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Technology is forcing us to review the way we view the finance industry. A decade ago, it would be impossible to imagine a loan without a credit score check. Today, the situation is very different. Cryptocurrency revolutionized lending as we know it and offer an alternative to the standard financial products. The sector is evolving fast and the technology upgrades are pushing in the direction of efficiency, innovation and safer lending practices. Cryptocurrency lending sites are based on blockchain and offer borrowing and lending services to their users.
There are not any credit checks required to receive a loan in cryptocurrency. Something more, crypto loans are available to anyone in an instant and borderless. In this article, we will review the 5 trends in lending and borrowing.
Stablecoin
The Stablecoind lending process involves 3 parties:
1. Stablecoin lenders who are looking forward to making money from their cryptocurrency;
2. Borrowers are individuals who are looking for money to start or expand their businesses;
3. Third party responsible for connecting the lenders and borrowers.
The lending process starts with the borrower approaching the lending platforms for a stable coin loan. The platform then verifies if the borrower meets the requirements for the loan. The crypto-lending platform then asks for collateral. Once we have all of the conditions met, the lender releases digital assets to the borrower. The interest payments are received from the lenders for the loan. The loan is paid the lending platform returns the held collateral to the borrower.
Stablecoin lending involves some risks but overall it is a safe investment. The main factors that determine the safety of the process are insurance, regulations and security.
NFT
Peer-to-peer lending platforms such as NFTfi allow users to list their NFTs and borrow DAI, USDC, and wETH with it. The borrowers could get their NFTs back when they repaid the loan. On the other hand, the lenders have access to the NFT listings and can select the terms that suit them best. Some of the platforms allow their users to communicate the terms of the loan.
This process provides high flexibility for the borrowers and lenders because there is not expiration day of the loan. Also, borrowers could find more suitable loan terms by using Dutch auction refinancing.
However, this process is not risk-free because it can be more complex than traditional peer-to-peer NFT lending. Also, lenders need to track actively the value of NFTs.
Flash loans
Flash loans are uncollateralized loans that allow users to borrow assets without upfront collateral as long as the borrowed assets are returned with the same blockchain transaction.
Decentralized finance started its ecosystem by recreating the traditional finance tools for blockchains. With the development of the ecosystem, its services changed too, or entirely new were created.
Flash loans enable users to borrow assets without upfront collateral as long as the borrowed assets are returned with the same blockchain transaction in the liquidity pool. In case the borrower is not able to return back the borrowed assets in the same transaction, the entire transaction is reverted including any actions taken afterward. This mechanism increases the access and variety of capital for the users across.
For a short period of time or a span of single transaction - a flash loan can turn anyone into a very well-capitalized person. The hundred million dollars of liquidity provided by the flash loans creates unique opportunities for liquidation, collateral swapping and the creation of a leverage position.
Centralized Finance (CeFi)
Crypto lending and borrowing options provided by centralized companies will always stay as narrative due to the easy-to-use interface and attractive yields. This option is offering an alternative to the standard saving accounts and allows users to earn more interest on their cryptocurrency holdings. The cryptocurrency may be borrowed or lent against fiat currency.
The fall of Celsius Network pointed out the flaws of the process like transparency, adherence to the laws, sustainable business models, and robust risk management practices. And alerted users to the risks of locking their assets in these types of companies. DeFi platforms have gained popularity as they offer increased transparency and reduced counterparty risk. They aim to eliminate intermediaries and rely on smart contracts. The flaws of Celsius Network’s business model contribute to the ongoing discussions about the advantages and disadvantages of centralized versus decentralized approaches in the cryptocurrency ecosystem.
Liquid Staking Token (LST)
Ethereum movement from proof-of-work to proof-of-stake has given birth to a new sector - liquid staking tokens (LST). When the token holders exchange them on different platforms, they receive secondary tokens - stETH on Lido and rETH on Rocketpool. This process is known as liquid staking.
Staking is considered a low-risk, long-term investment and helps only legitimate information is added to the blockchain. The process helps cryptocurrency holders earn passive income by validating transactions and adding new blocks to the blockchain. The ability to borrow cryptocurrency against liquid staking tokens increases the LST strategies for maximizing earnings.
Currently, there is a total value of 19 USD billion that can be lent and borrowed, turning the liquid staking tokes into one of the most popular tools for earning passive income.
Conclusion
The culture of the crypto lending and borrowing market will change and evolve over time. Currently, the purpose of most of the transactions is market activity and crypto trading.
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