Decentralized finance (DeFi) has gained a bad reputation (if not explosive) throughout 2020 and 2021. The need for decentralization in financial markets is real, with central entities controlling the performance of this entire sector.
Today, let’s take a closer look at lending, the cryptocurrency lending activity. This field has gained popularity in the crypto world in a very short time, causing a lot of puzzles and interest from users and investors.
General information about lending
The concept of lending is very simple. Borrowers can use Digital assets as collateral to get Loan in fiat currencies or stablecoinswhile lenders provide the assets required for the loan to A Agreed interest rate. Lending can also work in the opposite direction. Borrowers will use fiat currencies or stablecoins as collateral to borrow crypto assets.
The amounts committed in decentralized lending protocols have increased during the recent period running bull. On the one hand, this is due to Increase in the price of the majority of assets. On the other hand, it’s thanks juice yield offered by these platforms. Until June, Aave, Compound, and MakerDAO were vying for the top-ranking lending platform. however, InsDapp It’s been gaining popularity lately and it’s coming up with new jobs thanks to its latest fundraiser.
On which platforms do you do lending?
As is often the case with cryptocurrencies, a novice can easily be overwhelmed by the number of options available to them. So we give you a quick overview of the lending platforms.
Decentralized Finance Lending (DeFi)
Decentralized lending platforms are standalone protocols that can be accessed by anyone at any time and without KYC (know your customer procedure).
These platforms, with the exception of Maker, whose decentralized governance system sets interest rates Interest rates that vary according to supply and demand from an asset. Crypto regulation of interest rates can lead to significant hikes when the demand for an asset is high.
protocols, such as complex where aviLets you lend your digital assets without going through an intermediary. Instead, a smart contract will be used to ensure that the loan will be Done properly. This smart contract will work automatically Operations when predefined conditions are met. This includes paying interest that may be periodic, and then dissolving the loan when the money is paid off.
When you lend cryptocurrency, you no longer own your assets: you send them to a smart contract. What you will get in return are bonds that prove that you are the owner of these loan assets.
Lending on MakerDAO
MakerDAO It decentralized autonomous organization, which develops borrowing and saving technology, as well as a stablecoin on the Ethereum blockchain. I created a protocol that allows anyone withEther (ETH) and wallet Metamsk To lend money in the form of a stable currency called DAI.
By blocking ethers, users can generate a certain amount of DAI. When users are ready to unlock their Ether, which acts as collateral for a DAI loan. All they have to do is pay off the loan and any fees. It was this project that developed establish What is now called decentralized finance.
When the loan guarantee falls below a certain threshold, it means The price of ether has fallen a lot compared to the amount borrowed from DAIThe loan has been liquidated. In other words, the Ether used as collateral is sold to repay the borrowed DAI, as well as fines and fees.
Lending on Aave
avi It is one of the most popular lending platforms on the market and a pioneer in the use of quick loans. these Instant Unsecured Loans Allowing users to borrow crypto assets without collateral, use them to buy an asset, sell that asset, and then return the original amount in the same transaction, all while making their own profit.
On the Aave platform, users deposit digital assets in “cash pools”. This then becomes the money that the protocol can then lend. Anyone who deposits their tokens into a group and “Provides liquidity” Receive Tokens (” to me ” for Aave). Therefore, if you deposit DAI into the liquidity pool, you will receive aDAI in contrast.
Central exchange lending platforms
Centralized lending platforms are very similar to traditional fintech companies Who work with cryptocurrency. These platforms tend to display Interest rates set by the company, which may be higher than that offered by DeFi protocols. But, to access it, this time you will have to follow the Know Your Customer procedure in order to open an account.
Among the most popular centralized lending platforms, we can mention BinanceAnd Queen Piece And nexo. These platforms much easier Beginners of DeFi protocols, both in terms of risks and ease of use.
Lending on Binance
At Binance, there is no need for any more questions about smart contracts and liquidity pools. enter a world CV Which, unlike DeFi, is centralized. Here, loan execution and asset custody are handled by the platform, in this case Binance.
The loan terms On a central platform in general less flexible than their decentralized counterparts. As you can see above, only Binance offers ‘Only’ 5 different deadlines beganing of 7 days to 3 months. You can of course split your crypto capital and lend across multiple time horizons. This will allow you to make your capital, while quickly getting back part of it. Once the money is committed, there is no going back.
Pros and Cons of Lending
Lending has undeniable advantages, but it also has various risks and disadvantages. Before embarking on your cryptocurrency loan adventure, you need to weigh the pros and cons of this allocation of your money.
What are the benefits of lending?
Attractive interest rates
The main advantage of lending remains particularly attractive interest rates. The Maximum interest rate for booklet A for 2021 in 0.5%. For comparison, the average return on loans for USDC is 6% and 8% for USDT, in July 2021. Finally, the average annual return for the major US stock index, the S&P500, is 8% between 1957 And 2018. So you can, in a few steps, get a return similar to that of the best fund managers.
In theory, you can lend any crypto asset you want. However, stablecoin lending is a great tool for Capital protection. By lending stablecoins, you can grow your capital, without exposing you to fluctuations digital assets. Of course, you have to keep in mind that there is no zero risk, especially in the world of cryptocurrency.
When you are in front of your bank, it is not always easy, if not completely impossible, to negotiate the terms of your loan contract. When it comes to lending, there are a wide range of possibilities. you can Commitment to money for an indefinite periodor chooseGet a better return and lock up your money for a few months. Some platforms offer a monthly repayment schedule, but it is also possible to pay off the loan in one go. In the general case, your banker This option will not allow you toBecause it is compensated based on the interest you pay and sometimes on the loan insurance.
What are the disadvantages of lending?
Market and Liquidation Risks
Cryptocurrency isOne of the most volatile asset classes. If you are borrowing a large portion of your portfolio and the rate has fallen, you may need to deposit more coins to increase your collateral. In addition, the lending platform You may sell some of your assets to lower the loan-to-value ratio. This means that borrowers need to carefully monitor the collateral ratio to ensure a margin of safety.
Within the DeFi ecosystem, smart contracts govern how loans work. So it is Errors or loopholes in these contracts may be exploited By malicious actors to steal money deposited as collateral. Every week we have at least one new DeFi ad that gets hacked. However, on veteran platforms, such as complex where aviThis is amazing risk he is less Although it still exists.
Automatic interest rate balancing
When it comes to decentralized solutions, the . fileThe massive influx of capital on a specific protocol It will greatly affect interest rates. If you place a digital asset on a platform and the whale has the same idea as you, the effective return of your cryptocurrency will likely drop sharply. If you are not careful, it is possible to lose a small percentage of the return.
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