Guide on How Crypto Lending Platforms Work | Notum
Jun 02, 20226 min read
If you’re in crypto, you know that a crypto loan is a way of making your money work and grow. Especially when the market is in stagnation and you don’t gain any substantial profit.
You might have heard about crypto loans here and there, but let’s clarify everything and dot the I.
How Do Crypto Loans Work?
Honestly, crypto loans are great on any market. The main thing is "you keep holding and wait for your desired price, but still gain liquidity right now without any wait" - that's the power of crypto loan services. But if there is any other option to make your money work? Crypto loans can be a solution.
A crypto loan is a form of finance that investors can use to lend their crypto assets to borrowers who are seeking investors. In return, you get additional liquidity and can trade or buy whatever you want. More than that, crypto loans are a non-taxable event, so it's a great way to use your crypto without paying taxes.
The question is, why would a borrower want to borrow funds? For example, you have Bitcoin ($BTC), and the market is rising. So, you don't want to sell it, but instead, use your Bitcoin as collateral, borrow a stablecoin such as Teather ($USDT) pegged to the U.S. dollar, and get liquidity. When you return your loan, you get your Bitcoins back, and if their value increases in that interval, you win.
When Do You Need a Crypto Loan?
- Reinvesting — borrow your holdings against stablecoins and spend the funds to stack more of the same currencies you have.
- Short-selling — borrow your stablecoins against chosen assets and sell received cryptocurrencies at the current exchange rate.
- Boost your passive income – take out a crypto loan and add the released funds to earn more passive income;
- Diversify your portfolio — borrow your holdings against stablecoins and spend it to diversify your portfolio by adding various currencies;
- Daily purchases — borrow your holdings against stablecoins, exchange them for fiat and spend for your day-to-day needs such as rent, traveling, clothes, or services without converting your crypto to fiat.
Cryptocurrency Loan Collateral
Borrowers have to over-collateralize their debts to protect the lender’s assets. It’s used as there are no credit checks for borrowing crypto. So, the collateral will be locked if a borrower can’t repay the debt. This allows people with poor to no credit history to borrow crypto.
Another way of using collateral is to calculate an individual's lending risk and terms of the loan, such as payment period, interest rate, and amount of lendable funds. The higher the collateral, the lower lenders’ risk.
For this, you should calculate Loan-to-Value (or LTV). LTV is the ratio of an individual’s loan value to the value of their collateral. With LTV, crypto loan providers can evaluate individual lending risk levels.
Is a Crypto Loan Risky?
Margin calls: it happens when your collateral’s value decreases and the lender requires you to increase your holdings to manage the loan.
There isn’t access to your assets: when your loan has an outstanding balance, you can’t access your holdings to trade or transact.
Repayment terms differ: These loans usually function like traditional installment loans, and depending on the crypto lending program, you may have less than a year to pay back what you borrowed. In other cases, you can create your own repayment schedule. With shorter repayment terms, you must know beforehand whether you can afford the payments.
Account funds aren’t insured: If you lend your own digital assets, the funds in a crypto interest account aren’t insured like your fiat money in the bank account.
Withdrawals can be slow: You can request a withdrawal from your crypto interest account whenever necessary. Depending on the platform, it could take some time, though.
Crypto Lending Platforms
Briefly, in the case of centralized crypto lending, the lending and borrowing processes are delegated to a company or a group of people. CeFi provides loans by lending or borrowing them through a centralized exchange.
Compared with DeFi, CeFi platforms are far more established, that’s why there is a great number of them.
CeFi platforms can also provide the best possible crypto assets access, unlike the DeFi project.
Moreover, DeFi smart contracts are not 100% ready because of their security risks. Some obvious reasons people develop smart contracts are that they can make mistakes and have other exploits.
With decentralized crypto lending, the protocols rely on smart contracts designed to automate the distribution of crypto loans and interest rate payments. They tend to be as self-executing as possible.
Pros and Cons of CeFi Crypto Lending
- Customer Service. Central authorities, centralized exchanges, and platforms can offer an intuitive and comfortable user experience as they give special attention to such things.
- Collateral variety. CeFi crypto loan platforms stand out because they have more borrowing and lending options than DeFi or traditional ones. You can only use real estate or precious metals as collateral with traditional loans. DeFi providers allow using Ethereum ERC-20 tokens. As for CeFi crypto loan providers, they give you a chance to choose from any Ethereum-based tokens and other popular coins outside the Ethereum ecosystem. This gives users more options when deciding how to secure their loans.
- Fiat-to-crypto conversions. As this kind of transaction demands identifiable authority involvement, CeFi platforms are way ahead.
- Customer-oriented. These platforms are regulated, so they provide insurance cover, offer storage solutions to shield the risks, and take proper care of their users' recovery phrases, wallet addresses, and private keys.
- Stable APR. CeFi platforms can support pretty stable, honest APR nearly all the time. As in DeFi, it can be changed hugely because all the economic balance is supported automatically.
- Lower returns
CeFi platforms may have lower interest rates, and that’s because they pay substantial fees to an intermediary.
- An intermediary is involved
That means your account isn’t under your total control. But that was made to ensure that the recovery phrases, wallet addresses, and private keys are well-protected.
Coinrabbit is a CeFi crypto lending platform with a smooth procedure for getting a loan with no credit history checks and asking for KYC. The platform offers unlimited loan periods. You can borrow the stablecoins, and there are no deposit or withdrawal fees. It has a low LTV ratio, which reduces the risk of liquidation. The interest rates are competitive. It has a major security structure that doesn’t depend on any contract code, which is a big safety concern when it gets hacked. You can also connect 2FA via Google Authenticator, which is requested on login and withdrawal operations. Coinrabbit provides a wide range of collaterals: Bitcoin, Nano, DogeCoin, Ethereum, Ravencoin, Digibyte, Bitcoin Cash, Ripple, Zilliqa, and a lot more. The whole list of supported collateral is here, but it’s constantly updating.
There are handy features like email and SMS notifications if your loan reaches any of the three limit zones. Plus, 24/7 live support is always there for you.