A crypto loan is a type of secured loan, similar to an auto or student loan, in which you commit to an asset as collateral in order to secure financing.
What Is a Crypto Loan?
A crypto loan is a type of secured loan, similar to an auto or student loan, in which you commit to an asset as collateral in order to secure financing. In this case, cryptocurrency is the asset offered to a lender in exchange for cash.These crypto-backed loans are secured loans that use digital assets, like Bitcoin, as collateral. The loans are usually paid out in stablecoins, which the borrower pays back over time.
With crypto loans, lenders (usually other users) lend cryptocurrencies to different users (borrowers) who are people looking to borrow cryptocurrency. In return for providing capital for borrowers, lenders receive interest payments.
Some crypto lending platforms are custodial — manage funds and approve transactions on behalf of their users. Others are non-custodial — with users managing their own funds and approving transactions themselves from personal own software wallets or hardware wallets.
Crypto lending allows users to take full advantage of crypto investing as the value increases the longer you hold onto your cryptocurrency without selling them. Another advantage to crypto loans is how fast the loan transaction takes place. Unlike traditional finance loans, there is no credit check or any qualification process involved so the platform distributes funds instantly. The loan amount is based on the collateral asset’s value, and some crypto lenders will allow borrowers to receive a loan worth up to 50% of their collateral value.
But, there is of course a large risk factor, as the crypto markets are extremely volatile. With huge wins come huge liquidation losses. There are also margin calls where users might find themselves in a situation where they have to add extra collateral to avoid liquidation. Depending on the platform you’re using, certain cryptocurrencies might not be eligible for loans, so you might have to first exchange one cryptocurrency for another.
Crypto loans are distributed through a few steps. The borrower goes to request a crypto loan through a platform and selects a loan amount and loan term. Then, the borrower stakes the crypto collateral before the loan provider pays out the loan.
The crypto lender will fund the loan and collect the interest as payments. Once the borrower pays off the entire crypto loan, the crypto lending platform will send the collateral back.
Some of the most innovative crypto lending platforms include Aave, Compound, MakerDAO, and SmartFi.
Author: Kadan Stadelmann, CTO of Komodo, a leader in blockchain interoperability and atomic swap technology.
Kadan Stadelmann is a blockchain developer, operations security expert, and Chief Technology Officer of Komodo, an open-source technology provider that offers all-in-one blockchain solutions for developers and businesses. Komodo works closely with organizations that want to launch their own custom decentralized exchanges, DeFi platforms, and independent blockchains. Its flagship technology and end-user application is AtomicDEX – a mobile and web-compatible non-custodial multi-coin wallet and atomic swap-powered DEX rolled into one dApp. Kadan strongly identifies with Komodo’s open-source vision and ideology. His dedication to the Komodo project is founded on an unwavering desire to make the world a better place. In addition to cryptography, blockchain technology, and development, Kadan is interested in literature, mathematics, astrophysics, and traveling.
