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Lending has revolutionized the crypto economy, giving hodlers a way to access cash while keeping their tokens and coins. Providing loans against cryptocurrencies is the core activity for dozens of businesses, and their popularity is soaring. But are such loans safe, and what should you consider when searching for a provider?
Cryptocurrencies, unlike fiat, are susceptible to market volatility, so they may theoretically gain value while sitting in your wallet — holding on to crypto is different from keeping wads of cash in a safe. Yet one must sell their assets to collect profit, accepting the opportunity cost. Crypto loans provide an alternative — a way to get cash without letting go of potentially lucrative holdings.
That said, crypto loans resemble conventional collateralized borrowing. Banks provide a yield on deposits and lend those funds to other clients at a higher interest rate to make a profit. Crypto lending is based on the same principles, but it eliminates paperwork, credit checks, and other standard requirements. Borrowers do not have to prove their solvency; approval is usually instant.
Banks use complex algorithms to assess creditworthiness. Traditional institutions may require multiple documents, including proof of income and employment status. Typically, the more guarantees, the lower the rate. Although crypto platforms do not set such hurdles, they still protect the lender’s interests if a borrower defaults on their loan.
To be eligible for a loan, one has to pledge coins or tokens whose market value exceeds the amount they wish to borrow. The LTV (Loan-to-Value) rate defining the collateral amount varies from lender to lender and depends on asset volatility. On average, crypto lenders impose LTV rates between 30% and 70%, so all loans are over-collateralized.
For example, 50% LTV means one may borrow exactly half of what their collateral is worth. So, what happens if the market goes south, causing the collateral to depreciate? By the same token, what if the loan currency goes up?
To protect themselves from such risks, lenders set an LTV threshold. Crossing it triggers liquidation — selling the collateral on a crypto exchange. The same happens if the borrower fails to meet their obligations. Whatever happens, the lender can still get their money back.
Crypto lending platforms are divided into two categories depending on how they are managed.
These platforms resemble traditional credit organizations in many respects. They operate as legal entities, have licences, and provide customer support. Collateral funds are usually stored in a custodian’s cold vaults.
In terms of speed and convenience, such sites are superior to conventional banks. Everything is handled online via a user-friendly interface, approval is almost immediate, and no credit checks are involved. However, users must provide basic personal data to complete KYC verification procedures for AML compliance.
The infrastructure of DeFi (decentralized finance) relies on smart contracts for supreme decentralization. These are pieces of code containing automatic, self-executing agreements. Furthermore, all operations occur on the blockchain, so they are publicly traceable via blockchain explorers.
In DeFi, information about market prices comes automatically through oracles, while transactions run entirely on smart contracts without customer support. Furthermore, many platforms have relatively complex interfaces that can be daunting to novices.
That said, DeFi lenders are more in line with the classical blockchain ideology. Unlike CeFi platforms run by businesses, they eliminate unilateral control.
Here are five prominent names in the space of crypto lending.
This platform is an all-in-one crypto environment with loans, earning opportunities, and a wallet supporting payments at merchants worldwide. The crypto credit program lets you borrow up to 50% of the collateral value and customize your repayment schedule.
Crypto.com offers only four loan currencies — popular stablecoins PAX, USDT, USDC, and TUSD. The choice of collateral is wider — users can pledge 20+ cryptocurrencies, including BTC, ETH, stablecoins, and Cronos (CRO), the firm’s native token. They may also unlock the best conditions by staking CRO, although the minimum value requirement is $40,000.
The standard annual rate is 12%. After a loan is approved, the amount arrives in the user’s crypto wallet on crypto.com. The company’s app is versatile, giving easy access to personal portfolios, an exchange, and multiple ways to manage and spend crypto. On the downside, the website lacks educational resources, and customer support has a poor Trustpilot rating (2 out of 5 at press time).
CoinLoan is a pioneering lender that offers crypto-to-crypto, crypto-to-fiat, and fiat-to-crypto loans. Its web platform and mobile app are intuitive and easy to navigate, with all the necessary features at hand. As of this writing, the choice of loan currencies includes 15 assets — cryptos, stablecoins, euros, and pounds.
