What is Crypto Lending? How does it work?

Crypto Lending can be understood as a form in which users will use their assets to lend to others, called a Borrower. Accordingly, the lender must accept the interest fee and payment deadline requirements from the lender.

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What is Crypto Lending?

Crypto Lending is a concept used to refer to an action in which a person or any organization will use their assets to lend to another person, called a Borrower. The subject of lending here is not necessarily an individual user but can also be trading platforms.

Cryptocurrency lending is similar to real-life loans in that the borrower must use electronic assets that can be used as collateral. At the same time, the borrower must also accept the payment terms and interest rate requirements if they want to receive the corresponding loan.

In case the lender fails to meet the required term or interest rate, the portion of the property used as collateral will be used instead.

How does Crypto Lending work?

Crypto Lending operates through two main subjects: lenders, borrowers, and a combination of third parties, DeFi platforms, or cryptocurrency exchanges. During the borrowing process, a smart contract will also be formed to establish and implement terms and conditions for borrowing and lending.

A detailed description of each step would be as follows:

• Step 1: The borrower requests a loan of a certain amount at DeFi platforms or cryptocurrency exchanges using a portion of the assets as collateral.
• Step 2: The asset owner deposits his money into the Lending Pool, which is a fund that earns interest from interest through lending.
• Step 3: A smart contract is established with terms and conditions for borrowing and lending corresponding to both parties:
• Step 4:
  • Step 4.1: The borrower pays the loan and interest in full on time and receives the mortgaged property back.
  • Step 4.2: If the borrower does not pay on time, the mortgaged property will be sold to pay the lender.

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How many forms of Crypto Lending are there?

Currently, if we eliminate the secondary and small forms, we have two main forms of Crypto Lending that can be mentioned:

• Collateral loan: Borrowers are forced to use electronic assets as collateral for the loan process in exchange for more time to repay the loan.
• Flash loan: Borrowers can borrow without mortgaging any assets. If the loan cannot be repaid on time, the transaction will be canceled before it is validated in a block, making this loan obsolete. so it hasn’t happened yet

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Advantages and Disadvantages of Crypto Lending

Advantage

• Allows any individual or group to access a large loan more easily than through traditional financial institutions.
• The entire lending process is completely automated thanks to smart contracts, allowing the loan process to be simpler and faster.
• Allows those who own assets to deposit money into the Lending Pool and receive a corresponding passive income.

Disadvantages

• In some cases, the collateral loses value, resulting in it being disproportionate to the loan amount.
• Smart contracts can be vulnerable to attacks, affecting the assets of both the lender and the borrower.
• Increases portfolio risk for those who want to earn passive income through Crypto Lending.

Conclusion

Here is all the specific information that we can share with you about Crypto Lending. If you have any other questions, don’t hesitate to contact AZcoin.