The market of crypto lending has been growing at an exponential rate. Data observed over the past year suggests that the total dollar value of active collateral in the crypto lending market has increased from a volume of US $1.9 billion to the US $24.3 billion between Q3 2019 and Q4 2020. In percentage terms, the growth is as high as 1170%. During this time, the number of Bitcoins used as collateral reached a figure of 420,000 coins, growing by 213,000.
What does this growth imply, and what opportunities this growth presents to the crypto lending market? To answer these questions, we need to delve deeper into the credit-based financial economy, its advantages, and how the scope of crypto lending fits into this scheme of things.
Why are Finances Based on Credit?
Finance is an umbrella term that includes matters relating to the creation, management, and study of money and investments. And, when it comes to subjects relating to money, credit takes the center stage.
The credit theory of money suggests that a sale and a purchase is essentially the exchange of a commodity for credit. What we can infer further from this is that the value of money is dependent on the right that the creditor acquires to “payment”. It is also dependent on the right to satisfaction for the credit and the obligation that the debtor has to pay his debt. Therefore, if we think in purely theoretical terms, we create a debt each time we make a purchase and acquire a credit each time we sell. It is why the credit-based movement of money is central to how we conceive the world of monetary finance.
How Do They Work and What is Their Advantage?
How does the credit-centric concept of finance translate to the real world? Being successful in business implies that we accumulate credits as a banker and we can buy without creating new debts. What happens in the process is that we transfer a part of our accumulated credits to our sellers.
While such explanations of credit-based monetary finance may still appear a bit elusive, the real-world benefits of credit are in front of us to see and realize hands-on.
For instance, the use of credit helps make deals without the involvement of cash, while providing a useful record of transactions. It also helps safeguard the buyer’s interest if there arises any dispute after the purchase. Since you do not need to pay the entire money upfront and pay only a part of it each month (or in any other fixed interval), it is easier to manage the finances and be in control of the cash flow. With credit, you can use something that you urgently need to use but haven’t yet been able to pay in full. It also becomes useful when there is a discount on the sales and you do not have the money with you right away to pay for it.
For all these reasons and more, credit plays a pivotal role in the way finance works.
How Can Crypto Lending Bring You Profit?
Now, let’s focus on crypto lending and how it may prove useful. Crypto lending helps you generate income with your idle coins. What is enticing is that you do not have to part with the ownership of your coins to generate income. Some exchanges let you lend your crypto holdings and, in exchange for that, you can have an annual percentage yield as high as 25%.
There are two types of ways through which you can lend your crypto. In the first one, you can become a lender of fixed loans. Here, you will lock your deposit at an exchange at a predetermined rate for a fixed time. This period can be as short as seven days or as long as 90 days. The incentives of lending through such a fixed-period mechanism come in the form of higher interest.
The other type of lending is flexible lending. This system is comparable to that of a savings account, where you can withdraw your funds at any time, but the interest rate is lower compared to the fixed lending type.
How to Use Market Movements to Your Advantage?
There are reasons why crypto lending is witnessing a surge in its market size. To begin with, it is much more inclusive than accessing credit through traditional banks. Borrowing from a mainstream financial institution requires a healthy credit score and loads of verification documents to furnish. On top of that, the approval often depends on the discretion of the bank. On the other hand, cryptocurrency borrowing does not require you to have a bank account, and most of the crypto-lending platforms do not even look at the credit score.
The rise of the market leads to increased competition, which brings more benefits to the users. Crypto lending platforms, for instance, have reduced the loan approval period by a huge margin. While traditional banks may take anywhere between a few days to a few weeks for approval, most crypto lending platforms can get your loan sanctioned within 24 hours.
In the traditional banking system, it is the bank or the financial institution that decides on the loan amount, interest rate, or repayment time, whereas, in crypto-lending platforms, the borrower gets to customize these terms. Crypto lending charges much lower transaction fees. Most of the crypto lending platforms store their funds in cold wallets, while many stores are even 100%, ensuring high levels of fund security.
For lenders, crypto lending provides an unmatched opportunity to earn with their idle holdings. Suppose you hold X number of crypto assets. You are waiting for its price to rise to a certain level so that you can sell them. But, during this waiting period, you do not earn anything with these coins. Crypto lending creates that earning opportunity for you. It secures your holdings from the uncertainty of price movements and market volatility. You might not know for how long you would have to hold on to your asset. But, that does not hamper your earning potential.
How Can CLAIM Help You With This?
Moving ahead with the concept of algorithmic stablecoin, our coin Claim is a credit-based stablecoin. If you hold DAI, you can deposit them to our platform Claim. What Claim will do is, it will mint cUSD and invest it in verify DeFi protocols. The Claim DAO verifies these protocols. The revenue that comes from these investments gets distributed among the CLAIM governance token holders. Users can redeem any stablecoin asset in the pool in a 1:1 ratio.
The unique benefit that our platform offers you is that the deposited assets are used as credit leverage. The stablecoin balances itself not only with the existing reserves but also the expected future returns of the assets, used as trusted collateral. The ROI in these assets serves as the support value of Claim’s credit system, yielding robust results for you.
