Being engulfed in the crypto ecosystem, you’re doing at least one of three things: creating a project, interacting with a project, or investing in one.
Nevertheless, a participant likely has funds tied to some protocol in the space, and for the die-hard hodlers, selling assets (unless for profit) is never ideal. Not everyone in the crypto world possesses the same capital margins, and as new opportunities continue to arise, which they do, many are left with a dilemma on their hands choosing where to allocate their liquidity.
Receiving a loan can certainly mitigate financial obstacles, but as we know, that is easier said than done. Applying for funding can be quite a tedious task, as various financial establishments require distinct forms of documentation, and loans can take a while to get approved.
With cryptocurrencies gaining more traction by the day, there has been an influx of available providers that lend digital currencies out to applicants who provide nothing more than collateral to back the loan.
What are instant crypto-backed loans?
These secure loans are lent by independent providers that issue advances and accept collateral in many digital currencies and stablecoins, as well as fiat.
Applicants must first create an account before filling out an application; upon providing collateral, lenders like Coinloan approve applications right when they are submitted. No credit score or extensive documentation is required, so loans are approved within seconds. While an application can be approved instantaneously, the funds can still take time to reach your account.
Lending platform CoinRabbit.io approves loans and transfers funds within 5-10 minutes upon receiving collateral; Nexo on the other hand approves loans in seconds and sends funds within 24 hours. A provider’s loan terms normally cover the duration in which you must repay the advance, and your collateral is returned; but only when the loan is fully paid off.
Getting loans quicker
Of course, some situations are more urgent than others, and every second wasted is a wasted second. Expediting the application process can be done by taking a few precautions:
•Borrowing from an exchange you already use bypasses creating new accounts.
•Calculating how much you can borrow makes it easier to apply for advances.
•Lenders with simple application processes are more enticing.
•Having required documents ready for submission speeds up the procedure.
•Opting to receive a loan in your desired currency (if available) makes for a more direct deposit.
Other factors besides speed
Speed isn’t the only thing that makes or breaks a lending provider. Below are additional qualifications that can make a crypto lender stand out:
•Interest rates
•LTV ratios
•Accepted currencies as collateral
•Loan terms
•Interest payments
DeFi loans
Another way of receiving funding for your cryptocurrency ventures is through a decentralized protocol within the blockchain ecosystem. Lending pools are a great source for collateralized loans that are simple and efficient.
In addition to this, the DeFi protocol Compound introduced a process known as yield farming in which users on a network contribute to various capital pools and accrue additional rewards in the native token on top of the interest on their funds.
Other users are then able to borrow funds out of the pool in exchange for depositing collateral to back the loan. Borrowed funds can then be used however the recipient chooses to do so, so that exchanging them for fiat (or anything else the borrower wants) is also an option with protocols like Aave and Compound. There are no terms regarding when a loan must be repaid, a borrower’s collateral will remain in the pool until the principal is paid off.
Flash loans
While Compound was the project to introduce yield farming to Defi, Aave is currently the top protocol with the most total value locked into the network. Aside from their yield farming operations, Aave also offers flash loans for tech-savvy developers.
These loans are for margin trading only and are an automated process utilizing smart contracts that establishes conditions for the loan to finalize. Borrowers do not need to deposit collateral, funds are borrowed and repaid in a single transaction. Conditions for an advance state that there is a 0.09% fee for loans that yield a profit from a trade; and of course, borrowers must pay the loan back. If a trade results in a loss or a borrower fails to repay a loan, the transaction is reversed, and funds are returned to the lender.
This is because all of these steps - taking the loan, using the funds to take advantage of an arbitrage opportunity, for example, and then repaying the loan - are parts of a single complex transaction, which is executed in a single block. Hence, if one of the steps fails, so that the loan isn’t repaid, then the whole transaction is reverted and the loan won’t be taken out in the first place.
Bottom Line
Crypto loans enable investors to accumulate additional funding without selling existing assets. By putting them up for collateral, you can still regain access to them when you repay the loan, and also benefit from any increases in price.
