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Crypto lending is the ability to borrow and lend cryptocurrency for a fee or interest. To get a loan and start investing right away, simply provide collateral through a DApp DeFi lending app or cryptocurrency exchange. If the value of the collateral falls below a certain value, it will need to be replenished to avoid liquidation. After repayment of the loan with a commission, the collateral capital is returned to the borrower.
Users also have access to unsecured flash loans that must be repaid in the same transaction. If the borrower is unable to do this, the loan transaction will be canceled before it is confirmed. Crypto loans simplify and automate the process of borrowing and lending. For many, this is an easy way to earn APY on held (HODL) crypto assets or take advantage of favorable loans.
However, cryptocurrency lending, like any project, smart contract or investment in the blockchain, is associated with financial risks. For example, using volatile coins as collateral can lead to liquidation. Smart contracts, in turn, are susceptible to hacking and attack, which can lead to large losses for users.
Don't forget that lending, whether borrowing or borrowing, always takes away control of your funds and reduces your liquidity. Review the loan terms carefully so you know exactly when you'll be able to regain access to your funds and what fees you'll have to pay. Log into your Binance account and go to the crypto loans page to start borrowing today.
Introduction
When talking about profits and losses in cryptocurrency, one cannot fail to mention price volatility and market turmoil. However, blockchain also offers other ways to earn money. Crypto lending is an opportunity to easily lend funds with relatively low risks, as well as borrow digital assets at low interest rates. Cryptocurrency loans are very convenient and beneficial for both borrowers and lenders, which is why they are actively used by both parties.
What is crypto lending
Crypto lending is carried out as follows: the cryptocurrency of one user is provided to another for a certain fee. The lending mechanism may differ slightly on different platforms, but the basic principles are the same everywhere. This service is available on both centralized and decentralized platforms.
You can not only borrow funds, but also receive passive income in the form of interest for placing cryptocurrency in a pool that will manage your funds. The risk of losing money in this case is usually small, but this will depend on the reliability of the smart contract used. The safety of funds is guaranteed by the borrower providing collateral, and the loan is managed by CeFi (centralized finance) platforms such as Binance.
How does crypto lending or cryptoloan work?
Crypto lending involves three parties: the lender, the borrower, and the DeFi (decentralized finance) platform or crypto exchange. Typically, the loan recipient puts down collateral (collateral) before receiving the cryptocurrency. An unsecured flash loan option is also available (more on this below). In this case, the role of the lender will be a smart contract that issues stablecoins, or a platform that issues funds to another user. Lenders deposit cryptocurrency into a pool, which then manages the lending process and remits interest to them.
Types of crypto loans
Flash loans
Flash loans are an opportunity to borrow funds without posting collateral. As the name suggests, the loan is issued and repaid within one block. If the loan amount with interest cannot be returned, the transaction is canceled before it is confirmed in the block. It turns out that the loan never existed, since such a transaction was not confirmed and was not added to the chain. The smart contract completely controls the lending process, so human participation is not required.
You cannot hesitate with a flash loan, since smart contracts are involved in the lending process. Using a smart contract, a top-level transaction with several subtransactions is created. If any sub-transaction fails, the entire top-level transaction will be rolled back.
Let's look at an example. Let's say a token is trading at $1 (USD) in liquidity pool A and at $1.10 in liquidity pool B. However, you do not have the money to buy tokens from the first pool to sell in the second. You can perform this arbitrage using a flash loan and make a buy and sell in the same block. Let's imagine that your main transaction takes out a flash loan of 1000 BUSD on the DeFi platform and repays it immediately. This transaction is then broken down into several subtransactions:
1. Borrowed funds are transferred to your wallet.
2. You buy $1000 worth of cryptocurrency from liquidity pool A (1000 tokens).
3. You sell 1000 tokens for $1.10 and receive $1100.
4. You repay the loan with a loan fee in the flash loan smart contract.
If at least one of the subtransactions fails, the lender will cancel the loan until the transaction is confirmed. This lending method allows you to make a profit without risks for the borrower or his collateral. Collateral swaps and price arbitrage are also typically available for flash loans. However, this type of credit is only used on-chain, since moving funds to another network will disrupt the payment mechanism in one transaction.
Secured loans
A secured loan gives the borrower more time to use their funds in exchange for providing collateral. MakerDAO is one such example that allows cryptocurrencies to be used as collateral. Because cryptocurrency is so volatile, the loan-to-collateral (LTV) ratio will likely be very low—for example, 50%, meaning the collateral will be twice the loan amount. This difference provides a cushion in the value of the collateral in case the price of the collateral falls. If the collateral falls below the value of the loan or a certain specified value, those funds will be sold or transferred to the lender.
