Crypto lending in 2020 has become the same type of crazy which ICO’s gained in 2016. The difference is that DeFi might be here to stay and DeFi sites like those listed on CryptoManiaks might be leading the pack.
If that’s true, then learning how crypto lending works and if it’s safe or not might be an essential thing to do.
Let’s dive in.
Crypto Lending — Why It’s Important
Many solid finance sites dedicate areas to learning about growing finance trends. The DeFi trend is one that needs to be governed.
Starting from the beginning, DeFi stands for Decentralized Finance.
In traditional finance, with lending and borrowing of fiat, customers need to work through centralized third-parties, people, and a credit check system to determine whether or not they can borrow or lend money.
Decentralized finance does not rely on people or credit check systems. Instead, this type of finance relies on the smart contracts that run on decentralized blockchains, such as Ethereum, to help people borrow and lend cryptocurrencies.
A recent Forbes article summarizes it nicely by quoting Alex Pack, managing partner at Dragonfly Capital, a $100 million crypto fund.
“The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way,” says Alex Pack. “You only get that shot every 50 years.”
Another important point to note is that major asset management funds are taking DeFi seriously.
Grayscale, the world’s largest crypto investment fund, is managing over US$5.2 billion of crypto assets, out of which, $4.4 billion of it is bitcoin.
Keep in mind too, that COVID-19 has driven global interest rates even lower.
The eurozone, for example, is now in negative territory and others such as the US and UK could potentially follow.
This climate could potentially take DeFi higher since it offers much higher returns to savers than fiat banks.
Compound, for example, has been offering an annualised interest rate of 6.75% for those who save with stablecoin Tether.
Crypto Lending in a Nutshell
Crypto lending is quite easy to grasp.
There are two types of customers: borrowers and lenders.
Lenders are people with cryptocurrencies. They want to earn money from them without selling their bags of cryptocurrencies.
If you’re in such a situation, if you have bags of crypto you’ve been hodling, then you can earn money without selling.
The steps are easy:
- Find a reputable DeFi platform like the ones linked in the article at the top
- Deposit how much crypto you feel comfortable depositing
- Collect interest daily, weekly, or monthly depending on the site
- Withdraw when you want
Cryptocurrencies are easy to deposit and withdraw thanks to their quick transfer times.
Borrowers are people who need a loan for various reasons.
You might need a loan to pay taxes, get a new laptop, or for other expenses. You might also want to consider getting a loan if you need funds but don’t want to sell your crypto assets.
The steps are far easier than a fiat loan:
- Find a DeFi platform you trust
- Find the terms that make sense for your needs
- Deposit the required amount of collateral.
- Receive your fiat or stablecoin loan
- Make payments according to the agreed terms
- When you pay off the loan, you can withdraw your collateral
This procedure can be done in as little as 30 minutes.
Compare this to a traditional fiat loan where you need to have your credit checked and possibly talk to the loan maker. The traditional process could take a few days.
Crypto Lending Safety
The fact is that DeFi is a new technology. It holds more risk than traditional loan financing.
DeFi loans are performed on smart contracts secured on the blockchain.
The blockchain is not the major issue.
The major issue is human error as well as DeFi sites being hacked.
Avoiding human error is easy with a bit of practice and following of a few rules:
- Always double check the address you send or receive cryptocurrencies.
The safest way to transfer crypto funds is to scan a QR code or copy/paste the crypto address. If you copy the address by hand then you’ll be more prone to human error. Always double check using any method.
- Make sure you have backup copies
Back up everything you do. Passwords and recovery codes are especially necessary to back up. Nothing’s worse than forgetting a private key and being locked out of your funds forever.
- Thoroughly investigate the DeFi platform you chose to use.
Some DeFi sites offer incredible rates for lenders and borrowers. But these sites may be prone to getting hacked or performing an exit scam.
Make sure you investigate the site, its security, its policies, and how reputable it is.
When you combine all this knowledge, you’ll be ready to dive deeper into crypto lending and how to use it for your benefit.