The cryptocurrency industry is continuously growing. The price of Bitcoin hit the ever highest two times in 2021, making crypto investments more attractive. A large number of people are adopting cryptocurrencies with increasing investment options. Crypto lending is one of the hot topics in the industry that allows investors to earn passive income with their digital assets through a lending platform. Though it is a new sector but is rapidly evolving.
In this article, we will discuss how crypto lending works and the key steps of the entire crypto lending process through online platforms?
What is crypto lending?
Crypto lending is a process that allows investors to lend their cryptocurrencies to different borrowers to earn interest or crypto dividends.
In holding, crypto enthusiasts lock their assets till the value appreciation, but crypto lending allows them to earn with their assets without actually selling them.
How does crypto lending work?
Crypto lending involves borrowers, investors, and a crypto lending platform.
The interest that investors earn can be different depending upon the coin. It can be between 3% to 7% or as high as 17% in some cases.
For crypto loans, borrowers have to stake their cryptos as collateral which acts as security to loan repayment. They cannot use it until the loan payment is not paid off. They pay the agreed interest rate regularly on a weekly or monthly basis.
The collateral value is always the loan amount so that investors can cover their losses if the borrower doesn’t pay off the loan. Usually, borrowers have to stake 25% to 50% of the loan in crypto.
Keys steps of the crypto lending process through an online platform
To put it simply, bitcoin is the digital currency in the cryptocurrency market. Hence, crypto is the alternative form of payment between two parties on bitcoin platforms. Compared to other types of crypto lending, btc lending is safer, much more simple, and straightforward to use. The purpose of btc lending is that investors lend the bitcoins to a borrower that repays the loan with interest. When it comes to investing in cryptocurrency, there are several key factors that you have to consider before choosing any landing platforms.
A crypto lending platform is a third party that connects borrowers and lenders in one place. It is responsible for handling transactions in the entire process.
There are two types of crypto lending platforms; centralized and decentralized. A centralized lending platform works through a third party to manage the transactions. On the other hand, a decentralized lending platform operates through smart contracts.
These platforms can further be automated or manual. An automated lending platform starts providing interest payments to investors as soon as they deposit their cryptos for lending purposes. In comparison, a manual lending platform requires the user to stake their cryptos for earning dividends manually.
These lending platforms work online through their specified websites.
To secure a crypto loan through a lending platform, users have to go through a process that varies depending on the platform. However, generally getting a loan through online lending platforms involves the following steps.
- A borrower visits a crypto lending platform and requests a crypto loan.
- He offers the collaterals in the form of cryptos.
- The lending platform processes his request. Upon approval, he can choose the coin to get the loan amount, the terms, and conditions for repayment of the loan, and the interest rate.
- After confirming the details, the loan is automatically transferred to his account, replacing the collateral.
- A borrower can transfer the funds to any bank of his choice.
A lender starts receiving the interest directly to his account as per the agreed rate and duration.
Let’s consider an example for better understanding.
Binance is an online crypto exchange that offers a crypto lending service. For borrowing crypto loans on Binance, users have to visit the Binance website to access the crypto loans options. By choosing this option, they can select crypto to borrow, collateral asset, interest rate, and lending duration. Once all details are filled in, the funds will be transferred to the users’ accounts, replacing the collateral. They are then free to use funds by transferring to any bank account. The interest rate will be charged throughout the lending duration, as agreed.
For repayment of the loan, users have to revisit the website and enter the repayment amount. After confirming the details, press the “Confirm repayment” and all done!
Similarly, lenders are also at ease, just like the borrowers. They have to access the website, deposit their cryptos in the platform’s wallet to offer for lending purposes, set their terms and conditions. They start receiving the interest without knowing the entire process happening on the platform.
The entire process is quite simple and similar to most crypto lending platforms. Just pay attention to the prompt offered by the platform to follow the process.
Examples of online crypto lending platforms
The following are the few most popular crypto lending platforms.
- DeFi lending platforms: Compound Finance, MakerDAO, Aave, etc.
- CeFi lending platforms: BlockFi, Celsius Network, Nexo, etc.
Conclusion
Crypto lending is rewarding, but it also has some risks, which one must know as well. Users’ experience in crypto lending highly depends on the lending platform. Therefore, it is crucial to choose a suitable platform. When choosing a lending platform, short-list 3-4 platforms and then finalize one after comparing their features.
As the crypto industry is evolving, it is evident that crypto lending is here to stay.
