Crypto loans have gradually been making a name for themselves in the industry in recent years. It would be easy to answer the question of “What is it?” by saying it is like fiat currency loans, except it is with digital currency. However, doing so would ignore the intricacy of the process.

 

What does it entail?

 

At its core, crypto lending is a simple concept to grasp. Borrowers can use their crypto assets as collateral in order to acquire a loan of either fiat currency or stablecoins (cryptocurrency whose value is pegged to an outside asset). Meanwhile, lenders provide the required assets for the loan at an established interest rate. This also works in the reverse, in which the borrowers use fiat currency or stablecoins as collateral so that they can borrow crypto assets.

 

Types of platforms

 

There are two types of lending platforms: decentralized and centralized. Decentralized lending platforms function as protocols that are accessible by anyone at any time. Moreover, they can be accessed without KYC (Know Your Client/Customer) or custody. With a few exceptions (i.e. platforms whose decentralized governance system dictates the interest rates), these types of platforms have fluctuating interest rates that are determined by an asset’s supply and demand. Whatever the interest rate function is can often result in huge swings in interest rates. For example, dYdX sometimes spikes over 30% for lenders.

 

Centralized lending platforms operate much more like conventional fintech companies that also work with cryptocurrency. They have a custodial system to provide protection for your assets, follow KYC procedures, and can develop traditional business partnerships with institutions, like negotiating loan agreements. These platforms typically offer interest rates that the company determines, which frequently include considerably higher returns for lenders of crypto assets (ex. Bitcoin and Ether) than decentralized platforms.

 

Consider a crypto loan

 

Most crypto holders will usually take into consideration the status of their investments in the long-term. Many do not plan on selling. However, even if they intend on holding their crypto assets, certain circumstances will force investors into a corner and make them sell their cryptocurrency for fiat currency.

 

Given the underlying investment strategy, instead of selling, crypto loans permit investors to utilize their cryptocurrencies as collateral towards a crypto loan. This gives them the ability to uphold the ownership of their funds, all while accessing the fiat currency they need. All in all, they are using the asset that they have (and do not want to sell) as a way to release money to put towards daily things, as well as significant purchases.