Blog Misc Crypto Lending Meaning, And How Does It Work?

Crypto Lending Meaning, And How Does It Work?

date June 27, 2022 time 6 min read 208 views

Since 2020, the cryptocurrency market has grown significantly, attracting millions of investors and generating a market value of billions of dollars. Many investors really believe in the potential of cryptocurrencies, and as a result, they want to keep our positions so that they may profit from the anticipated long-term price gain. Fortunately, crypto lending has made it easy to hold your cryptocurrency while using actual money.

Crypto Lending meaning

Crypto lending is the act of taking cryptocurrency from one user and giving it to another for a fee. In general, this is similar to depositing fiat money in a bank. But in the cryptocurrency market, the lender’s assets are the tokens/coins they currently hold and have no need to use, and that’s the Crypto Lending that lends digital money for digital interest.

How does it work?

You can find crypto lending services on both centralized (Cefi) and decentralized (Defi)  platforms, but the core principles are quite similar.

CeFi : These are centralized financial crypto lending platforms. The feature of this type is that there is always a third party in between controlling the activities of the lender and the borrower, often associated with the form of trust. 

DeFi: Crypto Lending platform in decentralized finance will completely eliminate third parties and forms of trust. Lending activities will be under the agreement of both lenders and borrowers. 

Benefits of lending cryptos

Investors who need to make an instant transaction but do not own enough cryptocurrency can also lend on Binance, Nexo, BlockFi, … or any other exchange that is suitable. In short, investors can meet their individual needs. As for the exchange, they seem to be the one that gets the most benefit.

Crypto lending has emerged as a viable alternative to financial institutions.
Crypto lending has emerged as a viable alternative to financial institutions. (Source: Unsplash)

As shared, through crypto lending, the capital round is rotated and brings a certain profit. Of course, this is not absolute, but there are actually very few cases of exchanges that “lose” when applying this mechanism, especially those that own the Margin Trading service.

Looking at the cryptocurrency market as a whole, lending is clearly a tool to ensure a circular and continuous “Crypto flow”. Any impact on the issue of prices, even the smallest supply and demand will be an indispensable stimulant for the whole picture. Cryptocurrency to sell cryptocurrency will help investors profit.

Crypto lending risks

Do you know what the downside of lending is? If we don’t take into account the specific issues of the entire cryptocurrency market such as unrecognized in most countries, still in the process of being completed, etc. Lending has the following two limitations.

Though crypto lending is a good solution for many, there are risks.
Though crypto lending is a good solution for many, there are risks. (Source: Unsplash)

The first is that some exchanges may use this mechanism as a tool to manipulate the price of the cryptos being supported by that exchange. Again, this is hypothetical but possible. And if that’s true, investors, especially “newbies” will lose their right to “competitive” fair, even being scammed, appropriated property without specific legal provisions. which protects.

Secondly, the price of the lending coin is reduced too deeply during the lending process and the interest rate cannot be compensated, making the “future” of the development of that cryptocurrency extremely dark, even impossible to recover.

On the other hand, there are crypto lending risks such as the over-financialization of the virtual currency market. And all the problems about belief between people with people.

Excessive financing when the value of the currency is “screamed” and the interests of the holder of the coin are negatively affected.

 As an alternative, unlike traditional borrowing, crypto lending has no middle ground. Transactions between two people only need smart contracts. Therefore, it is impossible to avoid contracts being hacked, or being scammed. Or the value of the world currency accepted lower than the original.

Currently, lending in crypto is divided into three main forms as follows:

1.  Peer-to-peer lending (P2P Lending)

P2P Lending is a form of direct lending between the borrower and the lender through a Smart Contract (smart contract) without going through any third party as an intermediary. Accordingly, the Smart Contract is self-executing and allows the transaction to take place if both parties ensure the requirements.

Because there is no third party involvement, the biggest advantage of P2P Lending is that the cost and interest rate in both lending activities are much lower than the other two forms. In addition, information related to transactions and customers is also guaranteed to be more secure. 

