Unless you have been living in the dark, dark cave traditional pure finance, you have probably at least heard of crypto loans – trends opening up opportunities for small and large crypto players, and powering Ethereum decentralized financial ecosystem to more than $ 1 billion in value locked.
At the core of crypto loan is a fairly simple concept: The borrower can use their crypto assets as collateral to obtain a fiat or stablecoin loans, while lenders provide the necessary assets for a loan at an interest rate that is agreed upon. It can also work in reverse, where the borrower uses fiat or stablecoins as collateral to borrow crypto assets.
You will see the possibility that there is nothing groundbreaking here – they only secured loans – but credit and loans that a strong financial primitive which opens a variety of applications and benefits for businesses, institutions, merchants and users. Moreover, in the developing Defi, this primitive has been opened for permissionless, open and composable access to loans. This leads to a new use cases such as optimized rates across platforms and “loans flash,” where users can utilize atomic transactions to borrow up to the full liquidity of these platforms as long as they pay back in the same transaction – but more on that later.
How important is a loan on the market?
At a fundamental level, the credit and lending markets increase the amount of money not by reallocating productive work of those cases are not immediately used for people with one. This increases the usefulness of that money for all parties, gives the borrower access to capital and lenders produce. Read more..
This is a great opportunity for crypto market and users, who have traditionally had two options on how to use their crypto: hodl or trade. Especially for hodlers, cryptocurrency already have one function – that is, to sit on their wallets. While some may argue that having a purpose to limit the supply in the market, usually we can agree that it is not a productive use of capital assets.
With the advent of crypto-asset loans, utility assets have increased significantly. An investment that previously static can now generate passive yield to the lender, and the borrower can either accept fiat without having to start sales of the taxable event or receive crypto assets to trade, arbitrage or market decisions. This is a huge improvement for hodlers individuals and large institutional investors alike.
In addition to these repair utilities, is also one of the few cases where crypto provides enhanced, direct analog to the financial system when comparing the loan back to the interest savings account. At the time of writing, most of the crypto-lending platform provides about 8% interest rate for loans stablecoins; In comparison, most of the savings accounts in the United States provides less than 1% return on the dollar.
While this is a huge improvement on the ecosystem crypto, does not offer the full benefits of a true credit – as in their current form, all lending crypto overcollateralized. This means that you should already have the capital you want to receive a loan, which means the crypto-loan market does not “grow the pie.” It is especially disappointing when it comes to under- and unbanked population of the world, most in need of improved access to finance.
Type of loan platform: Centralization vs. decentralization
Since 2018, a number of lending platforms have been cut in the crypto industry and can be generally grouped into centralized and decentralized platform. At the core of the difference is basically who or what that handles lending and borrowing process – business or protocol.
Centralized lending platform acts more like a traditional fintech company who happened to work with cryptocurrency – they follow Know Your Customer process, has the depository system to protect your assets, and can form a traditional business partnership with the Institutes.