In recent years, there has been the emergence of unsecured lending platforms or protocols with no collateral requirements that aim to increase the capital efficiency of borrowers. These lending methods perfected by blockchain allow individuals to build credit.
Cryptocurrency loans
Cryptocurrency loans are הלוואות מובטחות individuals get from cryptocurrency exchanges or other forms of crypto lending platforms. Its function is similar to car loans or mortgages, where you use these assets as collateral. However, in this case, your cryptocurrency is used for securing the loan funds.
Cryptocurrency financing also lets investors borrow loans in crypto or cash offered by offering cryptocurrencies they own as collateral. As the lender, you remain the asset owner, but the cryptocurrency provided cannot be used for any transaction during the lending period.
Cryptocurrency loan types
There are several types of cryptocurrency loans, including the following:
הלוואות בבטחונות
This is the most common type that requires a deposited cryptocurrency used as loan collateral. Most crypto platforms need over-collateralization, meaning borrowers can only access up to a specific percentage of the collateral deposited. This is usually below 90% הלוואה לפי שווי (LTV). A low LTV equals a low-interest rate and also a low risk of being margin-called.
הלוואות ללא ביטחונות
These are less popular; however, they are similar to personal loans in their function. Here, borrowers usually fill out loan applications and pass an identity verification and a creditworthiness review if the loan is to be approved. However, these loans typically have a high risk of loss for lenders since there isn’t any collateral for liquidation in case of a loan default.
קו אשראי קריפטו
Some crypto platforms provide a cryptocurrency line of credit instead of traditional loans with a fixed term length. For instance, individuals can borrow BTC ל- USD, but in a specific percentage of the deposited collateral. However, there is no repayment term, and users are only charged interest on withdrawn funds.
How DeFi facilitates loans with low collateral requirements
Over the years, decentralized finance (DeFi) has rapidly expanded the financial services and instruments ecosystems. Unlike traditional centralized finance (CeFi), it offers many tools that allow growth and generate wealth. Additionally, individuals don’t need huge funds or previous experience in investing to use them.
DeFi has allowed individuals worldwide to improve their מצב פיננסי. Individuals don’t require approvals from centralized institutions, brokers, or bankers to trade or invest. Uncollateralized loans enable individuals to access funds when they don’t own the assets for collateral.
This grows DeFi features like Peer-to-peer (P2P) loans, complete asset management, global availability, devoid of centralized authorities control, and the immutable security of blockchain technology.
DeFi also allows effective and quick borrowing and lending at low-interest rates. This results in individuals being able to borrow money for various reasons, irrespective of their background or income.
This is where uncollateralized loans become essential. The option for individuals to gain access to zero or low collateral attracts others to DeFi. This will result in an expanding ecosystem with more financial tools. DeFi might have more beneficiaries and users than centralized systems.
Advantages of Collateralized Loans
Individuals with the asset can apply for a cryptocurrency loan and enjoy the following benefits:
שיעורי ריבית נמוכים
DeFi borrowing platforms usually include a minimum of 10% interest rate with loans. This rate is reasonably affordable for many borrowers and an excellent alternative to traditional bank loans.
Assets determine the amount of loan
Your assets determine the amount of loans you can access. Depending on your asset, it can be as high as 90%.
A wide range of loan currencies
DeFi loan platforms have grown to include many cryptocurrency assets and fiat currencies. As opposed to banking institutions’ loans, DeFi provides users with numerous sources.
ללא בדיקת אשראי
Individuals who have applied for a bank loan understand the slow process of bureaucracy it involves. Having reliable collateral and an excellent credit check would speed up the process. However, with cryptocurrency loans, you can access these loans with no אשראי or poor credit history.
Get funds quickly
Many lending platforms offer borrowers their requested loans within a few hours. This means you can get the money you require for your project within the same day of request.
An opportunity to earn passively
When you lend to other investors, you can passively earn income. For instance, many DeFi platforms let users make an interest when they place their assets into the liquidity pool. Doing this allows you to sit back and watch your money multiply instead of vice versa.
