Loans in the world of cryptocurrencies

New technologies such as blockchain enable us to use available innovations in various areas of life. Not only do they help you perform complex calculations, but they also come into the field of finance and investment. Due to the undeniable profit-making opportunities through cryptocurrencies, it is the most exciting and rapidly growing field.

After introducing cryptocurrencies to the widespread use or playing them on the stock exchange, a natural consequence is the emergence of loan services in cryptocurrencies. Experts believe that this year we will see a significant increase in innovation in this field.

Cryptocurrency loans can be taken in two ways. Either through the crypto exchange or through the loan platform (DeFi).

The basics are very similar to those for a bank loan.

Before granting a loan, the bank checks the customer and his creditworthiness, and only then determines the amount of the loan he decides to grant.

When it comes to cryptocurrency loans, the borrower must provide some security before borrowing any cryptocurrency. Lenders by transferring their cryptocurrencies to the pool from which the loans come out can count on the return of interest from that pool.

If the cryptocurrency that is the collateral has a low value, the borrower will receive only a part of the value of the collateral from the lender. Thanks to this procedure, the margin of movement of the cryptocurrency’s hedging value is ensured, and if the collateral drops below the loan value, the borrower may add more funds or lose his collateral and the loan amount will be returned to the lender.

The Smart contract watches over the course of the process, thanks to which the whole is clear and transparent.

When the borrower repays the loan with interest, he also gets his security back.

But you can take advantage of loans witch are unsecured — these are flash loans.

Flash takes place through a smart contract in four steps, if any of them cannot be realized, the funds are returned directly to the lender. This requires quick action.

The first step is to transfer funds to the borrower’s portfolio.

In the second step, the borrower buys cryptocurrencies and the third step is to sell the purchased cryptocurrency with a profit.

The fourth step is to transfer the loan with the fee to the flash loan smart contract from which the funds were withdrawn.

The undoubted advantage of cryptocurrency loans is the availability of capital because you can get funds in a much simpler way than in traditional finance. And the management of loans by Smart contracts increases the efficiency of the process and makes it easier to generate passive income.

However, it is important to remember about the disadvantages that occur mainly in the world of crypto finance, witch is hacking attacks, high volatility of cryptocurrencies and, of course, high risk of liquidation of funds in secured loans.

Currently, the biggest players in the world of cryptocurrency loans are Maker and Aave, but the others should not be underestimated: Compound, Anchor Protocol, Venus, JustLend, BENQI or Solend. All the protocols (about 138) that borrow cryptocurrencies are estimated to have funds of approximately $ 50.66 billion.

However, before starting any actions, it is worth checking whether we correctly understand the processes that govern such loans and whether we correctly understand the terms of the contract and the risks associated with them (correct understanding of the terms of the contract may protect the borrower from unfair practices of unknown entities). It is worth considering all the pros and cons before making a decision, especially since the world of cryptocurrencies still does not have a developed legal environment that can adequately secure both parties to the transaction.