With the arrival of Ethereum’s Smart Contracts, various applications are entering into the crypto world. As the application of this technology becomes more apparent, it is no wonder that established economics is gradually but definitely making its move into the crypto field. Customarily, this applies to the lending business as well. In other words, crypto lending is the system of lending cryptocurrencies via crypto exchanges or several lending policies with an interest rate.
There are various platforms such as crypto exchanges or commercial emissaries such as Bitbond which offers crypto rental. The assets in all kinds of cryptocurrencies ensure money growth and low risk. Let’s take a look at some opportunities.
How does crypto lending work?
Cryptocurrency lending platforms unite borrowers to lenders on their platforms. Lenders get their cryptocurrencies in return once the borrower repays the loan. Loans on maximum platforms are supported by substantial assets, such as real-estate. Other platforms enable users to take loans supported by cryptocurrencies.
Although crypto lending varies somewhat depending on the platform users are utilizing, the overall approach is identical. A lender executes his or her holdings ready to loan at an estimated price. People normally lend crypto assets for two purposes: private profit and boundary lending. In boundary lending, once the lender’s stocks become free, a borrower who believes a special coin will bear price inflation will demand to lend some of the lender’s stocks from the platform. After a few days, the borrower will repay the acquired crypto assets, with the interest rate.
AAVE (ETHLend)
ETHLend is one of the first peer-2-peer crypto rental platforms to launch in 2017. Towards the end of 2017, the company held a thriving ICO and all tokens were traded. The lend token today has about twice the ETH value of the ICO, but the value of FIAT currencies has faded like the entire crypto market (~ -47%). ETHLend has established the roofing company, AAVE, which allows crypto-payment assistance in addition to the crypto rental. In addition to loans in ETH and the in-house LEND Token, there is also the possibility of borrowing stable loans or FIAT currencies linked to ETH.
The rental platform ETHLend works as follows.
The borrower initiates a smart contract in which he/she stores security in the form of a cryptocurrency (supported token as a pledge ). After that, he/she places which cryptocurrency he/she would like to borrow, duration and what interest rate he/she will pay for it. A lender who is satisfied with the conditions runs the smart contract, thus establishing a market. The borrower can borrow a culmination of 50% of his/her security or the security must be 200% of the loan. If the price of the accumulated security drops too much, it comes near to the price of the loan, the lender can pick it up. The Smart Contract ensures that the lender gets back at least the amount of the loan + any interest due from the security.
Similarly, a lender can initiate a smart contract with the solicited terms. He/She decides which tokens he/she admits as security and can even define several interest rates for the loan depending on the token. There is also the opportunity of sections, so-called installments. The collateral does not have to be as same as the loan.
For loans connected to FIAT to ETH, the borrower has no uncertainty regarding the chosen FIAT currency. There is the opportunity for speculation with such loan standards. The borrower can probably enter into a long trade. For example, consider the ETH price is $100, someone lends $500 linked to ETH (5 ETH). The ETH price rises to $200, now the borrower only has to return 2.5 ETH and thus has 2.5 ETH more than before. In return, the lender begins a short trade and dissipates 2.5 ETH in the example case. As the price goes down, the circumstances change, the borrower has to repay more ETH than he/she has borrowed and the lender gets more return.
In the year 2018, the project had reached a loan volume of approximately $20 million. So far, only Ethereum and its tokens have been approved for a loan. For a few weeks, Stablecoins loans and Bitcoin as security. The Lend Token allows some commercial advantages on the platform.
Bitfinex
Bitfinex is a central crypto exchange. The opportunity of Margin trading is an extension on the platform. Essentially, the trader bets on the declining price of a particular asset. He/She borrows this from a lender on the platform and trades it with the intention of repurchasing it more economically after some time. However, he/She must have some reserves to ensure that the loan can be sustained. Certainly, as the price of the sold asset rises, the trader must contribute more than the profits to buy it back. If he/she mounts so high that the security is used fully, the buyback is enforced by the platform.
Let’s understand this scenario in more detail
Frank has $100 on Bitfinex. He wants to bet on a rising bitcoin price. Maria keeps $500 on the crypto exchange and wants to improve it with low risk. She lends Frank the money for a specific interest rate and for a specific period of time. Frank sells the Euro against Bitcoin and takes a short position on the Euro to Bitcoin. If the bitcoin price at the time of opening the account is $1000 / BTC, so Frank receives 0.5 bitcoin.
Scenario 1:
The bitcoin price rises to $2000 and then Frank closes the position and gets $1000. The $500 + interest he pays back to Maria and is happy about ~ $500 profit.
Scenario 2:
The bitcoin price declines. Since Frank himself has $100 in the account, he must be able to buy back at least $400 + interest with the 0.5 Bitcoin, in order to serve Maria’s credit. This corresponds to a price of 400 / 0.5 = $800 / BTC + interest. If the price approaches this value, Bitfinex automatically repurchases the euro, gives Maria the money and Frank has lost his $100.
More about Margin trading
This kind of trading is also called leveraged trading. Frank has $100 and lends $500. This leverages his efforts by 5 times. He also gets benefit 5 times as much from an uptick in price as from $100, but he misses accordingly, at 20% namely 100% of his capital.
The principle works on Bitfinex with all proposed currency pairs. The interest rate is defined by a market. There are so-called lendingbots such as Coinlend, which design and optimize lending via the Bitfinex API. The user only has to configure the bot and then earn profit from the rental.
Since Bitfinex is a central exchange, lending/borrowing is subject to the same risks as trading. Although lending is fairly safe from the risk of gain/loss, and only a very extreme short-term price can jeopardize the mechanism (highly unlikely), a total loss from a hack from the crypto exchange can never be ruled out.
Bitbond
Bitbond is a financial mediator that organizes cryptocurrency loans to small and medium-sized businesses. The lenders put control of their funds in the hands of the company. In return, they receive fixed interest of 4% per annum as a kind of bond, which is paid quarterly and additionally distributes pro rata 60% of the annual pre-tax returns. The lender receives tokens (BB1), which the company buys back with a guarantee after the term for the selling price.
BB1 are tokens can be traded as digital securities. Distributions are made in the cryptocurrency lumen (XLM) on the Stellar platform.
Conclusion
Platforms such as ETHLend or Bitfinex offer a dynamic environment for the lenders. There are several different assets that one can use to lend money. This allows experienced lenders to tailor their loans and potentially generate more returns than a more rigid model like Bitbond.
Currently, the interest rates of the banks are remarkably low, one wonders why borrowers do not simply borrow the money from the banks. One possible answer is that the requirements can not be met, which indicates a certain risk of default. If suddenly other more lucrative possibilities of the plant open up, the price of the BB1 can fall.
In addition, as with any bond, people are exposed to the risks of possible high inflation. If the inflation rate is higher than the interest rate, people make losses and the BB1 token price will fall. Cryptocurrency lending arrives with many advantages. First of all, it provides lenders an opportunity to make income by lending crypto to other people, allowing the digital assets that they have at their end but are not currently utilizing or thinking to trade in the near future. This is a profitable opportunity as this kind of lending can produce a much greater interest rate in relation to conventional profits accounts.
Disclaimer: This information should not be interpreted as an endorsement of any cryptocurrency. It is not a recommendation to trade. The crypto market is full of surprises and overhyped assets. Do your research before buying anything. Do not invest more than you can afford to lose.
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