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Since the introduction of the first cryptocurrency called Bitcoin, the cryptocurrency industry has been striving to disrupt the conventional banking system. Actually, Bitcoin (as well as the rest of cryptocurrencies) was intended to replace cash payments. Nevertheless, with the development of crypto technology, its use as a store of value has grown as well. Eventually, the crypto industry has turned into a competitor of the conventional financial system.
The Crypto industry is currently attracting more and more attention from conventional investors due to its growth potential. The development of crypto lending has become one of the greatest achievements of recent years, attracting lots of conventional investors and extra funds to the cryptocurrency markets worldwide.
The history of crypto lending started with the introduction of Bitcoin lending. However, with the development of the new blockchains, crypto lending managed to include more assets and provide extra flexibility to crypto investors. Crypto market m-cap jumped exponentially in 2020, thus attracting extra attention and funds to the market. Crypto lending can revolutionize the crypto industry and the entire financial market.
How Does Crypto Lending Work?
Crypto lending is a process of borrowing or lending against the cryptocurrency you’re holding. Taking such loans is very fast and easy. In addition, borrowers can repay the loan conveniently with any supported currency at no fee.
Almost all crypto lending platforms recommend their clients open savings accounts to make more money off their crypto (and, of course, crypto loans). The majority of crypto loans are secured. Choosing crypto lending allows you to avoid credit check and obtain a loan immediately.
Pros and Cons of Decentralized and Centralized Lending
Crypto lending gives you an opportunity to hold digital assets while obtaining extra income for your trading. Customers can obtain a crypto loan in one of the following ways: decentralized (DeFi) or centralized (CeFi). They have different functions, as well as their own advantages and disadvantages.
What Is Decentralized Lending?
Decentralized platforms are based exclusively on algorithms. They use lending protocols, which can be open-source or elaborated by the project’s team members. Decentralized platforms have refused completely from human involvement, which allows them to establish the lowest APR and origination points. But of course, we all can make mistakes (for example, press the incorrect button, indicate the wrong crypto address, etc.) The bad thing is that decentralized lending platforms don’t tolerate mistakes.
Most platforms don’t warn their clients of the changes in the cryptocurrency market. Therefore, there is a high risk of losing assets, especially for the new traders. Meanwhile, customers are not obliged to pass the registration, which allows them to preserve their anonymity while obtaining loans or performing any kind of transaction.
And What About Centralized Lending?
Centralized lending has considerable advantages over decentralized lending. Centralized lending platforms employ experts who monitor every single transaction within the ecosystem. Even if a client commits a mistake, a support team can help 24/7 and sometimes even give a refund. At the same time, since centralized platforms employ professionals to support the customers, carrying out operations may be very expensive. Consequently, APR rates can be higher than those of their decentralized competitors. Please note that centralized lending platforms ask the new clients to pass the registration. You will have to show your identity document and confirmation of address, such as a gas bill. Therefore, you can’t stay anonymous, and the platform’s staff will be informed of all your transactions.
The Effect of Crypto Lending on the Crypto Industry
Selling and owning cryptocurrency has long been one of the most common ways to earn from virtual assets. However, the growing popularity of crypto lending in recent years has created a new method of earning on cryptocurrency. Below you can find out the reasons why crypto lending can upset the financial market:
More Freedom with Assets
The possibility of lending or borrowing against digital money offers crypto investors extra flexibility in dealing with their assets. If you’re going to buy a specific cryptocurrency for trading it later at a higher price, you should make a deposit to a crypto lending platform and make extra money off it. For the users who prefer going short, crypto loans can free up the assets they’re currently owning and allow them to work with the loaned currency.
Centralized lending creates an extra set of instruments to the crypto investing arsenal. This method allows you to earn passive income on the assets you’re not going to trade. At the same time, almost all crypto lending platforms allow you to cash out your funds for free. Keeping digital assets doesn’t provide the investors with any benefits, while crypto loans allow them to gain liquidity without touching their assets.
Higher Annual Percentage Yield
High APY is one of the main advantages of crypto lending. Due to lending protocols, the most popular crypto lending platforms can promise you over 10 % APY if you put your assets into a liquidity pool. You can get much more for depositing fiat currency to a savings account managed by a common bank. Users can also enjoy the lowest loan repayment rates due to the collateralization of a loan.
Simpler Entrance Barrier
Crypto lending platform links borrowers to creditors with no need for intermediaries. Forget about long waits for a loan- the collateralization makes the credit process fast and easy. Moreover, securities-based crypto lending allows you to avoid tiring credit searches, as a credit report is not necessary to get a crypto loan. It is especially attractive for investors who need to get a loan immediately without a long and exhausting credit history review.
Findings
Crypto lending provides investors with larger freedom with their assets. Due to the high annual percentage yield, the clients can make more money off the assets they own. All this (in combination with a simple entrance barrier) increases the interest of crypto and conventional investors in crypto loans. Due to the increasing popularity of cryptocurrency, crypto lending can upset the market by attracting many new investors (and hence extra money) to the cryptocurrency market.
Conventional bank lending is much harder than crypto lending. Therefore, a simpler and more optimized process can bring traditional investors to the digital market. Crypto lending has developed significantly since the invention of Bitcoin lending. Today, users have an opportunity to make more money off their cryptocurrency, thanks to an influx of investments into the crypto market.
