Current market situation and how æternity is changing the game
Blockchain technology holds the potential to deliver far more than an alternative means of value storage and transfer. While the launch of the Bitcoin blockchain in 2009 brought the first truly peer-to-peer payments platform to the world, the rapid evolution of blockchain technology has made possible to create peer-to-peer financial ecosystems with far more functionality than value transfer.
Decentralized finance, or DeFi, leverages blockchain technology in order to create decentralized, peer-to-peer alternatives to traditional financial instruments or systems that are free from middlemen or third party control.
Crypto lending is one of the most obvious applications of blockchain technology and cryptocurrency, and has captured a significant amount of attention over the last few years. Unlike traditional fiat currency lending, cryptocurrency is automated, in many cases decentralized, and is executed in a completely code-based ecosystem.
To take things to the next level, a more refined and nuanced technical approach is needed. This would allow for people from all walks of life to access the wide plethora of features that blockchain technology has to offer. Luckily, æternity has created a blockchain-powered environment in which anybody can create their own blockchain token or network, for any purpose — including DeFi or crypto loans.
What is Crypto Lending?
Crypto lending is a broad term used to define the ever-growing environment in which people can use cryptocurrency in order to acquire a loan and this gain access to financing — be it in fiat or in crypto. It works in a similar fashion to peer-to-peer lending, where lenders and borrowers are connected via online platforms, but the trade currency is crypto instead of fiat money.
This concept allows market participants to lend or borrow using cryptocurrency as collateral for access to stablecoin or fiat loans which can then be used as, say, investment or working capital. Loans are granted in exchange for interest rates on the asset, much like taking out a loan with a bank. But, there is a crucial difference — market participants often don’t need to complete complicated application processes or credit checks in order to start lending or borrowing, which allows them to access funds faster and leads to a more stable and fast capital flow.
How Does Crypto Lending Work?
The key concepts that drive crypto lending are decentralization, automation, and enforcement by code. DeFi — Decentralized Finance — and by extension crypto lending, cut out the middlemen and human administrative elements, allowing for greatly reduced fees and significantly faster execution.
Crypto lending represents a significant portion of the DeFi industry which is, for reference, valued at USD 68 billion, at the time of writing.
The majority of crypto lending is executed as loans for fiat currency / stable coins, like we mentioned already. Cryptocurrency lending platforms and DeFi services connect borrowers to lenders, who then proceed to agree upon a loan.
These loans are backed by cryptocurrency collateral — something the borrower uses to cover the loan and guarantee its return. Lenders provide fiat or stablecoin assets to borrowers in return for an agreed-upon interest rate. Borrowers place the crypto collateral for their loan under escrow, which is released when the principal and interest is paid in full.
Crypto lending can also operate in the opposite direction, with borrowers placing fiat currency or stablecoins in return for crypto assets.
Why is Crypto Lending Disruptive?
Crypto backed loans and the crypto lending market are a major step forward for the blockchain and cryptocurrency ecosystems. In simple terms, credit or lending markets significantly increase the amount of work that can be performed with assets by temporarily transferring them from static holding to immediate use cases. That way, the value that these assets represent is used to generate more value and push the system forward.
The ability to rapidly exchange value between crypto and fiat markets, while generating value through interest, dramatically increases the utility of crypto assets. On the one hand, this allows the lenders to generate an income of value on assets they are not using at the time. On the other hand, the borrowers are able to access fiat currency or crypto assets and could capitalize on arbitrage or market-making.
The DeFI ecosystem has the potential to deliver far greater value than traditional savings accounts — some crypto lending platforms, for example, currently provide interest rates of 8% on average for lending stablecoins. Savings accounts across the USA, on the other hand, can provide less than 1% interest.