Hey everyone, I'm curious about crypto loans and how they work, but I'm a bit confused. From what I understand, you can use your cryptocurrency as collateral to borrow other types of crypto, and you have to pay interest on the borrowed amount. I've also heard that they require "over-collateralization," which is pledging more crypto than the value of the loan to reduce risks.
I also came across some info saying that crypto loans are different from DeFi lending because they have fixed interest rates, don't require extra crypto addresses, and don't have gas fees. Plus, the borrowing process is supposed to be simpler.
Can anyone explain if I'm on the right track? How do crypto loans actually work, and what should I watch out for? Any tips or personal experiences would be really helpful. Thanks!
You are right. About the over-collateralization, even the traditional banks have always operated in over-collateral, it's always less than 80% of the valuation of whatever collateral you may put. The percentage can be higher or lower depending on the nature of collateral like it's gold or a car. The excess value of collateral is for the depreciation, expenditure in liquidation process and other legal expenses.
In matter of crypto and stocks, it's decrease in price. And as Crypto are much volatile, you need to put a large collateral in order to take loans. Lesser the collateral, more are the chances of liquidation and for something that aims to profit from banking, liquidating is not their top priority as it might make them lose customers. Crypto loans are often taken by active traders that plans to make profit on their idle money.