What is lending? Things to know about Lending in Crypto (2019)

By F | Invest

What is lending

Lending coins must have been familiar to the brothers participating in the market since 2017. Onecoin, Hextracoin, Bitconnect, Regalcoin, RGX are "unforgettable" names for many brothers.

In this form of lending coins, you use BTC and ETH to buy coins with lending and then receive interest. But that period of MLM Lending coin is long gone.

In today's article, I want to introduce to you about the definition of Lending that we often see recently.

It is a form of lending and lending money to receive interest almost similar to the brothers depositing money to receive interest.

This form is growing fast and is diverse from lending on separate platforms (NEXO, Cred, Constant, BlockFi ...) to lending right on the exchanges (Binance Lending, Gate Lending, Poloniex ...).

In addition, it is a vertical in the overview of DeFi (decentralized finance) that my previous article mentioned.

OK, let's find out in the article!

Lending translated into Vietnamese means lending.

Lending or “lending” is a form of users using their assets or money to lend to others "Borrowers" with a certain interest rate.

After a period of time, they will get back the principal and interest as the original agreement.

Borrowers here may be other users, or organizations such as exchanges (Binance, Bitfinex, Poloniex).

For example: Brothers lending VND 100 BUSD on Binance lending with an interest rate of 10% a year for 14 days (picture below). Then after 14 days, the total amount of coins you receive is: 100 BUSD + interest.

Interest = 100 x 10% x 14/365 = 0.5283 BUSD.

Total = 100.5283 BUSD.

An overview of Lending in Crypto

As an overview of Lending in Crypto above, including:

  • Lending right on the exchanges.
  • Separate lending platforms. You can see that you have divided lending platforms into two categories, CeFi and DeFi.

In which:

  • Lending in CeFi: Lending platforms in centralized finance. A third party is always in control of the lender and the borrower. It always comes with Custodial or consignment.
  • Lending in DeFi: Lending platform in decentralized finance. Eliminate intermediaries, no trust (non-custodial).

For those who do not participate in any lending platform, you can bypass the distinction CeFi, DeFi.

But I think it will not be redundant if you learn about DeFi from now on. In my opinion it is the future of the upcoming open economy. And very soon, you will see it more and more familiar in life.

Coin98 There is a detailed article on DeFi decentralized finance, you can refer to the article below.

Besides, Lending DeFi is also one of the components in that decentralized finance.

So for the parameters of Lending Crypto, you need to pay attention to what parameters?

Parameters to consider in Lending

Lending whether it is DeFi or CeFi, they also have the same important parameters such as Interest rate, lending time ...

You refer to the table comparing these figures between platforms as follows:

Interest Rate (interest rate):

This is the interest rate when you make a loan of any Crypto. Of course, as a lender you will want this number to be as high as possible.

Lending time (lending time):

A period of time when your Crypto currency is locked and lent to others. Often platforms will lender multiple time frames to choose from. For example Binance Lending has 14-day, 28-day frames ...

Number of coins allowed for lending on the platform:

Whichever platform the lending currency allows, the more options the user will have.

Total Value Locked (TVL):

  • It is understood as the total amount of lock assets within the platform. This number represents the level of interest, user engagement to that platform.
  • The more assets locked inside the platform, the more impact the price of the coin will have.

Below I will explain more clearly.

Features of Lending

Advantages of Lending

Users can choose to lend lending their idle coins to increase the number of coins.

Often platforms will have multiple lending duration options to diversify their choices of lenders.

Disadvantages of Lending

The biggest risk to lending is that the price of the coin is reduced during the loan process & the interest rate cannot compensate for the deficit due to the coin price.

For example: On Binance Lending, open lending at ETC. Interest rate is 7% a year, for 14 days.

September 11, 09 (starting lending): ETC price is $ 2019 USD.

September 25, 09 (principal + interest): ETC price is $ 2019 USD.

