Why Would Anyone Borrow Against Their Crypto?
Imagine getting a loan at a significantly low rate without going through the cumbersome processes of signing documents, paying overhead fees, or pledging your home or car. Sounds too good to be true, right? Well, that’s borrowing against cryptocurrencies for you!
Borrowing against cryptocurrencies has become tremendously popular over the past few years. With the growing prominence of these digital currencies, people are now not only trading their currencies but using them to get loans, too.
Multiple new-age financial platforms are lending money to people who own cryptos like Bitcoin, Ethereum, Cardano (ADA), etc... They can pledge these digital currencies and get loans in the form of cash or stablecoin. Stablecoins can be later converted into the borrower’s native currency.
But here’s the major question - why would anyone borrow against their cryptos? And, what is the significance of DeFi lending protocols in this whole process?
Why do People Borrow Loans Against Their Cryptos?
Today, crypto enthusiasts are tapping their digital holdings to borrow loans quickly and at much lower rates than traditional loans. With some crypto in their digital wallets and a few clicks on their smartphone, people can now secure hassle-free loans. These are some reasons why people borrow against their crypto holdings:
1. Getting a loan against cryptos is a fairly quick process
Borrowing against cryptocurrencies allows individuals to unlock the potential of their digital assets by leveraging them as collateral for loans. While getting a loan from traditional banks is a long and tiring process, borrowing from “crypto banks” is easier and quicker.
The reason for this is that crypto lending platforms don’t require you to submit reams of paperwork. If you have a government-issued I.D. and the cryptocurrency that will be used as collateral, you can get your loan within hours.
2. It is more accessible and flexible
In traditional banking, you are only eligible for a loan if you have a certain credit score. On the other hand, decentralized crypto lending platforms don’t assess your credit scores. In fact, you don’t even need to have a bank account. This makes lending more accessible to individuals who have poor credit scores or don’t have a financial history.
Moreover, crypto loans have flexible repayment terms. Many lending platforms ask for no minimum monthly payments as long as the loan is paid back in full within the stipulated time. You can also get better exchange and interest rates along with a lower service fee.
3. It is safe and allows you to maintain your privacy
If you choose to borrow crypto from DeFi platforms, you won’t have to hand over any of your private information. These platforms work on decentralized lending protocols that allow the lending and borrowing of cryptos without the interference of any intermediaries.
Every single transaction is recorded in a high-secure distributed ledger. The user can check and confirm their transaction whenever they want. This makes the whole process safer and more transparent.
4. Allows users to access liquidity without enacting a taxable event, all while keeping your digital assets in your control for the long term.
Digital asset investors often are heavily weighted in terms of net worth in crypto assets, and are often “crypto rich” and “fiat poor”. Users can leverage their holdings to obtain fiat without selling their crypto. This allows users to unlock value while keeping a long position for the future.
Benefits of Decentralized Lending Protocols
While you can get loans on your crypto on both centralized and decentralized platforms, the latter has some undisputed advantages over the former.
Due to their high level of security and transparency, decentralized protocols and crypto-lending platforms have gained immense popularity in the crypto world. These platforms leverage decentralized lending protocols for automating loan payouts. The transactions are handled by computerized codes and algorithms rather than people.
Here are some of the benefits of opting for a decentralized lending platform for borrowing funds against your cryptos:
1. On decentralized lending platforms, you can apply for a loan of any size without going through rigorous red tape a bank would require. A simple KYC/AML is all that is needed.
2. You don't have to fulfill any financial obligations like credit checks, proving solvency, or the ability to meet long-term debts, etc.
3. The DeFi lending protocols, like MELD, are built on blockchain technology, which is why their safety is unmatched.
4. Borrowers can get a higher loan amount at a lower interest rate comparable to unsecured bank loans or credit cards.
5. Borrowers hold the ownership of their crypto that they have used as collateral and can get it back as soon as they repay the loan within the agreed time.
6. Defaulting on the loan will not damage their credit history.
So, these were some of the many reasons why crypto owners borrow funds against their holdings. Today, decentralized crypto-lending protocols provide a flexible, safe, and hassle-free financial space to both lenders and borrowers.
While many lending platforms are still in their early development stage, they have great potential and are developing more and more into fully fledged financial dApps (decentralized applications). These dApps are free from all the time-consuming traditional formalities of lending and borrowing. These platforms are a real world game-changer and the next big thing in the crypto universe.
The opinions shared within this article are those solely of the MELD Ambassador. Note that the content within should not be considered financial, legal, or tax advice. Neither the author nor MELD Labs PTE Ltd. are financial, legal or tax advisors. None of this content should be used to make any form of financial, tax, or legal decisions. Do your own research and consult professionals as needed for official policies, restrictions, and requirements in your jurisdiction.
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