Cryptocurrency loans and borrowing: everything you need to know 

The growing popularity of cryptocurrencies has led to the emergence of alternative financial services, which can be used to solve financial problems faster and more efficiently compared to the traditional market. The history of crypto-loans began with the blossoming of DeFi in 2020. 

Crypto-loans: the beginning and the heyday  

Compound, a popular income farming protocol, launched a native token in 2020. The platform started with a liquidity mining program, providing high APY to both borrowers and lenders in the form of bonus COMP tokens on the platform. This method proved incredibly successful, attracting hundreds of millions of dollars in deposits.

All users wanted to get as many COMP tokens as possible. The liquidity mining program became so in demand that it even increased the APY of all other tokens on the platform.

Users were borrowing and lending more actively than ever to earn management tokens. Thanks to the hype, the interest rates in the pools changed several times in a minute. Soon traders automated the swap process from the pools with the highest APY.

Thus Compound began the history of crypto lending and the blossoming of the entire decentralized finance industry.

Crypto loans without collateral

What is a loan and collateral in cryptocurrency

A crypto loan is a way of borrowing funds using stablecoins, where the borrower has to pay back the loan with interest after a pre-determined collateral term. You can borrow funds on a crypto platform or the decentralized DeFi protocol, which automatically disburses the loan through a smart contract. The terms of the collateral depend on the platform you choose, and often the type of collateral as well.

Cryptocurrency lending is classified as a high-risk service because of the increased volatility of the assets it utilizes. This is why lenders require the value of the collateral to be significantly higher than the loan amount. This approach is referred to as overcollateralization.

By using a crypto loan, you get liquidity without having to sell your cryptocurrency. Once you receive the money, your collateral is locked up for the duration of the loan. If the debt is not repaid, the lender will be able to hold or sell that collateral to secure themselves and recover their funds.

So, what are crypto loans and how to get one in practice?

Cryptocurrency loan: an example in practice

Imagine that you urgently need to borrow 1000 USDT on a lending platform. Usually, such platforms require a cryptocurrency collateral of around 1500 – 2000 USD to protect yourself in case the price of the pledged asset drops.

The Loan-to-Value (Loan-to-Value or LTV) ratio of the collateral is usually 50-70%. The final amount depends on the volatility of the asset and the features of the platform itself. If the price of your collateral starts to fall and the LTV exceeds the acceptable level, a liquidation mechanism will be triggered and your collateral (or part of it) will be forcibly sold by the lender.

You will be notified to replenish your collateral or partially repay your debt as soon as possible.

In addition, cryptocurrency lending requires you to pay interest for the use of funds. There are two types of interest rates: fixed and floating.

In decentralized protocols, the rate often depends on the supply and demand in the loan market.

If it is a centralized service, the rate is usually fixed and set when the contract is signed. Interest payments are made on a regular basis.

Is a cryptocurrency loan without collateral possible?

Crypto-credit is very convenient to use: after all, it does not require a credit history check or a certificate of income. The guarantee of repayment in this case is the collateral itself. That is why a person with a bad credit history is more likely to choose this method rather than a traditional loan, where he is likely to be denied.

However, there is such a concept as a collateral-free crypto-credit on the market. In practice, it is rarely used, but it can still be realized in several ways. The first is loans issued by centralized platforms based on the analysis of the borrower’s creditworthiness, similar to traditional lending. The second option is so-called flash loans.

Centralized unsecured loans

Centralized services can issue crypto loans without collateral. To do so, they need to carefully evaluate the personal data and reputation of the client. In this case, the borrower must necessarily undergo KYC (identity verification) and provide information about their income or credit history.

Only after providing all the above information, the centralized platform will be able to make a final decision on granting a loan in cryptocurrency or stablecoins without collateral.

It is worth noting that unsecured loans are not repaid much more often, and therefore the interest rates on them are usually noticeably higher. Lenders usually insure themselves against force majeure with high interest rates and can demand regular repayments, closely monitoring the fulfillment of obligations.

Since you have to provide a lot of personal information before applying for this kind of loan on a centralized platform, unsecured loans are often used by scammers. Therefore, always conduct a DYOR before choosing a platform.

Flash loans

A flash loan is another type of unsecured loan. It allows you to borrow almost any amount of cryptocurrency without collateral. However, you will need to fulfill one important condition here – the loan must be repaid within a single blockchain transaction.

So, you borrow cryptocurrency and repay the debt in a few seconds, before the current transaction is completed. If you fail to do so in time, the transaction is simply canceled. This way the lender keeps their funds safe and secure. Flash loans are often used by experienced traders to arbitrage, quickly refinance loans or exchange collateral assets.

Get a cryptocurrency loan now

Getting a cryptocurrency loan online today is quite easy. So, here are the points by following which you will be able to apply for a crypto loan.

Choose a lending platform

Explore all possible options and compare the terms and conditions. Diversify your choice: analyze both large exchanges (Binance, Kraken) and specialized services for crypto-lending (Nexo, Crypto.com) and DeFi protocols (Aave, Compound, MakerDAO). Pay special attention to the main criteria, including interest rates, required collateral ratio (LTV), loan terms, and platform reputation.

Register and confirm your identity (for centralized platforms)

If you have opted for a centralized service, register an account and go through the KYC process by providing the required details. In the case of using the DeFi protocol, registration is not necessary – it is enough to link your cryptocurrency wallet to the service’s website.

Make a deposit

Deposit the cryptocurrency that will serve as collateral into your platform account or into the protocol’s smart contract. Check the amount – it should cover the required loan amount with a margin (check the minimum amount of collateral required on the platform).

For example, if you want to borrow $2000 in stablecoins, you may need Bitcoin or Ethereum collateral of around $4000 (at LTV of 50%). Transfer the collateral to the address provided.

Apply for a loan

Select the necessary loan terms: amount, loan currency and term. The service will show the terms – interest rate, repayment schedule and collateral amount. Study all the terms and conditions and check all the details before confirming the application by clicking the appropriate button on the platform’s website or signing the transaction in the DeFi app.

Receive the funds

Get the loan after the application is approved. On centralized platforms, the loan amount is credited to your account. If the loan is issued in cryptocurrency, you can withdraw it to your wallet or exchange it for fiat. Some services have an option to receive a loan directly in fiat to a bank card. In DeFi protocol, the borrowed tokens will immediately arrive on your linked wallet.

Repay your debts on time

Remember to service your loan and make your payments on time. At the end of the term, pay back the loan amount along with the accrued interest. If you have the entire amount, you can repay the loan by paying it off early (most services offer this option).

To do this on the DeFi platform, you need to send back the tokens you received through the debt repayment feature. Unlock the pledge and withdraw it back to your wallet. Avoid delinquencies: if you don’t repay the funds on time, the platform will realize the collateral by selling your cryptocurrency to cover the debt.

Conclusion

By following these steps, you will be able to get a quick loan while keeping your crypto assets safe. Remember that any crypto-loan is high-risk: always assess the volatility of the pledged asset and do not borrow the maximum amount – you will need a reserve in case prices fall.

Read the terms of the contract carefully and take into account all fees. Crypto-loans can solve financial problems without selling investments, provided you have a competent approach and continue to use them.