2.  Over-Collateralized Lending

Over-Collateralized Lending is a form of lending where the collateral is more than the loanable asset. The advantage of “Over-standard lending” is that users can make the most of their capital. But with the profit comes a small risk when the “Futures” order goes against the trend of the market.

3.  Under-Collateralized Lending

Under-Collateralized Lending is a form of lending quite opposite to Over-Collateralized Lending when the collateral is less than the borrowed asset, so it is also known as Credit or unsecured – using your reputation to borrow even though the collateral is less. than. However, at the present time, this form is not common in practice, but is usually only applied in the Whitelist to serve lending projects, for example Cream, etc.

In addition to P2P Lending, the other two forms use the lending pool mechanism. Accordingly, the lender will transfer the supported cryptocurrencies into the “Liquidity Pool” – Lending Pool. In return, they will receive the following interest rate corresponding to the loan result. 

The Borrower will transfer another cryptocurrency into the Lending Pool as collateral for their loan and receive the coin they want to borrow from the Liquidity Pool. Of course, at the end of the term, Borrower must pay both principal and interest respectively.

The interest rate will be calculated automatically based on the available formula and depends on the supply and demand as well as each asset class in the Lending Pool.

Crypto Staking vs Crypto Lending

Crypto Staking

Staking crypto involves locking up your crypto for a certain period of time to generate passive income from it (in the form of more crypto). It is comparable to a cryptocurrency certificate of deposit (CD). Even if you can’t touch it, at least you can see that it is drawing attention while remaining largely safe.

The majority of staking is completed in periods of just 30 days, which is far faster than a CD.

Staking makes money because you are compensated for putting up your cryptocurrency as collateral to sustain the blockchain network. In this regard, staking and mining are similar: Stakers commit currency to the network, whereas miners commit processing power. More cryptocurrency is given to both.

Now, not all cryptos can be staked, but more on that in a bit.

The process for staking is pretty simple. Find a platform that supports staking. Next, decide how much to stake and for how long to start earning passive income.

Staking is best for long-term cryptocurrency owners who desire sustained earnings with the least amount of risk.

So how is that different from lending?

Crypto Lending

Crypto lending also involves pledging your crypto to a certain platform to earn more crypto but with three key differences.

You can also invest in crypto lending, and earn inflation busting interest rates.
You can also invest in crypto lending, and earn inflation busting interest rates. (Source: Pizabay)

The first difference is simply how the crypto is used. As the name implies, when you lend crypto, you let the platform lease it out to crypto borrowers. The platform charges those borrowers interest and splits the earnings with you. Crypto loans are secured using the borrower’s own crypto as collateral.

The second is that staking locks up your crypto for a preset period of time, but many lending platforms let you withdraw your earnings anytime you like.

So if staking is like opening a CD, lending is like opening a savings account.

Does that mean the interest rates are a piddly 0.50% like they are with regular savings accounts? Blessedly, no. In fact interest rates on lent crypto reach as high as 14%.

The final differentiating factor between staking and lending is how U.S. regulators perceive them. The Securities and Exchange Commission (SEC) doesn’t seem to view staking as a big threat (well, no bigger than crypto as a whole).

Investing cryptocurrency to earn more with MyConstant

You might want to consider using the P2P lending site MyConstant as part of your investing plan if you want to acquire cryptocurrencies. You may use a variety of cryptocurrency and USD products from MyConstant to make the most of your cryptocurrency and earn interest on it up to 15% APY, or you can store it in our multi-cryptocurrency wallet (and even earn interest on stablecoins).

Furthermore, you can invest in P2P loans and earn 7% APR by lending money online to people and businesses all around the world.

Other benefits include:

  • 24/7 customer service no matter where you live.
  • Rates as low as 6%.
  • Early repayments for lower rates.
  • Instant matching.
  • The Minimum investment is just $10

Sounds interesting? Sign up for a free account today and start investing in.

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George Schooling

George Schooling

Buy MCT token with ease and enjoy the staking rate of up to 12% APR

Tags: crypto lending risks crypto lending vs staking

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