Since Bitcoin’s 2009 launch, cryptocurrencies would go on to rise in popularity and gain mainstream attention. In doing so, they were considered a new asset class, which was something that had been unheard of during the past few decades. In this era of innovation concerning the emergence of digital currency, the practice of crypto lending has also gained prominence. This is an alternative form of investment in which investors lend fiat currency or cryptocurrencies to other borrowers. In exchange, they receive interest payments.

 

There are several types of crypto loans, with four of them including undercollateralized, collateralized, overcollateralized, and flash. Out of the bunch, undercollateralized loans are garnering attention and are touted as being the future of decentralized finance (DeFi). 

 

In what ways are they beneficial?

 

Undercollateralized crypto loans are becoming important players in DeFi’s future. The idea sounds implausible, no doubt, but don’t dismiss it too quickly. DeFi platforms are already starting to offer this service to their users.

 

So, what are undercollateralized loans? Well, it is best to look at its collateralized counterpart first because anyone who has secured a loan through DeFi platforms or a traditional channel will have heard of them. Collateral refers to any asset possessing value and the lender accepts it as a security from the borrower. Any sanctioned loan with the security of backed collateral is deemed as a collateralized loan. Put simply, the collateral effectively covers the loan or principal. 

 

An undercollateralized loan, contrarily, refers to a loan that is not fully collateralized. In other words, if the loan is defaulted, then the collateral can not cover the principal. Admittedly, the undercollateralized loan concept may be questionable and concerning to some. However, the point of its existence is to protect the borrower’s interests, as well as the lender’s.

 

Fast evolution

 

DeFi is a new product on the market that is still technically in its infancy, but it is continuously evolving. What that said, it is easy to see why many believe that undercollateralized loans are capable of further increasing the popularity of decentralized finance.

 

Since the emergence of DeFi, products related to this form of finance have come to the aid of many people in need. The introduction of undercollateralized loans will undoubtedly provide additional relief to those who are lacking any collateral.