Summary

With cryptocurrency lending, users can borrow cryptocurrencies for a fee or lend cryptocurrencies to earn interest. Just provide the appropriate collateral to get a loan and start investing. You can borrow money through a decentralized finance (DeFi) lending DApp or cryptocurrency trading platform. If the collateral is lower than a certain value, users can avoid forced liquidation by recharging to the required value level. Once the loan and fees are repaid, the funds are unlocked.

In addition, users can obtain "flash loans" without collateral, but they must be paid back in one lump sum. If this is not possible, the loan transaction will be withdrawn before finalization. Cryptocurrency lending makes borrowing and lending convenient, and the entire process is automated by smart contracts. For many people, this makes it easy to earn an annual percentage rate of return (APY) or obtain low-interest credit by holding cryptocurrency assets for a long period of time.

However, like any project, smart contract or investment in the blockchain, cryptocurrency lending involves financial risks. For example, if you use a volatile token as collateral, your position may be liquidated overnight. Smart contracts can also be hacked, maliciously attacked, or exploited, often resulting in huge losses.

Before borrowing, users need to understand that they will lose their token custody rights during the borrowing period. Tokens are removed from personal control and the liquidity of the asset becomes reduced. Pay attention to all terms and conditions of lending to find out when funds will be unlocked and available and if there are any fees involved. Go to the Pledged Coin page immediately to start lending using your personal Binance account.

Introduction

When it comes to the profit and loss of cryptocurrency, we immediately think of fluctuating prices and hot markets environment. But that’s not the only way to make money in blockchain. Cryptocurrency lending services are readily available, allowing users to lend out funds with less risk. On the other hand, digital assets can be borrowed quickly and at low interest rates. Cryptocurrency loans are generally more straightforward, efficient and affordable to lend and issue, making them an option worth exploring for both borrowers and lenders.

What is cryptocurrency lending?

Cryptocurrency lending works by one user taking out their cryptocurrency and providing it to another user in exchange for a fee. The exact way to manage your loan varies from platform to platform. Users can find cryptocurrency lending services on both centralized and decentralized platforms, and the core principles of both remain unchanged.

Users do not have to be borrowers. They can also lock their cryptocurrency in a fund pool, and the fund pool manages the funds to earn passive income and interest. By choosing a smart contract with high reliability, the risk of losing personal funds is usually minimal. This is mainly because borrowers provide collateral or have loans managed by centralized finance (CeFi) platforms such as Binance.

How does cryptocurrency lending or staking work?

Cryptocurrency lending generally involves three parties: lenders, borrowers, and decentralized finance (DeFi) platforms or cryptocurrency trading platforms. In most cases, lenders are required to post collateral before borrowing cryptocurrencies. Or, use a flash loan that requires no collateral (more on that below). Lenders can choose smart contracts that mint stablecoins, or other platforms where users lend funds. The lender adds the cryptocurrency to the pool and then manages the entire process and transfers a portion of the interest.

Types of cryptocurrency loans (pledged loans)

Flash loans

Flash loans allow you to lend funds without collateral. The name comes from the fact that the acquisition and repayment of the loan all occur within the same block. If the loan amount and interest cannot be repaid, the transaction will be canceled before block verification. This means that since it was unconfirmed and not added to the chain, the loan never actually took place. Smart contracts control the entire process without human interaction.

To use flash loans, you need to act quickly. This requires smart contracts to come into play again. Using smart contract logic, users can create top-level transactions that contain sub-transactions. If the sub-transaction fails, the top-level transaction will not go through.

Let’s look at an example. Assume that a token worth $1.00 in liquidity pool A can be sold for $1.10 in liquidity pool B, but the user does not have the funds to purchase the tokens in the first pool first and then sell them to the second one. Capital pool. Then, if users try to use flash loans, they will have the opportunity to realize this arbitrage transaction in a block. For example, suppose we first obtain a flash loan of 1,000 BUSD from the DeFi platform and later repay it through the platform. We can break this loan down into smaller sub-transactions:

1. The borrowed funds are transferred to the personal wallet.

2. Purchase $1,000 of cryptocurrency, i.e. 1,000 tokens, from Liquidity Pool A.

3. Sell 1,000 tokens at a unit price of US$1.10 and obtain US$1,100.

4. Transfer the fees incurred from loans and borrowings to the flash loan smart contract.

If any of the above sub-transactions cannot be executed, the lender will cancel the loan before the loan occurs. In this way, users can profit from flash loans without any risk to individuals or collateral. Using flash loans offers great opportunities including collateral swaps and price arbitrage. However, flash loan funds can only be used on the chain, and transferring funds to other chains will violate the single transaction rule.

Collateral Loans

Because the borrower provides collateral, the mortgage funds can be used for a longer period of time. MakerDAO is an example, where users can obtain loans by providing various cryptocurrencies. Due to the high volatility of cryptocurrencies, the loan-to-value ratio (LTV) will be relatively low, such as about 50%. This value means the loan is only half the value of the collateral. This difference provides room for changes in the value of the collateral if it falls in value. When the collateral falls below the loan value or other given value, the funds will be sold or transferred to the lender.

