Crypto lending. What is it and when can it be useful?
Crypto lending allows users to borrow digital assets at low interest rates, or to lend funds and earn money from it.
Imagine that you need stablecoins to participate in some promotion or for your other needs, but you don’t have any. However, you hold ETH tokens. You could sell and then repurchase them, but you think the value of ETH will increase soon, so you want to take advantage of this possible growth.
In this situation, you can use the services of crypto lending. You use your ETH as collateral to borrow stablecoins. And after some time, you return them by paying an annual rate of 5-10%. For example, if you take $1,000 and pay it back a week later, with a yearly rate of 10%, you will pay a $2 commission. After paying off the loan with a commission, you’ll get your collateral back.
You can lend money and receive passive income as interest for placing cryptocurrency in a pool that will manage your funds. The risk of losing money in this situation is minimal. However, this depends on the smart contract's or the exchange's reliability.
Venus Protocol
Each exchange or dApp has a different selection of tokens, lending terms, and interest rates for cryptocurrencies that can be borrowed.
Since cryptocurrency is highly volatile, the loan-to-value ratio (LTV) will be low (depending on the LTV service, from 50 to 80 percent). That is, if you use a service with 50% LTV, the collateral must be twice the loan amount. This difference acts as insurance in case the value of the collateral drops. Or the token you borrowed starts to rise in price, your LTV increases, and you can get liquidated when it reaches the limit. To prevent this from happening, you must carefully monitor the prices. If any of the above scenarios occur, you will need to replenish your deposit with additional funds.
Use only reliable lending platforms and stable assets for collateral. Check the terms, rules, and ranking of the platform you will work with. Find information about smart contract audits to understand how safe it is to keep your funds there. Be aware of the risks associated with storing cryptocurrencies on other platforms. When the coins leave your wallet, a third party (or smart contract) is in control. Many projects can become the target of scammers, which can lead to loss of funds.
