Crypto-based borrowing and lending is gaining momentum. This is indicating the start of a new financial era. Centralized crypto financing, such as BlockFi, have garnered an impressive foundation of 450,000 customers. Here are some details about how crypto-based financing works and its main attributes.
For starters, borrowers take loans in crypto by keeping their digital assets as a collateral in a traditional bank. Once you use crypto assets as collateral, you are still the owner but you can’t use them for transactions. Similarly, you can’t trade them for other assets as well. There’s plenty of excitement when loans have half the price of collaterals.
Not to mention, there’s no credit checks in BlockFi or DeFi. There are immense gains if the value of crypto appreciates, but if it doesn’t, there are bigger losses. For crypto depositors or lenders, API can be as high as 8.6 percent in BlockFi. This is opposed to the 0.006 percent of conventional banks.
Here’s a glance over the various crypto lending options currently on the global market. According to the regulatory framework, there are two types of crypto financing. They can be decentralized or centralized. Some of the main features of decentralized crypto financing services are as follows. To begin with, it uses decentralized financing uses automated market makers. This means borrowing and lending rates are determined according to an algorithm.
In this case, the algorithm is based on the real-time demand and supply of each crypto asset in the market. This way, lenders can withdraw deposits at any point. Decentralized crypto financing ensures high levels of transparency. That’s because the transactions are stored on a digital ledger where everyone can see them.
Thanks to the thorough absence of regulation, everyone can access simple banking services. At the same time, they can ensure complete anonymity, and without any KYC. The user-community vote on interest rates on the DeFi platform. Community members are given governance tokens on lending as rewards.
DeFi doesn’t have any know-your-customer requirements, which allows anonymous users to protect their identities. At the same time, there are some risks involved. For starters, you risk losing money if they value of crypto depreciates. After the influx of scams and other liquidity, there is a risk of financial projects suddenly closing.
There are technology risks like code errors mean that decentralized financing is susceptible to hacking. Some prominent players in the DeFi financing domain include Pancake, MakerDAO, and Compound. Nowadays, two main kinds of DeFi exist. These are stablecoin lending and yield farming.
Meanwhile, centralized crypto financing follows the know-your-customer model, which means no anonymity. It offers standard investment and retail banking services, like trading platforms, loans, and savings accounts.
