How Does Crypto Lending Work?
Crypto lending is the new method of securing loans other than using the traditional financial institutions. The method gained popularity in 2020 when many financial institutions were unwilling to lend money to borrowers because COVID-19 pandemic-related risks. Instead of walking to a bank and making an application for a loan, the selected DeFi platform will provide the loan and the coins you have will serve as collateral.
Crypto loans are fast to process because you are not required to go through the lengthy process of identification. For example, there are no background checks that target to unearth your credit score and monthly income. All that you need is your crypto coins and an appropriate DeFi platform. Remember that you can also lend money to others depending on the DeFi network.
Avoiding the Risks Involved in Crypto Lending
As you go for crypto lending, it is paramount to appreciate there are a number of risks. Here are some of them and how you should avoid or minimize them:
- You are required to deposit your coins to a pool: Although the coins will be sent back to your wallet after repaying the loan, they are less secure in the pool than in your wallet. To avoid this, consider only borrowing money with some of your coins while the rest remains in your wallet.
- Concerns of platform security have emerged: With cases of crypto theft emerging every other day, such as the recent loss of $600 million from Poly Network, more people are worried whether their assets are safe in different pools. One way of reducing the risk to your coins is identifying a DeFi network that puts a lot of effort into keeping clients’ assets safe.
- Crypto assets are very volatile: This is a risk that faces all the people in the crypto industry. Although there is not so much that you can do because the factors that push this volatility might be beyond you, it will be a good thing to have a long-term strategy. For example, you should target holding cryptos over a longer period and sell when the price hits a peak. You can opt to store the coins in your wallet waiting for the value to go, but a better idea would be staking them for some returns.
Crypto lending has become the new go-to method for fast access to loans. It is easy, pretty straightforward and the best part is that you are not selling your coins. So, you will still enjoy the growth of your investment if the value of the selected crypto coin goes up. To enjoy all of these benefits of crypto lending and avoid associated risks, it is important to ensure you work with a trusted DeFi platform.
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