What is lending?

Lending is a form of loan with cryptocurrencies. The concept is no different from that of a traditional loan, as two figures are established, the lender and the borrower. The former gives an amount of certain tokens to the latter, with the commitment that the latter will return the borrowed amount, within the established term, along with the agreed-upon interest. In exchange, the borrower will receive an amount of a token that they can use to trade on other platforms or to be able to acquire goods and services, without having to sell their own tokens for it.

In this case, the difference between lending and a traditional loan is that, in this instance, the user must have the backing for the loan available in tokens.

What are the main risks of lending?

One of the risks to consider when using lending services is the volatility of the crypto market.

The price of cryptocurrencies can vary greatly from one moment to another. Therefore, it is important that the asset deposited as collateral always has a value higher than the minimum value required to be maintained to cover, in case of liquidation, the requested amount. In this regard, if volatility reduces the value of the collateral to the point of liquidation, the necessary amount of the collateral will be used to cover the requested amount. Resulting in the partial or total loss of the assets deposited in the operation as backing.

Another risk inherent in the lending system is that it is carried out on smart contracts. These smart contracts are made by a person, so they are not infallible and may contain flaws that make them vulnerable to hacks.

Finally, traditional lending systems are also used, instrumentalized through private contracts in which two parties agree on the delivery/return of a specific amount, during a specific period, and with interest to be accrued. These may or may not have real collateral or backing.