If you lend lending 100 ETC, the total received will be 100 + 100 x 7% x 14/365 = 100.268 ETC = $ 661.772 USD (calculated at the time of loan).

But if calculated according to ETC price at the time of interest payment, the total revenue will be 100.268 x 4.6 = 461.2328, down 30.3%.

The active nature of Lending

How Lending works on exchanges

Lending coins (borrow coins) to fund funds for margin services.

In the previous article, Coin98 introduced about Margin trading what? You can refer to the following article.

This is a form of margin trading, traders will borrow an additional piece of coin from the exchange to leverage their trading. So where does this extra coin come from?

There are two ways the exchange can lend money to traders, that is:

Option 1: Use coins from the reserve fund of the exchange.

This way the floor will encounter problems if the amount of deposits is large, leading to a large amount of loans. And the floor must have a huge reserve fund to lend traders.

Option 2: Borrow coins from users with certain interest (for example, A%). Then, use that coin to lend in margin trading with margin fee (for example, B%). Usually A% <B%.

Option 2 is the relatively common way that brokers are using it for their margin trading. And A% is usually smaller than B% so with the margin trading problem, the exchange always auto rates at the lending rate.

That is also why exchanges with margin trading often come with lending.

You refer to the table below to compare these 2 ratios.

How Lending platforms work

Lending on the exchanges, the coins participating in lending will be put into the margin trading mechanism. And inside other lending platforms, there is no margin trading.

At this time, the amount of coin participating in lending will be used to lend to borrowers.

On the other hand, platforms will stand in the middle and benefit from the difference between lending and lending rates.

For example: Communication NEXUS including lending and borrowing services to users. The floor now plays a role in the middle of the intermediary.

Because NEXO is an intermediary 3rd party holding the amount of coins participating in lending and interest, they belong to the CeFi group (financially focused).

The effect of lending on the prices of coins

Under the lending mechanism, the coins participating in lending will be locked for a certain period of time. This will have a positive impact on those coins.

  • Total Valued Lock (TVL) lock coin causes traffic to decrease over time.
  • Demand for buying coins to participate in lending increased.

These factors will theoretically impact the price of coins.

However, there are many other factors that affect the price of the coin, making the price virtually unchanged such as: The amount of coins participating in the lock is too small compared to its total supply resulting from the impact of buying demand and reducing the supply. as does not affect.

For example: In the case of BNB, when Binance informed of their lending platform, it was time to start lending. BNB price changed from $ 26.26 USD to $ 25.37 down 3.4%.

The total coin lock in lending is only 200,000 BNB, accounting for 0.129% of the total circulation of BNB.

These are the two reasons why BNB price is hardly affected by Binance lending event.

Besides, Lending is also a game of exchange trading platform. This is a conspiracy theory that we & the team have seen. You can refer to the following:

In lending, the floor will hold a large amount of coins (from lenders deposited).

Exchanges can be dumped: Use that amount of coins to sell down, causing the dump price. Then use the money to buy at lower prices. Thereby increasing the amount of coins they hold between.

For example: On August 28, 08, Binance started lending for BNB. BNB price = $ 2019 USD. The lowest time compared to that time was $ 25.37 USD on September 14.2, 26.

During that 28-day period, there were 7 times Binance Lending with BNB and a total of 2,643,040 BNB locked in Lending, accounting for 1.7% of total supply.

Although this number feels small, but in the position of an exchange and holding many BNB coins, pushing their coin prices down is not difficult.

Summary

In the upper part of the article, I introduced you about Lending in the Crypto market.

Hopefully the brothers have grasped an overview of it and selected for themselves the lending form that suits their needs.

Lending in Crypto still has many platforms or platforms offering lending, Coin98 There will be an article detailing these forms.

Lending is also part of Crypto's DeFi picture, knowing that lending knowledge will help you.

See you in the following posts!

F

AI, Machine Learning, Big Data & Blockchain are 4 pillars of the current Technology Development.