Crypto Lending, Flash Loans, and Collateralized loans - Everything You Need to Know



There are plenty of options for storing your crypto coins, but one simple method is to store them in a safe wallet and wait for the market price to go up. While you hold your crypto, you can use it as collateral for a loan. Your coins will be returned if the repayment is made on time.


What is crypto lending?

Crypto lending is a growing trend and it is the process where one user provides cryptocurrency to another in exchange for a fee.


The way of managing loans varies from one platform to another. You can find a lending service for crypto on both centralized and decentralized platforms, but the core principles are still the same.


You don't just have to be a borrower - you can also passively earn interest on your crypto by leasing it. You can then watch your cryptocurrency balance grow and collect monthly lease payments in the form of interest.


It's usually safe to use a smart contract as long as it is of high reliability. The platform, like centralized exchanges or DEX, may require the user to put up collateral.


Types of crypto loan

As easy as it may sound, there could be a number of ways you can use this digital financial service. Here are the two basic types of crypto loans.


Flash loans

Flash Loans make it possible to borrow money without collateral. This is because you repay your loan in a single block.


If the loan amount is not returned with interest attached, it can be canceled before it becomes validated by a block.


This means that the loan never happened since it was never confirmed and added to the chain. The whole process is handled using a smart contract, so no human intervention is required.


Collateralized loans

A collateralized loan lets you use your money for as long as you need to in return for providing collateral. CRO (crypto.com) is one example, as it allows users to provide a variety of crypto as collateral.


The price of cryptocurrencies can be volatile - which means you'll likely have a low loan-to-value ratio (aka LTV).


This difference provides room for the debt to decrease in value and remain collateral if it falls below the loan's value. Once your collateral falls lower than that value, the funds are sold or transferred to the lender.


How does crypto lending or crypto loan work?

Crypto lending is a common financial instrument that typically involves three parties: the lender, the borrower and a DeFi platform or crypto exchange. In most cases, borrowers need to provide some collateral before borrowing any crypto.


Flash loans are also available that do not require collateral. There are many different loan types, as well. Some will mint a stablecoin, while others might lend out funds from another user.

Lenders offer their crypto as collateral on loans, which then manage the process and distribute the interest to them.


Famous crypto lending projects


Elite Cash

Elite Cash (ELC) is an EtherLite-based DeFi protocol that offers crypto loans. With ELC, you can both borrow and lend. Moreover, you can participate in liquidity pools and access other DeFi services.


The team behind ELC is working towards making the crypto loan project popular. To lend funds, you deposit your tokens into ELC and receive tokens, acting as a receipt. Plus, the interest you get depends on the coin/token you are lent.


Binance

Apart from their exchange service, Binance offers many other financial products. They include launchpad, lending/borrowing for cryptocurrency, staking, flexible savings, and many more.


If you don't want to access DApps or manage a DeFi wallet, the CeFi options can be a lot easier. They hold many different tokens and coins and offer something for everyone, including Bitcoin (BTC), Ethereum (ETH), and many others.


Cryptocurrency loans have been a feature of the DeFiversefor years, but despite their popularity, there are some drawbacks too. Make sure to take a balanced look before you decide to experiment with lending or borrowing:


Benefits of crypto loans


Get back the access to your fund anytime.

A crypto loan can provide a quick way to get financial backing without having to deal with the hassle of waiting on approval from a traditional institution.


Blockchain-based process

Blockchain-powered, smart contracts make it faster and easier to lend and borrow money. That way, there will be security, transparency, and auditability.


Effortless passive income

HODLers can find security and peace of mind by sending crypto to a vault where it will start earning interest without having to manage the loan.


Low-interest rates

Savings with crypto loans are hard to match. They have lower interest rates than many unsecured personal loans and credit cards because they're secured by an asset. That makes them attractive to those who wish to save money but don't currently need their digital assets.


Drawbacks of crypto loans

High risk of liquidation if over-collateralized

Cryptocurrency prices can plummet, and your highly collateralized loan could get liquidated.


vulnerable to cyber attacks

Poor source code and exploit breaches can lead to the theft of your funds or collateral.


Scam projects

While using your cryptos in innovative ways to make money sounds perfectly fine, it requires due diligence before putting your money anywhere. So many scammer groups are active in the world of crypto that may impersonate the original company to steal your money.


The main takeaway on crypto loans

By leveraging a lending platform and stable collateralized assets, you can ensure crypto loan success. But before you take out a loan or lend someone any, consider the following factors:


Cryptocurrency market trend

When you see the downtrend in the crypto market, your coins might be inaccessible for a certain time, making them hard to access. On top of that, lending or borrowing might not be worth the hassle in a highly volatile market.


Risks of third-party management

Be sure to educate yourself on how a crypto loan project works before sending your money their way. Always remember that you have no control over your tokens as soon as they leave your wallet.


Facts, figures, and terms

There are a ton of options for crypto loans, so do your research before picking the one that works for you. You should look at features like terms, company stats, type of loan, interest rates, and other conditions to find what fits you best.

11 views0 comments

DISCLAIMER

This article does not constitute any financial advice, and all suggestions/recommendations in this post are for informational purposes only. Elite Cash does not bear any responsibility for your loss. Please consult your financial advisors before investing in cryptocurrencies.