The growth of the cryptocurrency space has created a new world of financial opportunities for anyone with an internet connection. The inception of DeFi further expanded these by bridging financial services and crypto.
We have talked about what DeFi is in the past. Today, we will be taking a look at one of the most popular services provided by DeFi platforms: Cryptocurrency loans. Cryptocurrency lending and borrowing are great tools to improve your investment strategies, with each of them offering great benefits.
Borrowing money from banks has proven to be one of the most difficult financial services to access for many people. However, DeFi is making it easier than ever to access loans in a matter of minutes.
By making use of open and decentralized protocols, DeFi platforms allow users to access loans instantly and collateralize their assets without any of the traditional barriers, creating new financial opportunities for people around the world.
This is possible by connecting those interested in generating revenue by lending funds with those looking to borrow. As blockchain allows the automation of all the processes by using smart contracts, trustless transactions as possible.
The result is that the parties don’t need to know or even trust each other, as collateral locked in a smart contract ensures the payment of the loan.
What this means for you as an investor is that you can use your crypto savings as collateral to obtain instant liquidity if needed. This liquidity can be then used in a variety of ways like traded for fiat, used to acquire a coin you expect to increase in value, buy goods, or any other way you need.
In addition to these uses, many crypto platforms also allow you to stake your collateral while the loan is active. By doing so, you will pay less interest on the loan, which will save you money in the long term.
If you are unable to pay the loan on time, there are two options: Some platforms will extend the loan while increasing the interest rate while others will just liquidate it.
This means your collateral is automatically traded and used to pay for the loan. This is the same process that takes place if the cryptocurrency used as collateral losses too much value in relation to the one you received. If you pay the loan, your crypto gets immediately returned to your wallet.
The benefits of this practice are pretty straightforward: Liquidity providers get to earn interest on their crypto while borrowers get liquidity when needed. The process only takes seconds and doesn’t require a credit check. This, and the fact that there is no risk for any of the parties, has made crypto loans one of the most popular crypto services.
