Crypto-backed loans, bitcoin loans or crypto lending are the terms that offer loans against the crypto you hold. So if you are a holder of Bitcoin/Ether/Altcoins and they are simply lying in your wallet, you could take a loan by putting your tokens as collateral.
What are Crypto-Backed Loans?
In a centralized system where banks or financial institutions or even local pawn shop provide you with a loan against collateral like land, gold, house, etc., with an agreed interest rate to be paid by the bearer. Here banks are the trusted parties that verify the collateral and identity of a person availing loan so that it does not lead to a loss to the bank/FI’s/individuals.
In a decentralized world, the same case is replicated where the borrower would be eligible for a loan amount against the collateral. However, here the issuer and borrower are directly dealing with each other, and there is no third party like ‘Bank.’ This is known as crypto-backed loans.
How does crypto lending work?
So say you have ‘x’ amount of bitcoin in your wallet, via smart contract you initiate the request on one of the crypto-lending platform. There would be other fields like Collateral Token, Loan Amount, Loan Tenure, Premium, etc. Sample this –
Once you have filled in the form, the submitted the request it would be available on the lending platform to get funded. The amount would be credited to your wallet which you could use as per your wish.
How are crypto-backed loans different from Peer-to-peer loans?