For example, for a BUSD loan worth $10,000, the loan-to-value ratio (LTV) is 50%, and the user needs to deposit Ethereum (ETH) worth $20,000 as collateral. If the token value drops below $20,000, users will need to add more funds. If it falls below $12,000, users face forced liquidation and lenders will take back their funds.

The loan obtained by the borrower is usually a newly minted stablecoin, such as DAI, or a cryptocurrency lent by others. Lenders deposit assets into smart contracts, which lock the funds for a specific period of time. Once the borrower gets the money, he can do whatever he wants with it. However, the borrower needs to recharge according to the spread of the collateral to ensure that the position will not be forced to liquidate.  

If the loan-to-value ratio (LTV) is too high, you may face penalties. Smart contracts manage the entire process, ensuring its transparency and efficiency. After the loan and interest are paid off, the collateral returns to its original owner.

Pros and Cons of Cryptocurrency Loans (Pledged Borrowing)

Cryptocurrency loans have been the Commonly used means in the field of decentralized finance (DeFi). Although popular among users, there are some drawbacks. Before deciding to try a loan, be sure to weigh the pros and cons:

Pros

1. Easy access to funds. Anyone can get a cryptocurrency loan by providing collateral or returning funds through flash loans. Loans of this nature are easier to obtain than loans from traditional financial institutions and do not require a credit check.

2. Smart contracts manage loans. Smart contracts implement automated management throughout the entire process, making lending more efficient and scalable.

3. Earn passive income easily. Holders can start earning Annual Percentage Yield (APY) by investing their cryptocurrency into a yield pool without having to personally manage the loan.

Disadvantages

1. Collateral faces a high risk of forced liquidation. Even if the value of loan collateral exceeds the limit, any sudden drop in cryptocurrency prices will result in forced liquidation.

2. Smart contracts are vulnerable to attacks. Poorly written code and backdoor attacks can result in the loss of loan funds or collateral.

3. Borrowing increases the risk of a personal investment portfolio. Diversifying your investment portfolio is a good idea, but using loan operations adds additional risk.

Things to note before choosing a cryptocurrency loan (collateral loan)

Use a trustworthy lending platform And choose stable assets as collateral to successfully obtain cryptocurrency loans. Before you make a hasty decision to borrow money, consider the following:

1. Understand the risks of handing over personal cryptocurrency custody. Once tokens leave a personal wallet, they must be trusted to process them by someone else or a smart contract. These projects can be targets for hackers and scammers. In some cases, personal tokens may not be immediately withdrawn.

2. Carefully consider market conditions before lending cryptocurrency. Tokens need to be locked for a period of time, making it impossible to react promptly to a downturn in the cryptocurrency market. Borrowing through new platforms also carries risks. It’s best to wait for the platform to build enough trust before taking action.

3. Read the terms and conditions of the loan. There are many channels for obtaining loans, and users should choose better interest rates and more favorable terms and conditions.

Famous cryptocurrency lending project

Aave

Aave is based on Ethereum DeFi protocol that offers various cryptocurrency loans. Users can borrow money, access liquidity pools, and obtain other DeFi services. Aave’s most famous work is probably the launch of flash loans. Users deposit tokens into Aave, obtain aTokens, and then lend funds. These aTokens act as receipts, and the interest earned by the individual is determined by the cryptocurrency lent.

Abracadabra

Abracadabra is a multi-chain DeFi project that allows users to pledge interest-bearing tokens as collateral. Users can obtain interest-bearing tokens by depositing funds into a lending pool or income optimizer. Token holders own the original deposit and the interest earned.

Users can further unlock their value by using interest-bearing tokens as collateral for Magic Internet Money (MIM) stablecoin loans. One strategy is to deposit stablecoins into a liquidity mining smart contract and then let the interest-bearing tokens generate MIM. As long as the stablecoin does not fluctuate, the probability of forced liquidation will be very low.

Binance

In addition to trading services, Binance also offers a range of other cryptocurrency financial products for users to lend, borrow and earn passive income. If you don’t want to access DApps and manage your own DeFi wallet, it will be more convenient to use the centralized finance (CeFi) option. Binance offers convenient crypto-backed loans across multiple tokens, including Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB). These loans are funded by Binance users looking to earn interest on their long-term holdings of cryptocurrencies.

How to get a loan through "Pledged Coin" on Binance platform?

Lending and borrowing cryptocurrencies is easy and direct through your personal Binance account. First, log in and go to the Pledge and Borrow page.

1. Enter the cryptocurrency currency and amount of the loan.

2. Select assets that can be used as collateral. Based on the initial pledge rate prompted on the right panel, the amount required to be provided will be displayed in this field.

3. Select the term of the loan asset.

4. After confirming the loan details, click [Start Borrowing Now].

Summary

If done responsibly, Cryptocurrency lending platforms have value for both borrowers and lenders. Holders now have another option to earn passive income, and investors can unlock the potential of their funds by using them as collateral. Whether you choose a DeFi or CeFi project management loan, you should understand the conditions and make sure to prioritize trustworthy platforms. Blockchain technology allows users interested in the supply and demand of credit to enjoy unprecedented convenience, and cryptocurrency loans have become a powerful tool for them.