Home Borrowing crypto, what are the advantages?

Borrowing crypto, what are the advantages?

Earn bitcoin

5 min read

You certainly know that on DeFi, you can borrow and lend cryptocurrencies. Whether you lend crypto or borrow it, both have financial benefits.

Crypto lending and borrowing are even the most used services in DeFi and those which were at the origin of the success of decentralized finance.

You can use sites like Nexo or Youhodler, for example, and generate 4% on Bitcoin and up to 12% on stablecoins like USDT. Youhodler is a CeFi platform (meaning it's a centralized company specializing in cryptocurrencies). It's one of the sites we use to generate weekly income from our crypto holdings.

It was through these services that we understood the advantages of decentralized finance over traditional finance. Many people were indeed excluded from the banking system and unable to obtain loans because getting approval from a bank was so complicated. Paperwork, asset verification, the requirement of having a permanent employment contract, etc., were all necessary. Now, these formalities are unnecessary in DeFi.

If you haven't understood the revolution caused by cryptocurrencies, here it is presented on a silver platter.

Then, and this is certainly the most attractive point of this new system, it turns out to be more advantageous in financial terms for both parties.

In this article we will look at the advantages of borrowing crypto and see how it works in general.

How Crypto Borrowing Works

Borrowers in decentralized finance can do so without intermediaries. They borrow from other users who are lenders. The lending is peer-to-peer. Lenders and borrowers connect on a platform, electronically subscribe to a smart contact, and carry out their transactions. All transactions are completed in just a few clicks, without any intermediaries.

Here are the points to remember before getting into the details.

Borrowing crypto is available to everyone on DeFi. These are loanst loans made between individuals (other users on DeFi). It's anonymous and to take out a loan, you don't have to fill out any paperwork or any administrative tasks.
The crypto lending and borrowing system is a win-win system for both parties. The borrower benefits from liquidity without having to sell his capital. The lender receives interest on these loans.
Each lending pool is different depending on the protocol selected. Everyone must do in-depth research to select the pool/interest rates/cryptos that best suit them.

Why are interest rates higher on DeFi?

As with traditional loans, a lender will charge interest on the loan and the borrower will have to repay the interest plus the money borrowed within a given time.

It's certainly more obvious to understand how a lender makes money. It is in fact relatively similar to traditional finance. The lender receives interest on the money he lends.

If you are wondering why interest rates are higher on DeFi, know that there are several reasons for this.

The first big reason is that there is no middleman in the loan process. Understand that there is no banker, room rental, lawyer, contract, papers, etc. which represent significant costs when taking out a loan in traditional finance.

*With cryptocurrencies, you can borrow the amount you want in just a few clicks* with sites like Youhodler.

On Defi, the only fees we have are transaction fees. These fees are paid back to the network on which the loan is made. So, beyond the completely legitimate fees (to pay blockchain miners), there is nothing to pay. In effect, the lender receives a higher interest rate.

What are the benefits of using crypto lending and borrowing over DeFi?

In fact, lending and borrowing in DeFi offer advantages to both parties. Lending means that lenders earn interest on the money they lend. It's even one of the best-known methods for generating passive income in the crypto world.

Likewise, borrowers can access loans at much lower rates than if they went through traditional loans.

There is nevertheless a big difference in the mechanics of bank lending and DeFi. When you take out a loan from your bank to buy real estate, your real estate becomes the collateral. If you fail to meet the payments with interest, the bank will seize the property.

So far, it is quite clear to understand because we are used to the banking system.

In DeFi, things are somewhat different. Instead of having a tangible asset (like a house or a car) as collateral, cryptocurrency is used as security. For the system to be reliable, the borrower must offer collateral equal to or greater than (often even twice as much as) the loan amount.

Very often, people borrow stablecoins like Tether (USDT) and deposit their cryptocurrencies (Ethereum, for example) as collateral. This way, borrowers don't have to sell their crypto and risk buying it back at a higher price. It's a perfect option for someone who wants to hold onto their cryptocurrencies and quickly access additional liquidity.

To give you a more concrete example, tell yourself that it's like if you wanted to buy a new car (obtain cash). You will then put your old car as collateral and take out a loan. Once you repay your loan, you keep your old car and in addition you have obtained a loan at a better rate than in traditional finance.

Final Word on Borrowing Crypto on DeFi

Finally, we must not forget that each platform has different interest rates and rules. Likewise, you can use centralized platforms and decentralized platforms to borrow or lend your cryptos.

You should also know that there are risks of liquidation penalties for borrowers. This can happen if the value of your collateral drops. You will then have to increase, for example, the value of your guarantee. On Defi, there may be more complicated mechanisms on certain platforms to better manage the risks of your positions.

It's up to you to choose which platform you want and you are spoiled for choice.

On Cefi: Sites like Nexo , Youhodler , and Celsius allow you to easily lend and borrow. You can generate income every week with just a few clicks.

?On DeFi: Platforms like MakerDAO, Compound, and Have allow you to lend and borrow crypto on DeFi immediately.

Disclaimer : This article is provided for informational purposes only. It is not financial, legal, tax, or investment advice. Always conduct your own research before investing in cryptocurrency.

To buy cryptocurrencies (in a simple way) :