Crypto lending is the process of lending and borrowing cryptocurrencies with a fee attached to them. Usually, the lender decides to offer their idle funds as a loan to a borrower that pays interest.
In some cases, the borrower is expected to provide a type of collateral. Crypto lending occurs in an exchange or a DeFi lending protocol designed for the very same purpose.
The collateral earmarked for the process must always be above a particular value, or the asset is liquidated. Once the buyer pays back the borrowed funds and designated interest, their collateral is returned.
Crypto loans can either be over-collateralized loans or flash loans. In the former case, the collateral has to be higher than the value of the loan borrowed. For a flash loan, collateral is not necessary. Instead, it demands that the user pays back that loan in the same transaction. The contract reverses the lending transaction for non-payments within the same transaction to ensure that. People earn interest by offering their idle crypto assets to lending protocols or exchanges for others to borrow.
Benefits of crypto lending:
- Automated lending process
Smart contracts automate the lending and borrowing process, reducing the chances of human errors.
- Seamless access to funds
As long as users can offer collateral, they are given the funds in a collateralized loan. In the case of flash loans, once they return the funds in the transaction, they can access capital. Users don’t have to jump through hoops and checks before accessing a loan.
- Stream of income
People can offer their idle funds to lending protocols and earn APY at the end of a period.
- Crypto lending risks
Crypto lending may have its perks, but it still possesses some disadvantages.
- Smart contracts have a risk of being attacked by hackers. An attack could lead to the loss of the crypto holdings.
- The borrower could lose their collateral to liquidation if it falls below a particular value. This is common because of the volatility of coins.
