An In-Depth Guide to Crypto Borrowing and Lending
The concept of borrowing and lending has been present since the dawn of time. Borrowers get to enjoy the benefit of having instant cash. At the same time, lenders expect to get additional money in the form of interest, making it a win-win situation for both parties.
Due to the sudden boom of cryptocurrency, and platforms such as Decentralized Finance (DeFi), borrowing and lending have also spilled over to the world of cryptocurrency. Knowing the differences and similarities between traditional financial institutions and crypto platforms when it comes to lending and borrowing can prove to be beneficial to potential investors.
In this article, we are going to be discussing everything regarding crypto borrowing and lending. We will be diving deeply into what makes everything work and its similarities and differences to the traditional lending and borrowing concept.
DeFi Crypto Borrowing and Lending
Several DeFi platforms cater to crypto borrowing and lending, and all of them work towards creating a permissionless system that allows users to transact directly with each other. The whole process of crypto borrowing and lending goes through Smart Contracts–programs built specifically to help see these processes through, allowing peer-to-peer transactions to happen.
Borrowers will get the amount of crypto they want to loan, but not before leaving collateral, which has to be greater than what they are borrowing. Collaterals serve as insurance and are required to ensure that the borrowers will not run off with the crypto they loaned. Borrowers will get the collateral they left after paying the amount of crypto they loaned in full.
Lenders, on the other hand, earn crypto through interest. The type of crypto they make can be similar to what they put up for a loan, but they can also earn a different cryptocurrency. Every process is done through Smart Contracts, ensuring smooth transactions between individuals.
Since DeFi is essentially in its infancy, risks are involved, like Smart Contracts being hacked and “Impermanent Loss.” Impermanent Loss happens when the value of the tokens an investor receives is not the same as the value of those tokens when they invested it. Impermanent Loss thus creates a discrepancy between what was invested and the expected returns.
DeFi Crypto Borrowing and Lending
Centralized Crypto Lending can be classified under Centralized Finance (CeFi). A CeFi system works similarly to how banks operate their businesses, as they require certain background checks and security measures to be put in place before someone can get a loan.
CeFi is a more secure way of transacting with other people because of the security checks. However, since Individual companies also control CeFi platforms, risks are also involved. Different CeFi platforms have varying rules in place, and some of these rules might not work to your benefit; that is why it’s essential to do a lot of research about these platforms.
Crypto Borrowing and Lending vs. Traditional Borrowing and Lending
Both traditional borrowing and lending and crypto borrowing and lending work under the same premise: the lenders earn through interest, while the borrowers get instant cash or crypto. The difference lies with how high the risks are and how strict the guidelines are.
Although DeFi lending platforms aim to establish a permissionless, peer-to-peer system, the risks are still substantial because the platforms rely on how stable a program (Smart Contract) is. If the programming of the Smart Contracts has been compromised, it can be susceptible to hacks and other undesirable effects.
On the other hand, while traditional borrowing and lending offer security, its security is one of its drawbacks as well. With the need to provide identification and further proof, traditional lending institutions might not be an ideal option if you’re looking to lend or borrow money quickly.
Traditional lending institutions also suffer from problems that plague privately-owned companies, like corruption and changes in management and policies. These problems also mean that risks and changes are associated with choosing the traditional lending route.
The most important thing to do before committing to any lending service is to research these companies or platforms. Knowing the risks and the benefits associated with these options is crucial to getting the most out of your transaction.
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Backed by world-class investors, RAMP DEFI is an optimized lending platform that aims to give users the highest deposit yields and lowest borrowing fees on collateral assets within Binance Smart Chain and Polygon.
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