security of crypto loans

Security of Crypto Loans: Things to Know

If you’re one of the early birds of cryptocurrency investment, chances are you have a nice stash of digital assets lying in a hardware wallet. You’ve done everything to ensure the Bitcoin or Ether you’re HODLing is kept safe from hackers. But did you know that you can unlock the value of your digital assets and buy your dream home, a car or make an investment without selling them?

You must have heard about DeFi lending sites that facilitate crypto loans at rates much lower than you get from credit card companies. DeFi borrowing enables you to collateralize your cryptocurrency for a fiat loan, and it doesn’t matter whether you have a short purchasing history or a bad credit report.

In this article, we’ll discuss the security of crypto loans and how your collateralized cryptocurrency remains safe during the loan period.

What DeFi is and Why It’s Secure

Decentralized Finance (DeFi) refers to blockchain-based applications that primarily run on the Ethereum blockchain. The aim is to use cryptocurrency to disrupt the traditional financial systems of banks, lending institutions, and banks. The main difference with Centralized Finance (CeFi) systems is their ability to run free of any central authority exercising control over the system.

Through DeFi lending, users can lend out cryptocurrency and fiat currency just like traditional banks do and earn an interest in the process. DeFi borrowing enables crypto HODLers to put their digital asset holdings as collateral for fiat loans. The lower interest rates and lack of credit checks have made DeFi platforms more attractive to anyone who can provide crypto as collateral.

Once you’ve put in your digital assets as collateral and taken a fiat loan, the question of the security of crypto loans could be at the back of your mind. Well, it’s an open secret that the security of DeFi platforms isn’t a debatable fact. That’s because they don’t rely on any third party to operate – they rely on blockchain smart contracts.

A smart contract is a blockchain terminology for security using a piece of software code that lenders and borrowers exchange. The smart contracts offered by DeFi Lending platforms define and govern the courses of action of every party in the duration of the loan period. They automatically regulate interest payments, what happens to your cryptocurrency, and the collateral liquidation process.

Smart contract-based applications (DApps) used for DeFi borrowing has a unique feature that lets you keep custody of your funds, but you can’t use them until you fully repay the loan. The non-custodial or self-custody function guarantees that no hacker or any other third party can take your collateralized cryptocurrency. It’s this self-custody function that makes DeFi lending decentralized and ensures the security of crypto loans.

How Does Crypto Lending Work?

You already know that most people visit banks or lending institutions when they’re short of cash. The bank gives them money they must repay with some interest, which is how banks make their money. DeFi lending puts you in the bank’s position, where you can lend cryptocurrencies or fiat currencies to borrowers and earn interest payments.

There are three primary parties involved in the DeFi lending process. The lender is the first party in the process. This could be anyone like you who want their crypto assets to work for them instead of just keeping them idle in the crypto wallet.

The second part is the peer-to-peer DeFi lending platform such as SmartCredit.io. They provide the platform on which the transaction will take place.

If you require cash against your cryptocurrency, then the third party represents the borrower. You’re the one who finally gets the money for buying a home, a car, or any other form of investment. While the DeFi lending/ DeFi borrowing process may differ slightly, it almost always follows these simple steps:

  1. The borrower opens an account and places a crypto loan request
  2. The DeFi platform calculates how much crypto you need to set as collateral as soon as the matching lender is found
  3. The collateral will be locked in a smart contract until the borrower repays the entire loan amount (The borrower cannot use the staked collateral until the loan as the whole is repaid)
  4. The lender automatically funds the loan amount via the DeFi platform
  5. The lender receives regular interest earnings
  6. The smart contract releases the collateralized crypto to the borrower as soon as they pay off the entire loan

What You Need to Know Before Using Crypto Loans

The DeFi lending market has put the smart contract system in place to guarantee the security of crypto loans. You can let your Bitcoin, Ether, or any accepted Altcoins work for you anytime you need some cash in hand.

The loan amount will be credited to your linked bank account when your crypto loan application is approved. It would be best to repay your loan, and your collateral will be reimbursed immediately after you fully repay the loan. There are attendant benefits associated with crypto loans, including:

  • DeFi borrowing doesn’t include financial background or credit score checks
  • The loan amounts are disbursed fast, meaning you can attend to emergencies without delays
  • You don’t have to sell your digital assets to receive the cash – you can still enjoy the benefits of higher crypto prices in the future
  • The process is straightforward, and you don’t have to fill in a ton of paperwork
  • Despite all the mentioned benefits, the cash you receive is a loan you must repay with some interest. You only risk losing your digital assets if you fail to repay the loan amount

Why Smartcredit.io Is the Most Secure Option

Smartcredit.io is a peer-to-peer DeFi lending platform meaning it facilitates a direct link between lenders and borrowers. Unlike what you have experienced with traditional lenders before, the platform offers blockchain-based credit solutions and eliminates third parties who only increase the cost of credit.

Lenders and borrowers can execute transactions using their standard cryptocurrency wallets, and as long as they keep their private keys secure, their crypto assets remain entirely safe. Smartcredit.io creates a legally enforceable loan agreement for every new loan between a lender and a borrower. Borrowers don’t have to worry about the security of crypto loans because all loans on smartcredit.io are also insured for face value.