One great thing that the crypto sector has done is change the way we see the financial market. Ordinarily, the market is not always available to everyone, but crypto has removed that barrier. The decentralized finance sector is solely responsible for this revolution. Just like banks, this sector provides decentralized assets but with a different twist. The twists are borrowing, margin trading, lending, and spot trading. Taking crypto loans in the DeFi sector is way easier than using a bank. This is because the person borrowing will not need to share their details.
What Are Crypto Loans?
Digital assets sent to a wallet stay there without bringing in profits, no matter how small for the trader. Even though the value may be subject to market fluctuations, the trader does not earn rewards for holding the assets. This is the gap that DeFi loans bridge. DeFi loans are specifically crypto assets borrowers lend. DeFi loans mirror the typical loans that traditional banks offer. However, the stark contrast is that DeFi loans are available to all borrowers while bank loans are available to specific people. To be able to generate interest in lending, most traders use lending pools.
How Do Crypto Loans Work?
To be able to take a loan successfully, borrowers usually provide collateral. In this case, the collaterals usually have more value than the crypto they intend to borrow. This means they would need to facilitate the loan with an amount equal to or greater than the amount they are borrowing. However, the collaterals can be in different tokens.
For example, if a borrower wants to borrow one Ethereum, he would need to send one or more Ethereum in DAI. DAI, in this case, is the native token of the lending platform, MakerDAO. After making use of the loan, the trader would repay and add 10% interest. This is the only time that the protocol will return the initial collateral to the trader.
Steps To Take A Crypto Loan
In this tutorial, we will be using the MakerDAO lending platform to put you through how you can successfully take a loan.
The first step will require you to send an amount of ETH to any Ethereum wallet of your choice. In this case, we will be making use of the MetaMask wallet. In the next step, you will visit the Collateralized Debt Portal platform. The next step requires you to connect your wallet to the portal. After connecting your wallet, you will need to click on the ‘Open CDP’ button. The next step requires you to enter the number of ETH you want to change to DAI.
After reading the terms, you can now click on the ‘Collateralized & Generate DAI button. This means your deposited ETH has now been received as collateral and you now have your borrowed DAI. After getting DAI for your collateral, you can now carry out the activities you wish to carry out using the minted DAI. However, one thing to note is that many other services provide crypto loans options. Platforms like Compound, Dharma, and a few others allow traders to borrow tokens.
Conclusion
Even though the steps above sounds simple to an average trader, one must not carry it out without an expert’s help. This is because there are some challenges that even prolific traders find daunting while connecting their wallets. You should know that most platforms rest their loan collection rate at 1.5x of the amount of loan collected. This means that a trader will pay $150 to facilitate a loan of $100. With this, the network will not approve users that want to use the service without any disposable income
