NEW DELHI: Lending and borrowing in crypto has caught momentum and signals the start of a new financial era.
Centralized crypto financing like BlockFi have gained a strong foothold with 4,50,000 retail customer base. Let’s get an insight into the modus operandi, types and attributes of crypto-based financing.
How does lending and borrowing in crypto take place?
In crypto financing, borrowers avail loans in dollars or crypto by keeping digital assets as collaterals as in a conventional bank. After collateralizing cryptocurrencies, you remain the owner of that collateral but you cannot use it for trading or making transactions.
Excitement comes in with loans priced at almost half the value of collaterals, no credit checks in both DeFi and BlockFi. high gains when crypto appreciates, but bigger losses if it doesn’t.
For crypto lenders or depositors, the annual performing interests (API) can be as high as 8.6 percent in BlockFi compared to 0.006 percent in traditional banks.
A look at the types of crypto lending options available in the global market :
Based on the regulatory framework, crypto financing can be of two types: Centralized and Decentralized.
Some of the key features of decentralized crypto services are :
* Decentralized financing uses Automated market makers(AMM), which means lending, borrowing rates are determined algorithmically based on real-time supply and demand of each crypto asset in the market. This also allows lenders to withdraw deposits at any time.
* Ensures transparency as transactions are available on digital ledger for everyone to see.
* Complete absence of regulation allows everyone access to basic banking services with no KYC and complete anonymity.
* Interest rates in DeFi platform are voted and decided by the user-community who are provided governance tokens as rewards on lending.
* DeFi does not have Know Your Customer(KYC) , allowing anonymous users.
Risks involved in DeFi:
* Losing money with the depreciation of currency,
* Sudden closure of financial projects after the influx of liquidity and other scams.
* Technology risks like code errors can make it vulnerable to hacking.
Some of the leading players in the DeFi financing are Compound, MakerDAO, Pancake.
Now there are two popular kinds of DeFi. These are Yield Farming and Stablecoin lending.
Yield farming or lquid mining :
* This method helps people earn passive income by depositing or lending one’s idle cryptocurrencies in DeFi banks in the hope of greater interests in future.
* The cryptocurrencies lent are in turn circulated in the liquidity pool which is passed to the borrowers.
* The entire process operates on blockchain-based smart contracts.
* The interests get higher with an increase in the value of digital assets.
* However since yield farming involves volatility, it needs active monitoring and the good knowledge of the market trends.
Stablecoins lending:
* Stablecoins being pegged to fiat currency are low-risk assets and are hot favourites of safe-playing crypto users,
* These give good returns even when crypto value does not appreciate, as stablecoins offset the volatility because of being attached to fiat money.
Following are the features of Centralized crypto services:
* To begin with BlockFi is not a company, but an entire set of new digital, blockchain based centralized and regulated banks.
* It has perhaps affected traditional banking most, as it offers a crypto model of savings, lending, credit cards besides trading platforms within the regulatory framework.
* It follows KYC and disallows anonymity.
* They offer basic retail and investment banking products, like savings accounts, loans and a trading platform.
(For the latest crypto news, investment tips and real-time price updates, follow our Cryptocurrency page.)

(Excerpt) Read more Here | 2021-09-13 08:23:00
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