Those applying for a loan may select a convenient LTV rate between 20% and 70% and a standard or customizable period between one month and three years. Approval is immediate — the only condition is sufficient collateral in your CoinLoan wallet.
CoinLoan is licensed and regulated as a virtual asset service provider in Estonia. It complies with applicable regulations, including AML laws, and ensures ironclad protection of user data and funds. Your collateral will be held at a trusted custodian and returned safely once the loan is repaid. Users looking for deposit opportunities may also consider the company’s interest accounts with fixed and flexible terms.
Nexo offers instant crypto credit lines with APR from 0% (only for Gold and Platinum members with LTV below 20%). There are no origination fees and monthly repayments – users can pay their balance off partially or fully when convenient.
Loan currencies include over 40 fiat currencies and two stablecoins — USDT and USDC. A unique leverage feature, Nexo Booster, lets holders trade with up to 3x the available balance. Like other popular providers, Nexo warns borrowers of margin calls in advance via email and SMS. However, the best conditions require premium membership and maintaining the lowest LTV rate.
This licensed provider is overseen by regulators in the EU, the US, Hong Kong, and Seychelles. Furthermore, it offers a crypto Visa card — a service that contributes to crypto adoption by facilitating the use of digital assets for everyday needs.
MakerDAO is a decentralized autonomous organization launched in 2017. It offers flexible loans in Dai, its native stablecoin backed by collateral on the platform. Maker aims to democratize crypto lending, driving DeFi forward. All lending processes are secured by smart contracts called Maker Vaults, while loans are referred to as collateralized debt positions.
Borrowers may pledge different Ethereum-based assets approved by the maker community. As Dai is a stablecoin, they do not need to worry about market fluctuations. The LTV rate (debt-to-collateral ratio), which initially started from 50%, may rise substantially, depending on the market conditions.
The value of Dai is supported by the funds in Maker Vaults and internal mechanisms, including the stability fees, which prevent excessive minting. What’s more, using convenient on/off ramps on regulated platforms, borrowers can convert Dai into fiat quickly and safely.
Aave is a well-known name in DeFi lending. This decentralized protocol offers users various innovative services, including crypto loans and deposits. It connects borrowers and lenders directly, offering loans in crypto backed by crypto. Currently, the platform supports six blockchains, including Ethereum, Polygon, and Avalanche.
The central mechanism — the liquidity pool — accumulates deposits that are subsequently lent out. All transactions are instant and automatic based on smart contract rules. On the downside, borrowers having problems with repayment do not have an opportunity to contact customer support and explain their situation. Users with little experience in crypto may find the system overly complex, as it requires knowledge of basic DeFi mechanisms.
The system uses the so-called health factor to evaluate the safety of loans across multiple risk parameters. Aave loans do not have a fixed period – if their collateral is sufficient, users can borrow for as long as needed.
Borrowing against crypto is easier and faster compared to the hassle of conventional consumer loans. The mechanism of over-collateralization eliminates credit checks and other solvency proofs. Not only are credit scores challenging to repair, but they also decline due to technical errors.
In the crypto space, approval is usually instant, as collateral is the only requirement. Although users of CeFi platforms complete KYC procedures to verify accounts, providers try to make them as efficient as possible, reducing the time to minutes. In comparison, DeFi allows anonymity, but the absence of customer support and clear regulations may be a turnoff.
Funds borrowed against crypto can be used for any purpose — large purchases, renovation, refinancing, down payments, and more. However, those who use borrowed crypto for high-risk purposes (such as funding another coin) must take full responsibility for any losses they may incur.
As the crypto market is still maturing, applicable regulations vary, so users should be careful to choose a platform that works in their jurisdiction legally. In addition, it is advisable to consider insurance and custody solutions, years in business, professional reviews, customer feedback, and more.
All in all, crypto loans are a hassle-free way to get cash for any purpose. Instead of selling cryptocurrencies and missing out on potential upswings, hodlers can pledge them and return after repaying their loans. This service is more accessible, convenient, and efficient than collateralized bank loans. However, users should choose their provider carefully and compare interest rates and fees, which vary significantly.
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