Loan in cryptocurrencies: what’s the difference?

Loan in cryptocurrencies: what’s the difference?

Platforms offering loans in cryptocurrencies have shown strong growth; but they have major differences from traditional credit

Loan in cryptocurrencies: what’s the difference?

By Editorial Staff

Cryptocurrency loans have been growing strongly throughout 2020. The evidence lies in the growth of DeFi platforms, or Decentralized Finance. They allow both to borrow on cryptocurrencies and to obtain an income on their idle assets. But do you know the difference of getting a loan in cryptocurrencies and a common one?

First, most lending platforms work with collateralized credit lines. That is, you deposit a certain amount of a cryptoasset and get a line of credit on some other digital asset. This is especially useful for those who want to trade with a specific asset or even arbitrate with the different interest rates paid on other DeFi platforms.

Another difference is that there is no credit analysis. Thus, from the moment the investor locks a certain amount, he automatically obtains a line of credit that usually represents a percentage of the total locked. If he does not honor with the payment, he loses part or all of the cryptoasset deposited as collateral.

A third difference is that cryptocurrency loans are programmed by smart contracts. Therefore, it is not necessary that there is a financial intermediary to transfer the resource. Generally, everything is done automatically on a DeFi platform.

Cryptocurrency lending: lower interest rates

Finally, the interest rates of a loan in cryptocurrencies are infinitely lower than those practiced in the traditional market. This is even due to the way the loan is operationalized, through a guarantee deposit. In the traditional banking market, for example, the bank lends without being absolutely sure that the customer will honor the payment. This ends up being priced in interest rates, which can reach double digits per month.