A cryptocurrency is a monetary unit. Regardless of its type, we can use crypto coins for different purposes. In certain situations, it can be either a commodity, a financial instrument, or even a technology. It all depends on the way you are going to use digital coins.
Thanks to the popularization of cryptocurrencies, crypto lending has become one of the main services in the DeFi sector, which is gaining popularity this year. To get a loan, you need to leave collateral (usually in one of the main cryptocurrencies). In most cases, a borrower receives funds in the crypt; however, there can still be some exceptions.
In this review, we will talk about how cryptocurrency affects customer credits, what are the risks when lending cryptocurrency, and what sites support the circulation of crypto assets as well as investor protection mechanisms.
How Cryptocurrency Works?
Cryptocurrency is an electronic means of payment. Although you will hardly be able to touch your crypto-money, you can still use digital coins just like traditional money. You can store the funds, transfer them to third parties, make payments for goods or services, or even lend digital coins.
Unlike an electronic wallet, cryptocurrency is based on a complex cryptographic algorithm. The principle of operation of digital coins is based on an open data transfer protocol. All actions, including issuing new money and processing transactions, are collectively performed by all network participants.
With the advent of cryptocurrencies, the nominal interest rate has changed significantly. This value reflects the market interest rate, excluding inflation. Nominal interest rates on credits can be more than zero, equal to zero (“interest-free credit”), and less than zero (“negative” interest). Thanks to crypto lending, real interest rates do not reach high levels, which guarantees the absence of usury.
Difference Between Cryptocurrency and Fiat Credits
Fiat credits are used by people to pay for goods and services in everyday life. These can be funds on a bank card, or banknotes. In other words, fiat money is issued by the government, which sets its value and guarantees its stability. Trust in funds is reinforced by the number of sales, purchase transactions, and the payment of taxes in national currency.
Fiat currencies are not backed by anything other than people’s trust. Currently, there are no standards that call for the use of gold or other precious metals to provide value for money. The rate of fiat money depends on the state’s attitudes and the economic situation in the country. If necessary, the government can print an unlimited amount of banknotes and put them into circulation. This increases inflation and lowers confidence in money.
The situation is completely different when it comes to cryptocurrencies. The latter has impacted customer credits by issuing them from network members. The maximum number of coins is known in advance, which indicates a deflationary nature and an increase in the value of an asset in the future. Of course, miners are engaged in the emission of new coins – they process transactions and extract new blocks for a reward. Although the value of digital coins is not supported by anything, it directly depends on customer demand. The more people are interested in cryptocurrencies and start using them, the higher the price for an asset is. The market is self-regulated.
Another key difference between fiat money and cryptocurrencies is the impossibility of canceling the transaction. In case of an erroneous transaction to someone else’s bank account with fiat money, a refund procedure is guaranteed. With cryptocurrencies, this is not possible. But on the other hand, thanks to bypassing banks, the credit rate is much lower, and all transfers are interest-free.
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Pros and Cons of Cryptocurrencies in Lending
The popularity of cryptocurrencies is due to a lack of trust in government and traditional money. People began to become disillusioned with monetary policy, so they resorted to using a decentralized payment system. Here are some other things that explain the popularity of cryptocurrencies:
- Reliability – Encryption algorithms, blockchain, and computing power make it difficult to hack or tamper with any sensitive data;
- Open-source – This allows anyone to investigate the software, look for bugs, and suggest improvements to the network;
- Limitation – The number of coins issued is limited and known in advance. The parameter can be changed only with the consent of the majority of users on the network;
- Cross-border payments – It is no longer necessary to use banks or expensive intermediaries to transfer money to people in other countries;
- Control over funds – In case of bankruptcy of a bank, no one guarantees the safety of funds or the possibility of their return;
- The low-interest rate for lending – When lending, the interest rate is minimal and fixed, in contrast to most bank floating commissions, which are subject to periodic revisions;
- Earning opportunity – The popularity and development of new technology allow for a greater return on investment compared to traditional tools.
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Despite a number of pros, cryptocurrencies have a couple of significant cons:
- The risk of losing all your money – To access the money stored in the wallet, you must enter the private key. It cannot be restored or changed. In case of loss of login data, funds will be frozen in the account;
- 51% attack – The security of any cryptocurrency is associated with the decentralization of computing power. In the event that one person or a group of people gains access to over 51% of the network’s resources, this will allow making any changes to the operation of the blockchain. However, the more computing power a cryptocurrency has, the more difficult it is to implement this plan;
- The volatility of the exchange rate – The value of digital coins is influenced by the level of user confidence and demand. Besides that, the market reacts unpredictably to changes in the policy of leading countries regarding cryptocurrencies;
- No warranties – All risks fall on the shoulders of investors. In case of loss of money, theft of funds, lack of access to the wallet, nothing can be done to safeguard a user.
Cryptocurrency credits may seem to be risky for experienced players in the digital industry; in fact, it is a real tool to boost financial capital significantly. The number of people who decide to borrow digital coins is growing every year. Perhaps in a couple or 10 years, it will be difficult to surprise someone when mentioning that you have a credit in bitcoins, and large banks will offer to issue loans in cryptocurrency in 15 minutes.