For centuries, traditional forms of lending – such as those offered by banks and other big financial institutions – have dominated the borrowing market. They have helped drive forward economic progress and supported businesses both large and small – but they’re not without their drawbacks.
The centralized and overly complicated nature of conventional lending puts all the power in the hands of the banks, meaning that both the borrowers and the investors (those with their funds in the bank’s accounts) are at a disadvantage. Crypto lending aims to right those wrongs through a new form of borrowing that prioritizes the needs of individuals rather than institutions. Here are a handful of ways in which it differs from traditional lending systems.
Collateral Quantity and Liquidity
Every loan that is approved today must have some sort of collateral to support it. For example, when applying for a mortgage from a bank, the collateral is the value of the house that the applicant wishes to purchase; in the case they cannot meet their repayments on the mortgage, the house may be seized by the bank to recoup their investment.
With crypto lending, the collateral takes the form of crypto assets. Because cryptocurrencies, by their very nature, facilitate liquidation far more readily than property does, they benefit both the borrower and the lender, who might wish to access the value of the collateral without having to wait.
Speed and Efficiency
Which brings us onto the second point – speed. Anyone who has ever applied for a sizable loan via the traditional method will know what a time-consuming and cumbersome process it can be. By contrast, crypto loans can be processed and approved within a matter of minutes thanks to the sophisticated blockchain technology involved in their composition.
What’s more, the fact that crypto lending chains and transactions are fully digitized means that there is no paper processing involved at all. That’s not only conducive to faster speeds and more transparent dealings, but also good for the environment, since valuable resources are not consumed needlessly.
Accessibility and Flexibility
As alluded to above, conventional loans are very much made on the terms of the lender – and even then, the decisions are made by a third-party (such as a bank) rather than the people actually involved (the borrower and the customers of the bank whose capital is used to fund the loan).
By cutting out the middleman altogether, crypto lending levels the playing field for both borrower and lender. The former can access the type of funding they want with a far greater variety of terms and conditions and they don’t need to jump through half as many hoops to prove their worth. Meanwhile, the latter doesn’t have to suffer a third-party siphoning off the majority of their profits and can benefit from vastly improved interest rates.
So, there you have it – crypto lending operates on similar principles to traditional lending, but deals with more fluid collaterals, accelerates the speed and efficiency of transactions, and enhances the accessibility and flexibility enjoyed by both parties.