digital currency lending system or crypto lending
Crypto lending or digital loan is a great opportunity for investors who are looking to earn money from digital currency. Also, people who intend to receive a digital currency loan can get the amount they need without going through time-consuming and troublesome banking processes. Other advantages of using digital currency lending system are:
- crypto lending is more practical due to not needing to explain the loan request and its use only in the stated context.
- The amount of the loan is determined based on the specified collateral and is not related to the borrower's payments and his transaction records.
- Determining the amount of the loan by the borrower and not limiting the requested amount
- There is no need for a long-term investment to qualify for a crypto loan.
- The amount received by the borrower and his repayments are not recorded in any centralized financial center and thus he will be exempted from answering to the tax department.
- Due to the universal nature of blockchains, CryptoLending can be used from anywhere in the world to grant loans to other places.
The risk of digital currency loans
The digital currency lending system, like other digital systems, also has disadvantages that are necessary for people who use it to know:
lawlessness
Since digital currency lending platforms and sites are not regulated by legal authorities and there is no supervision over them, their administration is not based on the common rules of the banking system. For example, the Federal Deposit Insurance Corporation insures US bank deposits up to $250; While cryptocurrency lending platforms and sites do not provide any guarantees, and in case of bankruptcy of the online loan platform, it is possible that all the capital of users will be lost, which is one of the most important risks of crypto lending.
Possibility of liquefaction
One of the types of financial risk and problems of crypto lending is the determination of heavy collateral by the system for the borrower. The system plans to receive the collateral in such a way that if the value of the digital currency of the collateral drops sharply, it will still be equal to or more than the loan received. But if the value of the collateral decreases to the extent that it is less than the loan amount; The system automatically auctions the collateral to compensate for its loss. This event is called asset liquidation or digital currency liquidation. In this situation, the borrower must immediately increase the amount of the collateral before the asset is liquidated. Another method in this situation is quick settlement of the received loan.
The possibility of cyber attacks
In this system, one of the problems for the borrower or lender is the error in the written codes of the smart contract. Digital currency lending is done by smart contracts, and if the smallest error occurs in the coding of these contracts, they will be vulnerable to cyber attacks.
Lack of liquidity
The first step to get a crypto loan is to deposit your assets for a certain period of time in a lending platform. If the user needs to withdraw money, he has to wait a long time in most cases. Because most platforms are facing the problem of lack of liquidity.
High interest rate
The interest rate or profit of most landing platforms is high. This is beneficial for lenders but creates serious problems for borrowers. Because in some platforms borrowers are required to pay up to 20% annual interest, which is not reasonable. Even in some cases, taking a loan from the bank can be a better option.
Important points before receiving a digital currency loan
The most important thing in crypto lending is to find reliable cryptocurrency platforms to have a successful crypto loan experience. When choosing these platforms, you should pay attention to the following factors:
Interest rate
One of the important factors in choosing a platform is its interest rate. Crypto loan interest rates are competitive and vary from platform to platform.
Platform security
Checking the security history about security risks is one of the important points in choosing an online loan platform. In recent years and the popularity of cryptocurrencies among people, these currencies have become a platform for hacker attacks and fraud. Hence, the best thing to do is to choose a platform with proper security measures.
Loan term
The loan term parameter can be fixed or flexible. Checking the refund terms provided by the platform is another important point. Keep in mind that some crypto lending platforms are only able to provide services to certain countries. Therefore, be sure to evaluate this issue before using the platform.
Costs
Before choosing a platform, compare fees and costs on different platforms. Remember that if you have different cryptocurrencies, you don’t need to use the same platform for all of them. It is also a good idea to check if the chosen platform has any minimum deposit requirements.
It should be noted that some centralized exchanges do not provide lending services to Iranian users. Therefore, in order to get a digital currency loan, you must authenticate with the documents of your acquaintances abroad.
In the process of receiving crypto lending, there are no restrictions on providing official guarantors and commercial certificates.
