Summary
With crypto lending, users can borrow crypto for a fee, or lend crypto to earn interest. Simply provide the appropriate collateral to get a loan and start investing. Borrowing can be done through decentralized finance (DeFi) lending DApps or cryptocurrency exchanges. If the collateral falls below a certain value, users can top up to the required value to avoid forced liquidation. Once the loan and fees are repaid, the funds are unlocked.
In addition, users can obtain “flash loans” without collateral, but they must be paid back in one lump sum. If this is not possible, the loan transaction will be withdrawn before finalization. Cryptocurrency lending makes borrowing and lending convenient, and the entire process is automated by smart contracts. For many people, this makes it easy to earn an annual percentage rate of return (APY) or obtain low-interest credit by holding cryptocurrency assets for a long period of time.
However, like all projects, smart contracts or investments in the blockchain, cryptocurrency lending also involves financial risks. For example, if a volatile token is used as collateral, a position may be forced to be liquidated overnight. Smart contracts can also be hacked, maliciously attacked or exploited, often resulting in huge losses.
Before borrowing, users need to understand that they will lose their token custody rights during the borrowing period. Tokens are removed from personal control and the liquidity of the asset becomes reduced. Pay attention to all terms and conditions of lending to find out when funds will be unlocked and available and if there are any fees involved. Go to the pledge borrowing page immediately to start lending using your personal Binance account.
Introduction
When we think of cryptocurrency gains and losses, we immediately think of volatile prices and a hot market environment. But this is not the only way to make money in the blockchain. Cryptocurrency lending services are readily available, allowing users to lend funds with low risk. On the other hand, digital assets can be borrowed quickly and at low interest rates. The lending and issuance of cryptocurrency loans are generally more direct, efficient and cheap, making them an option worth exploring for both borrowers and lenders.
What is cryptocurrency lending?
Crypto lending works by one user taking out their own crypto and lending it to another user for a fee. The exact way the loan is managed varies from platform to platform. Users can find crypto lending services on both centralized and decentralized platforms, but the core principles remain the same.
Users do not have to be borrowers, but can also lock their cryptocurrencies in a fund pool, and the fund pool manages the funds to earn passive income and interest. By choosing a smart contract with high reliability, the risk of losing personal funds is usually minimal. This is mainly because borrowers provide collateral or have loans managed by centralized finance (CeFi) platforms such as Binance.
How does cryptocurrency lending or borrowing against collateral work?
Cryptocurrency lending generally involves three parties: a lender, a borrower, and a decentralized finance (DeFi) platform or cryptocurrency exchange. In most cases, the lender must provide collateral before borrowing cryptocurrencies. Alternatively, a flash loan (described below) is used, which does not require collateral. The lender can choose a smart contract that mints stablecoins, or other platforms where users lend funds. The lender adds the cryptocurrencies to the pool, manages the entire process, and reinvests part of the interest.
Types of Cryptocurrency Loans (Pledged Lending)
flash loan
Flash loans allow you to lend funds without collateral. The name comes from the fact that the acquisition and repayment of the loan all occur within the same block. If the loan amount and interest cannot be repaid, the transaction will be canceled before block verification. This means that since it was unconfirmed and not added to the chain, the loan never actually took place. Smart contracts control the entire process without human interaction.
To use a flash loan you need to act fast. This is where smart contracts come into play again. Using smart contract logic, users can create a top-level transaction that contains sub-transactions. If the sub-transactions fail, the top-level transaction will not go through.
Let's look at an example. Suppose that a token worth $1.00 in liquidity pool A can be sold for $1.10 in liquidity pool B, but the user does not have the funds to first buy the tokens in the first pool and then sell them in the second pool. Then, if the user tries to use a flash loan, there is a chance to realize this arbitrage transaction in one block. For example, suppose we first obtain a flash loan of 1,000 BUSD from a DeFi platform and repay it later through the platform. We can break this loan into smaller sub-transactions:
1. Transfer the borrowed funds to your personal wallet.
2. Purchase $1,000 of cryptocurrency, i.e. 1,000 tokens, from Liquidity Pool A.
3. Sell 1,000 tokens at a unit price of $1.10 and receive $1,100.
4. Transfer the fees incurred from loans and borrowings to the flash loan smart contract.
If any of the above sub-transactions cannot be executed, the lender will cancel the loan before it occurs. In this way, users can profit from flash loans without any risk to individuals or collateral. Using flash loans offers great opportunities including collateral swaps and price arbitrage. However, flash loan funds can only be used on the chain, and transferring funds to other chains will violate the single transaction rule.
collateral loan
Because the borrower provides collateral, the time frame for using the collateralized loan funds can be longer. MakerDAO is an example, where users can obtain loans by providing various cryptocurrencies. Due to the high volatility of cryptocurrencies, the loan-to-value ratio (LTV) will be relatively low, such as about 50%. This value means that the loan is only half the value of the collateral. If the value of the collateral drops, this difference provides room for its value to change. If the collateral falls below the loan value or other given value, the funds will be sold or transferred to the lender.
