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What is lending?

Updated on Wed, 7 Feb, 2024 at 8:28 PM

Lending transparency

Lending is a form of loan with cryptocurrencies. The concept is not different from that of a traditional loan, since it is a contract between the lender and the borrower.

The lender delivers an amount of certain tokens to the borrower with the commitment that the latter will return the amount loaned, within the established term, together with the agreed interest rate.

In return, the borrower will receive an amount of a token that can use in order to trade on other platforms or be able to purchase goods and services, without having to sell his own tokens to do so.

In this case, the difference between lending and a traditional loan is that, in this case, the user must store the loan guarantee in tokens.

What are the main risks of lending?

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

The price of cryptocurrencies can vary greatly.

It is therefore important that the asset being deposited as collateral always has a value greater than the minimum value required to be held to cover, in the event of liquidation, the amount requested.

In this sense, in the event that volatility reduces the value of the collateral to the point of liquidation, the necessary amount of the collateral will be available to cover the requested amount. As a result, the partial or total loss of the assets deposited in the operation as collateral.

Another risk inherent in the lending system is that it is based 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 hacking.

Finally, traditional lending systems are also used, exploited through private contracts in which it is agreed between two parties the delivery/repayment of a determined amount, during a determined period and with interest to accrue. They may or may not be secured by collateral.

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