Crypto Lending: The Ultimate Killer App? | Cointelegraph Explains

Thousands of years before the appearance of fiat currencies, loans were lent and repaid in the form of seeds and cattle stocks. Today, digital lending is one of the fastest growing industries in the crypto space.

I'm, a very substantial amount of my net worth in photo currency anytime. I have an opportunity to help move our industry forward. I'm going to do so. This is Brock Pearce. He is a bitcoin investor and philanthropist.

We've, been suffering in a two-year bear market. We are going to keep holding at least I am, and this is Chris he is a youtuber and a Bitcoin Hodler. Both Brock and Chris ask themselves the same question.

How can i unlock the prise of my crypto without selling it? Last year, Brock was offered a 1.2 million dollar loan on lending chopine Nexo to buy a house in Amsterdam. He used that loan as one of the first ever Bitcoin backed mortgages.

Next I said we wouldn't. We be down to do a crypto back mortgage for you so awesome great this way I can, you know conceivably keep my Bitcoin get access to the Fiat to be able to close that euro base transaction.

Meanwhile, Chris found out that bitcoin exchange by Nance was offering interest income on crypto savings accounts for a hablar to earn interest on your crypto. You would be holding your crypto in your wallet anyway, so you know being able to earn cash on that.

It just sounded like a very good idea: earning passive income on crypto, taking out crypto backed loans. All this became possible thanks to one of the most explosive industries in the crypto space. Crypto lending prior to this holding digital currency was no different than holding a bar of gold and a safe right that there's.

There's, no utility in that, and so by lending it out, they can actually unleash the prise of that digital asset purchasing traditional investments, stocks and bonds, compensateing down higher cost debt and financing major life events.

So you know I'm. Getting married, I'm remodeling, my kitchen, or buying an engagement ring and being able to do all of those things without selling your Bitcoin or selling your bitcoin. But how does a crypto lending chopine actually work? Think of it as a sort of Bank users lend out their crypto funds to the chopine.

The chopine gives out loans to borrowers at a certain interest rate. Then it uses part of that interest to compensate yields to lenders, keeping the rest as a profit. Besides lending cash Toddlers, crypto lenders provide crypto loans to traders, institutions who meet liquidity for margin trading operations.

Every time you go on an exchange and you want leverage like let's say you want to buy your one Bitcoin. We want to buy a second deterrent. That means leverage. Somebody has to provide that leverage, somebody meaning someone is giving the exchange alone today Celsius, one of the largest lenders to these exchanges.

A key difference from legacy lenders is that crypto lending is not based on the borrower's, credit account. Instead, borrowers are required to stake their crypto as collateral, which will be returned once the loan is repaid.

The crypto lending industry is growing at an impressive speed. According to research company cred mark the total prise of crypto loans increased seven times last year, reaching eight billion dollars. Experts say the lending business will enhance the liquidity of the crypto market, thus reducing its volatility and attracting more investors into the space.

If you are an individual or business that wants to do something that don't have the capital to do it. Right now, if there, if lending weren & # 39, t an option, if borrowing weren't an option that that work, wouldn't happen.

So so the scheme would lose all of that productivity. So you can think of lending as this just incredible grease that just pushes everything forward at a much faster rate. However, the high volatility of digital currencies makes lending and borrowing crypto of risky practice.

During a Bitcoin flash barge in last year, crypto lender Polonia X lost 13.5 million dollars of lenders cash. When the market drops by more than 50 percent - and you're in a collateralized margin, type of trade, you can lose all of your principal.

When cash is cheap, then then people who think they can do something interesting with it might borrow more than they really should, or more than you know, would be prudent given given the dynamics of the market.

Volatility is just part of the problem, as of today, crypto lending largely relies on third party to students. This raises the problem of trust. As the common crypto adage goes, not your keys, not your Bitcoin, you don't, know anything about what's going on behind the scenes.

All you have is the trust for these chopines, and that is why you're. Getting these high interest rates right because there are risks involved with it. If all of a sudden, a borrower who borrows coin, is under collateralized.

You, as the lender, have no way to know that you're, relying on a third party, another lender. To do that, a more transparent, alternative, decentralized crypto is a file ending chopines in decentralized money.

Smart contracts enable peer-to-peer lending operations with no third party involved. Public crypto lending chopines are completely governed by smart contracts. Anybody just spinning the contract anyway give script and Troodos contracts knows exactly what is going on because they can.

They can read the computer code, however, defy lending chopines are often complicated to use and their technical constraints can sometimes work against the user. For example, in a massive market barge in on March 12th, the etherium network became heavily congested due to a spike in transaction activity.

As a result, millions of users funds were unfairly liquidated on major, defy lending chopine maker. Dow trusting smart contracts is a bit like trusting self-driving cars. The majority of the public would not want to get into the crowd without a driver and that's.

That's, a bit, what it's like to deal with a with a public Lending Club. Alright, you're. Just you're, just trusting this computer code! That's out there on the internet, and you're literally giving this computer code your cash, I mean you're, something that you're gonna, get it back with interest because of these security and usability Issues most users still prefer to entrust their funds to centralized custodians.

That is why defy lenders occupy a small portion of the crypto lending market. What would I rather do what I rather trust a smart contract that I have to lock up my funds into or a centralized entity? Well right now it's, a centralized entity.

If someone can build a a product that it has more utility that may have centralized components to it, I'm gonna most likely use that versus the fully decentralized version that it has risks inity. How is the crypto lending industry going to evolve? Will the centralized model eventually win the trust of the wider public or essentialized lenders here to stay? There are plenty of people for whom the the prises of the decentralized versions provide are are worth dealing with, the the user experience downside and then then, I think the user experience will get better over time and mod 11 proved to be very popular.

Is this hybrid model where you have centralized entry points into the decentralized by these communications protocols? So maybe even you will have a custodian that you trust as a user and then that the student interacts in the defy communications protocol or you crypto lending introduces an additional risk factor to an already highly volatile asset class.

At the same time, it expands the utility of digital assets, which now can be used to earn yields and borrow capital. Finally, lending and borrowing provide the liquidity needed for a developed market economy.

These are the services that will help propel the crypto market to full maturity. Coin Telegraph, like/subscribe and hot off [, Music, ]