What is Crypto Lending? How does Crypto Lending work

In the finance market, crypto lending is becoming a new trend and growing in popularity. This model helps users to generate passive income from their idle assets. So what is Crypto Lending? How does Crypto Lending work? Let's find out with Market247.io in this article.

What is Crypto Lending?

Crypto Lending is a form of crypto asset owners lending idle coins for a certain period of time at a specific interest rate.

Currently, the cryptocurrency market consists of 2 types of exchanges corresponding to two forms of lending.

CeFi - Centralized: Centralized financial lending platform. With this type, there will always be a third party controlling the activities of the borrower and lender. Some reputable centralized lending exchanges today such as Nexo, BlockFi, Salt ...
DeFi - Decentralized: This is a lending platform in decentralized finance, completely eliminating the influence of third-party intermediaries. Borrowing and lending activities will be under the agreement of the two parties. Some decentralized lending exchanges are widely used today such as Maker, Fulcrum, Constant, Bzx...

How does Crypto Lending work?

Lending Coin is a form of creating funds for Margin Trading services, this is a type of margin trading, traders will borrow a certain amount of coins from the exchange to leverage their transactions. The question is where does this amount of coin come from?

Use coins from the exchange's reserve fund. This approach for exchanges will cause problems if the margin is too large, leading to a large amount of loans and now the exchange needs a large reserve fund to cover the amount of loans.
Borrow coins from users at a custom given interest rate. Then use this coin to lend in Margin Trading and Margin Fee.

It can be said that method 2 is quite popular and is being applied by exchanges to use for their Margin Trading. That is also the reason why brokers with Margin Trading products will often come with Lending.

When Lending on the exchanges, the coins will be included in the Margin Trading leverage mechanism. As for Lending platforms, the amount of coins lent will be used to lend to borrowers. In this case, the platforms will act as intermediaries and benefit from the difference between borrowing and lending rates.

Advantages and disadvantages of the Crypto Lending

Crypto Lending is a model that is becoming more and more popular in the crypto market. It has certain advantages and disadvantages as follows:

Advantages

Easy access to capital: As discussed above, anyone can join as a mortgage on an idle property and pay it back with a quick loan. This form can make it easier for them to get a loan compared to borrowing using traditional finance as before.
Smart contracts manage loans: Smart contracts will automate the entire process without third-party intervention. This makes borrowing and lending efficient and easy to scale
Simple passive income generation: Lenders can put their crypto in the pool and earn interest without having to manage their own loans.

Disadvantages

Liquidation Risk: Even with over-collateralized loans, cryptocurrency prices can change or fall dramatically and lead to asset liquidation.
Smart contracts can be hacked: If smart contracts are hacked by bad people, it will lead to the loss of your loan or collateral.

Impact of Lending on coin price

In the Crypto Lending mechanism, the coins participating in the pool will be locked for a certain period of time. This locking will positively affect the price of that coin. Specifically: TVL when locking a coin causes the circulating supply of that coin to decrease for a period of time The demand to buy coins to participate in lending increases

These two factors will make the price of the coin increase. However, other factors can also affect the price of the coin causing the price to barely increase. That is, the amount of coins participating in the lock is too small compared to the total supply of that coin, so the impact from buying demand and the decrease in supply is too small to cause too obvious an effect.

Besides, Lending is also a popular form for exchanges with Margin Trading products. In Crypto Lending, the exchange will hold a large amount of coins from the lenders deposited The exchange can release coins by using the amount of coins deposited by users to sell down, causing the coin price to plummet. After that, the exchange will use the money to buy at a lower price. Thereby increasing the amount of coins that the exchange is holding.

Important factors of Lending

Lending interest rate

This is the rate of interest a user can get for lending any crypto asset. The interest rate is considered to be the biggest purpose of promoting the lending behavior of lenders. Highly stable coins like ETH or BTC usually have lower interest rates than new coins.

Lending time

This is the period from the time the loan is issued to the time when the principal and interest are received. Each exchange will specify a different loan period. During the term, the user's coin will be locked and loaned to others. Lenders will not be able to withdraw their loan amount before maturity.

Lending assets

Each Crypto Lending platform will accept a variety of coins. As long as you own the authorized coin, you have enough lending facilities.

Total Value Locked (TVL)

TVL is understood as the total amount of assets locked inside the platform. TVL represents the level of user interest and engagement in the platform. The more assets locked inside, the more impact on the price of that coin.

Conclusion

Above are the most basic knowledge about Crypto Lending in the cryptocurrency market. Market247.io believes that you have an overview of the Lending mechanism and choose for yourself the appropriate form of lending. Don't forget to follow Market247's channels to update more useful knowledge.

Frequently asked questions

Can you make money from Crypto Lending?

Borrowers can often secure a crypto-backed loan at a lower interest rate than a bank loan, another advantage of crypto lending. Cryptocurrency lenders can generate passive income from their crypto holdings at rates often much higher than those on savings accounts.

How to start crypto lending?

To become a lender, users will need to sign up for a lending platform, choose a supported cryptocurrency to deposit, and deposit funds into the platform. On a centralized crypto-lending platform, interest can be paid in kind or in tokens of the native platform.

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What is Crypto Lending? How does Crypto Lending work - Market247.io