Gold has been a precious commodity for most of the investors, while experts argue there have been reports that Gold protects user’s financial portfolio from volatility as there is an inverse relationship between gold and equities. Gold is also widely used as collateral in the Debt market, and with the push of innovation, now borrowers in the crypto lending community could use gold as collateral. Let’s explore a bit more on this –
The Crypto Lending Using Gold as Collateral
Conventional Lending has been a cumbersome and tedious job, as individual raise a request to the Bank or NBFC ’s, Banks explore the user’s credit score, verify personal and financial details and then the loan is sanctioned. Crypto Lending, on the other hand, does not need to verify your economic status, based on the collateral value the loan amount is fixed and released at a predefined interest rate. While earlier tokens were used as collaterals, quite recently Gold has been used as collateral by the crypto-backed loans platform.
How Gold as Collateral works in Crypto Loans?
The borrower could submit a loan request and deposit the gold in the wallet provided by the Blockchain lending platform. Here there are two types of service providers, one where the platform connects the borrowers/lenders from across the world and second where the platform itself act as a lender. So in the first case, once the loan request is made, and if a matching application from a lender exists, the loan could be issued promptly, or otherwise, the request sits on the dashboard unless an apt funder is found. In the second case, the loan amount either in the form of cryptos or fiat is issued and transferred directly to the bank account or a crypto wallet.
Once the repayment of the principal amount is made, the borrower can get his Gold collateral back. Mostly there are no prepayment charges applied by the lending platforms and have fixed interest rates.
The Lender and borrower are under an agreement made by smart contracts, to prevent either party from relapsing on the agreed terms.
Why Gold as Collateral in Crypto Lending?
By using Gold as collateral, the blockchain lending platform is raising the possibility of including other tangible assets like precious metals, real-estate, etc. Also, Gold as collateral has been existing since olden times, and individuals still include Gold among their financial portfolio as a diversifier or as a hedge in case inflation is peaking so then why not take its benefits in crypto markets as well?
What are the Risks Associated with Gold loans in Crypto Market?
Gold loan is classified as a secured loan because it’s an asset-backed loan where mostly lenders do not have to worry about defaulters and Gold is a universally accepted commodity. Hence lenders are making a safe bet. However, the borrower might have to worry about the crypto prices since it’s a volatile market with not much regulation.
Firms Offering Gold Loans in Cryptosphere
ETHLend has listed the gold-backed cryptocurrency, the Digix Gold token (DGX), on its platform; enabling borrowers to use gold as collateral effectively for blockchain lending.
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