Borrowing crypto: What are the advantages of doing it?

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 Nexus or Youhodler for example and generate 4% on bitcoin and up to 12% on stablecoins like USDT. Youhodler is a so-called platform CeFi (i.e. it is a centralized company in the field of cryptocurrencies). This is for example one of the sites that we use to generate income every week on our cryptos.

It is with these services that we understood the advantages of decentralized finance over traditional finance. Many people were in fact excluded from the banking system and could not qualify for loans as it is so complicated to obtain the banker's agreement. Paperwork, verification of assets, need to have a permanent job etc. are required. Now these are unnecessary formalities 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 this without an intermediary. They will borrow from other users who are lenders. The loan is done peer-to-peer. Lenders and borrowers meet on a platform, subscribe to a smart contact electronically and carry out their transactions. All operations are done in a few clicks, and without an intermediary.

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 on DeFi provides benefits to both parties. Lending means that lenders earn interest on the money it lends. It’s even one of the best-known methods of generating passive income in the cryptosphere.

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.

On DeFi, this is somewhat different. Instead of having a tangible asset (like a house or a car) that will serve as collateral, we will use cryptocurrency as collateral. For the system to be reliable, the borrower must then offer a guarantee equal to or greater (often, it is even twice greater) than the amount of the loan.

Very often people borrow stablecoins like Tether (USDT) and deposit their cryptos (Ethereum for example) as collateral. Thus, borrowers do not have to sell their crypto and take the risk of buying them back at a higher price. This is a perfect option for someone who wants to hold their cryptos and get extra liquidity quickly.

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 Nexus, Youhodler et Celsius allow you to lend and borrow easily. You will be able to generate income every week in just a few clicks.

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

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

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