For example, for a BUSD loan worth $10,000 with a loan-to-value ratio (LTV) of 50%, users need to deposit $20,000 worth of Ethereum (ETH) as collateral. If the token value drops below $20,000, users will need to add more funds. If it falls below $12,000, users face forced liquidation and lenders will take back their funds.
The loan the borrower receives is typically a newly minted stablecoin, such as DAI, or a cryptocurrency lent by someone else. Lenders deposit assets into smart contracts, which lock the funds for a specific period of time. Once the borrower gets the money, he can do whatever he wants with it. However, the borrower needs to recharge according to the spread of the collateral to ensure that the position will not be forced to liquidate.
If the loan-to-value ratio (LTV) is too high, there may be a fine. Smart contracts manage the entire process, ensuring it is transparent and efficient. Once the loan and interest are repaid, the collateral is returned to the original owner.
Advantages and disadvantages of cryptocurrency loans (collateralized lending)
Cryptocurrency loans have been a common practice in the decentralized finance (DeFi) space for years. Although popular with users, there are some drawbacks. Before deciding to try lending, be sure to weigh the pros and cons:
advantage
1. Easy access to funds. Anyone can get a cryptocurrency loan by providing collateral or returning funds through a flash loan. Loans of this nature are easier to obtain than loans from traditional financial institutions and do not require a credit check.
2. Smart contracts manage loans. Smart contracts implement automated management throughout the entire process, making lending more efficient and scalable.
3. Earn passive income easily. Holders can start earning annual percentage yield (APY) by investing their cryptocurrencies into the yield pool without having to manage the loan themselves.
shortcoming
1. Collateral faces a high risk of forced liquidation. Even if the loan collateral is overvalued, any sudden drop in cryptocurrency prices will result in forced liquidation.
2. Smart contracts are vulnerable to attacks. Improperly written code and backdoor attacks can lead to loss of loan funds or collateral.
3. Borrowing increases the risk of your personal portfolio. Diversifying your portfolio is a good idea, but using loans can add additional risk.
Things to consider before choosing a cryptocurrency loan (collateralized loan)
Get a cryptocurrency loan smoothly by using a trusted lending platform and choosing stable assets as collateral. Before you make a hasty decision to borrow money, consider the following:
1. Understand the risks of handing over custody of your personal cryptocurrency. Once your tokens leave your personal wallet, you must trust others or smart contracts to handle them. These projects may become targets for hackers and scams. In some cases, your personal tokens may not be immediately available for withdrawal.
2. Carefully consider market conditions before lending cryptocurrency. Tokens need to be locked for a period of time, making it impossible to react promptly to a downturn in the cryptocurrency market. Borrowing through new platforms also carries risks. It’s best to wait for the platform to build enough trust before taking action.
3. Read the terms and conditions of the loan. There are many channels to obtain loans, and users should choose better interest rates and more favorable terms and conditions.
Famous Cryptocurrency Lending Project
Ghost
Aave is an Ethereum-based DeFi protocol that offers various cryptocurrency loans. Users can borrow money, access liquidity pools, and obtain other DeFi services. Aave’s most famous work is probably the launch of flash loans. Users deposit tokens into Aave, obtain aTokens, and then lend funds. These aTokens act as receipts, and the interest earned by the individual is determined by the cryptocurrency lent.
Abracadabra
Abracadabra is a multi-chain DeFi project that allows users to stake interest-bearing tokens as collateral. Users can obtain interest-bearing tokens by depositing funds into a lending pool or income optimizer. Token holders own the original deposit and the interest earned.
Users can further unlock the value of interest-bearing tokens by using them as collateral for Magic Internet Money (MIM) stablecoin loans. One strategy is to deposit stablecoins into a liquidity mining smart contract and then have the interest-bearing tokens generate MIM. As long as the stablecoins are not volatile, the probability of forced liquidation will be low.
Binance
In addition to trading services, Binance also offers a range of other cryptocurrency financial products for users to lend, borrow and earn passive income. If you don’t want to access DApps and manage your own DeFi wallet, it will be more convenient to use the centralized finance (CeFi) option. Binance offers convenient crypto-backed loans across multiple tokens, including Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB). These loans are funded by Binance users looking to earn interest on their long-term holdings of cryptocurrencies.
How to get a loan through Binance Platform’s “Pledged Coin Loan”?
It’s easy to borrow and lend cryptocurrencies directly through your personal Binance account. First, log in and go to the pledge borrowing page.
1. Enter the cryptocurrency and amount you want to borrow.
2. Select the assets that can be used as collateral. Based on the initial pledge rate prompted in the right panel, the amount required to be provided will be displayed in this field.
3. Select the term of the loan asset.
4. After confirming the loan details, click [Start Borrowing Now].
Summarize
Cryptocurrency lending platforms can be valuable to both borrowers and lenders if done responsibly. Holders now have another option to earn passive income, and investors can unlock the potential of their funds by using them as collateral. Whether you choose a DeFi or CeFi project management loan, you should understand the conditions and make sure to prioritize trustworthy platforms. Blockchain technology allows users interested in the supply and demand of credit to enjoy unprecedented convenience, and cryptocurrency loans have become a powerful tool for them.