More and more people are starting to use cryptocurrencies; they buy, exchange, and sell digital coins, take crypto loans, and much more. However, the “fate” of cryptocurrencies is such that volatility works both ways. So, you should keep track of the industry as a whole as well as individual coins.
Either way, a decentralized lending application (Defi) from the Ethereum blockchain allows any holder of a supported cryptocurrency to deposit it into a composite smart contract, where it joins the liquidity pool and starts generating interest. In this article, we will talk about how safe a bitcoin loan is, what interest income comes from other users, and how to maximize your profits.
How Does Crypto Lending Work?
When funds are deposited, the protocol generates tokens. So, if Ethereum (ETH) is deposited, an equivalent amount of ETH will be received. These tokens can then be used as collateral for the loan, which essentially means the funds can be spent while they are “earning interest.”
In this case, the profit is determined by smart contracts of crypto lenders operating on a supply and demand basis. If there are many people who are ready to borrow a certain asset, the smart contract increases the interest rate to attract lenders and make the loan more expensive. The top platforms currently support nine key assets, including Tether (USDT), Dai, Wrapped Bitcoin (WBTC), and Basic Attention Token (BAT).
Pros of Using Crypto Lending
Crypto lending has a lot of advantages, such as:
- Conversion – The conversion takes place at the exchange rate, and there is an increase in the amount of the original asset by the time it is withdrawn from the market;
- There are no fixed interest rates – Their value depends on the current ratio of supply and demand for each of the assets;
- There are no time limits – you can collect funds deposited through the protocol after any time. The same goes for paying off debts;
- Credit conditions – To get this opportunity, you need to sync your acc with a wallet that you are going to use to secure loans. Depending on the quality of assets (for example, the level of liquidity), users can borrow up to 75% of the available balance. Moreover, there may be several loans;
- Protocol control – The process is carried out by smart contracts, which excludes the intervention of the human factor and ensures a high level of security for financial transactions.
What Does It All Mean?
Based on the above, cryptocurrency lending is safe as long as you use reliable and reputable DeFi platforms. It is also worth noting a well-thought-out system for automatic calculation of interest rates based on an analysis of the current market situation for each of the assets available in the service. So, if you approach it carefully, you can count on regular gains.
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