Disadvantages of Collateralized Loans
While collateralized DeFi loans may look good, they could be better. They also come with several risks, such as:
תנודתיות בקריפטו
A significant issue with offering your crypto asset as collateral is that cryptocurrency’s value usually falls at any time. The cryptocurrency market is known to be very volatile. If your security value falls, the lender will require that you raise the collateral. Additionally, the platform might sell the borrower’s collateral to reduce the loan-to-value ratio.
כספים נעולים
Another disadvantage of collateralized loans is that you must lock the assets for the duration of the loan. For instance, borrowers can only get their collateral once the loan is repaid. On the other hand, lenders have to wait for borrowers to pay back. It could pose an issue if you hurry to get your cash.
Different terms of repayment
The cryptocurrency market has a high market volatility. Many platforms have a short repayment time as a result. You must pay what you want quickly. The downside is that you stand to lose your money due to margin calls. This also impacts your loan amount because large loans are challenging to repay, so they are scarce as a result.
שום ביטוח
Against traditional bank loans, there is no insurance with lending DeFi collateralized loans. When the lending platform fails or defaults, your funds become lost, whether collateral or loans. Without insurance, you will need help to retrieve your money.
נסיגות איטיות
Many lenders usually need help getting their interest-rate passive income. Many lending platforms want to keep their lending pool full. They make the withdrawal process very slow, which can be very frustrating for many.
Advantages of uncollateralized loans
As DeFi gradually replaces traditional financial tools, uncollateralized loans have allowed individuals with little assets to get access to funds that were previously inaccessible. The following are some of the advantages you stand to gain when applying for an uncollateralized loan:
זמן עיבוד מופחת
Borrowing and lending are now more straightforward than before. Compared to traditional loans, the application process is seamless and reduces transaction time. Its easy availability and getting the money quickly make it a preferred choice for many.
גמישות גבוהה
Uncollateralized loans are very flexible and can be used for different purposes. You are free to use them for precise purposes like housing or automobiles.
Fewer risks
Uncollateralized loans offer reduced risk for the borrower. There is less threat of losing property or assets kept for collateral. Additionally, it is cost-effective for individuals who don’t have enough possessions.
Disadvantages of uncollateralized loans
While uncollateralized loans have several advantages, they are not risk-free or flawless. They have disadvantages, just like collateralized loans. Let’s find out some of them:
No regulatory body
Web 3.0 creates an absence of regulatory intermediaries and institutions. This results in risk and a doubtful lending ecosystem. Since the transactions are usually anonymous without user identity authentication, it increases the risk of theft, money laundering, and other illegal activities.
קריטריונים לזכאות
Since financing isn’t baked by security, lenders usually set strict criteria. Some common instances include no underlying debts, high ציוני אשראי, ועוד.
Negative popularity
Apart from market volatility, a crypto asset can be affected by negative popularity. A loan’s value might drastically reduce and result in the lender losing their fortune.
סיכונים טכנולוגיים
These are found in the blockchain protocols powered by smart contracts. There has been an increase in faulty transactions, identity thefts, system bugs, cybersecurity threats, and more, which results in transactional errors and high transaction fees.
How to access cryptocurrency loans
- You must own any cryptocurrency accepted for loans before you can get a crypto loan. Ensure the lender accepts your cryptocurrency.
- Next, find reputable lenders while comparing their interest rates, funding time, and תנאי החזר. Every lender has its application process, so carefully read their terms and conditions and eligibility requirements.
- Now, create the account with the chosen lender, then begin the application process.
- Complete the account creation process by verifying your identity and crypto holdings. Note that there is no אשראי check for cryptocurrency lenders.
- Now, choose the loan amount you want and the terms of repayment. Most cryptocurrency platforms have calculators showing you the collateral amount required for your preferred loan.
- The last step is to submit the request.
- Cryptocurrency lenders usually have a fast turnaround time, with some approving and sending the funds to your account within 24 hours.
סיום
As decentralized finance keeps growing, more financial services and products are being built on blockchain. Crypto lending is one of the new and successful applications of DeFi services, and many crypto platforms and exchanges offer ending and borrowing services. Investors deposit cryptocurrencies while the platform lends them out to borrowers with interest.