For example, a loan with a 50% LTV of $10,000 will require collateral of $20,000 in Ether (ETH). If the value of the bond falls below $20,000, you will have to add more funds. If the value falls below $12,000, liquidation will occur and the funds will be transferred to the creditor.
Loans typically involve newly created stablecoins (such as DAI) or cryptocurrencies that have been lent by other users. Lenders deposit assets into a smart contract, which can also lock those funds for a certain time. Once you receive the funds, you can use them as you wish. However, you will need to top up your collateral if the price changes to avoid liquidation.
If your LTV ratio increases significantly, you will have to pay a penalty. The lending process is completely transparent and controlled by a smart contract. After repaying the loan with interest, you will receive your deposit back.
Advantages and disadvantages of crypto loans
Crypto loans have been widely used in the DeFi space for many years, however they are not without their drawbacks. It is necessary to have a good understanding of this issue before borrowing or lending funds:
Advantages:
1. Easily accessible capital. Crypto loans are issued to anyone who can provide collateral or immediately repay the funds in a flash loan. This type of loan does not require borrowers to have a good credit history and is much easier to obtain than a loan from a traditional financial institution.
2. Loans are managed by smart contracts. A smart contract automates the lending process, making it more efficient and scalable.
3. An easy way to earn passive income. HODLers can deposit their cryptocurrency into a vault and earn APY without having to manage the credit themselves.
Flaws
1. High risk of liquidation depending on the collateral. Even a loan with a large amount of collateral can be liquidated if the cryptocurrency suddenly drops in value.
2. Some smart contracts are vulnerable to attacks. Poorly written code and loopholes can lead to the loss of loan funds or collateral.
3. Borrowings and credits can increase the overall risk of a portfolio. Portfolio diversification is considered an effective and safe practice, but doing it with debt increases risks.
What you should pay attention to
The main recommendations for a successful cryptocurrency loan are the use of a reliable lending platform and stable assets as collateral. However, before you start working with lending, read the following useful tips:
1. Be aware of the risks associated with transferring cryptocurrency for safekeeping. Once the coins leave the wallet, their management passes to a third party (or smart contract). Many projects can become the target of scammers, and in some cases, coins cannot be withdrawn immediately.
2. Analyze market conditions before borrowing cryptocurrency. Your coins may be locked for a certain period, which means you will not be able to react to downturns in the cryptocurrency market. Also, lending on a new platform can be risky, so sometimes it's better to take your time and make sure the platform is reliable.
3. Study the terms and conditions of the loan. Each lending platform may have different rules, so do your research ahead of time to find the best interest rates and terms.
Famous crypto-credit projects
Ghost
Aave is an Ethereum-based DeFi protocol that offers a variety of crypto loans. It allows you to both lend and borrow funds, as well as enter liquidity pools and access DeFi services. Aave is best known for its work in popularizing flash loans. To lend someone funds, you need to deposit your tokens into Aave and receive aTokens, which act as a receipt. The amount of your income will depend on the cryptocurrency you borrow.
Abracadabra
Abracadabra is a multi-chain DeFi project where users stake interest-bearing tokens as collateral. Users deposit their funds into a lending pool or yield optimizer and receive interest tokens. Owning them provides access to an initial deposit with earned interest.
You can also unlock interest tokens by using them as collateral to borrow the Magic Internet Money (MIM) stablecoin. It is also possible to stake stablecoins in a smart contract to generate income and then use interest tokens to generate MIM. If your stablecoins are not subject to volatility, the likelihood of liquidation remains low.
Binance
Binance offers not only standard exchange services, but also a variety of other financial crypto products that users can lend, borrow, and use to earn passive income. If you don't want to manage your DeFi wallet through DApps yourself, try using CeFi (centralized finance) projects. Binance provides access to easy loans with cryptocurrency collateral in a variety of tokens and coins, including Bitcoin (BTC), ETH and BNB. Funds for these loans come from Binance users who want to earn interest on the cryptocurrency they hold.
How to take a crypto loan on Binance
You can easily borrow cryptocurrency directly from your Binance account. To do this, log in and go to the crypto loans page.
1. Specify the loan amount and the desired cryptocurrency.
2. Specify the asset and security amount. The minimum collateral amount will be displayed in the bottom box based on the initial LTV on the right sidebar.
3. Select the loan term.
4. Double-check your loan details and click [Confirm Loan].
Summary
When handled responsibly, crypto lending platforms benefit both borrowers and lenders. They also give HODLers another passive income option, and investors the opportunity to get the most out of their funds by using them as collateral. Regardless of which project you choose to manage your loans - DeFi or CeFi, be sure to study the lending terms and choose reliable platforms. Blockchain technology has simplified the crypto lending process, giving us a powerful new tool for making a profit.
