Welcome to The Loans of the 21st Century.
When humans first developed the idea of need and want, we invented the barter system. Humans would exchange goods with each other based on their necessities. As we evolved, so did the system of currency and lending. The earliest lending system for humankind was established as far back as 3000 years in ancient Rome. Ever since then, loans have been a part of human history all the way to the modern age. What we’re witnessing now is another revolution in the system of loans. This is the era of the crypto line of credit.
What is a Line of Credit?
A line of credit refers to a present borrowing limit that can be used at any given time by a borrower. It allows financial institutions to establish a maximum borrowing limit that can be provided to any of their customers based on their credit rating. A borrower can borrow some or all the funds made available to them and agree to pay back a certain interest upon the principal loan amount. Once the entire loan amount plus interest is paid off, borrowers can once again apply for another loan based on their line of credit. Borrowers are generally free to use the loan for any purpose they see fit — be it for purchasing a home, a vehicle, or medical procedures.
This is a fairly simple system that has been in place for centuries now. And yes, it does work. Where people do sometimes face an issue is the concept of collateral. It requires borrowers to provide a physical asset — like a home or a mortgage — against which the loan is granted. In some cases, where you may not have access to a physical asset, it may be hard to get a loan, regardless of how dire your requirements may be. So, what is the alternative?
Understanding Crypto Loans
Crypto lines of credit are a relatively new financial product that have become increasingly popular among cryptocurrency users. They function in a way that’s similar to traditional loans, with one big advantage. The loans can be acquired without the need for physical collateral. Borrowers can take out crypto loans against their current digital holdings. These loans allow individuals to borrow money using their cryptocurrency assets as collateral. This means that they can access cash without having to sell their crypto holdings, which can be a valuable option for investors who want to maintain their positions in the market.
In a typical crypto loan, the borrower provides their cryptocurrency as collateral for the loan, and the lender holds on to the crypto while the loan is outstanding. The borrower is then required to make regular interest payments on the loan, and once the loan is repaid in full, the lender releases the crypto back to the borrower. ByteX is taking this one step further by offering semi-collateralized loans or zero protocol collateral loans. This allows borrowers to put up little to no collateral to acquire loans. This is done by our proprietary ByteX Credit Ratings System that uses artificial intelligence to monitor on-chain & off-chain behaviors to determine their creditworthiness. Once this is established, borrowers can choose to put up some collateral before acquiring their crypto loan.
As compared to regular loans, crypto loans are generally of shorter periods, ranging from as little as a week to as much as 6 months. Another key difference between traditional loans and crypto loans is the calculation of the interest rate. While interest rates in traditional loans are calculated on a monthly basis, interest rates for crypto loans are calculated on an hourly basis, to factor in market volatility.
What are the Benefits of Crypto Lines of Credit?
- One of the key advantages of crypto lines of credit is that they provide investors with a way to access cash without having to sell their crypto assets. This can be particularly useful for investors who believe that the value of their crypto will increase over time.
- Crypto loans allow investors to maintain their position in the crypto market without having to incur heavy losses.
- The ease of acquiring loans: Borrowers can collect their loans much faster when it comes to crypto loans rather than traditional loans.
- Another advantage of crypto lines of credit is that they can be a more flexible option than other types of loans. Many traditional loans require the borrower to put up a specific asset, such as a car or a house, as collateral. Crypto lines of credit, on the other hand, allow borrowers to use their crypto assets as collateral, which can make it easier for them to access the funds they need.
- Lastly, crypto loans are accessible to almost everyone. People with little to no credit history and folks who may not meet the requirements of a conventional loan can also acquire crypto loans.
What are the Disadvantages of Crypto Lines of Credit?
- When compared to traditional financial loans, crypto loans do have a higher Loan-to-Value ratio. The LTV ratio is calculated by taking the loan amount and dividing it by the value of the asset or collateral the amount is being borrowed against. In the case of Zero Protocol uncollateralized loans on ByteX, the LTV is determined by ByteX’s Credit Rating System (CRS).
- Crypto loans are also subject to liquidity risk. Given the inherent volatility of the crypto market, if the value of your collateral falls too low, then you will need to add more liquidity, or your lender may liquidate your assets.
- Higher interest rates with lower loan period: Crypto loans charge anywhere between 5% to 13% APR and are often dispersed for time periods as low as 7 days.
Borrowing Crypto Loans With ByteX Lend
ByteX Lend is our borrowing and lending platform. Based on our hybrid centralized-decentralized finance (CeDeFi) model, it allows institutional and individual borrowers to get the capital they need with or without collateral. We’ve made the process of acquiring a crypto loan extremely simple for our institutional and individual borrowers. Here’s a step-by-step process of acquiring a crypto loan from ByteX:
The Borrowing Process
- A borrower initiates a request for a loan on ByteX.
- They answer a few simple questions like loan amount required, purpose for the loan, repayment period, etc.
- The borrower’s profile is then run through our proprietary Credit Rating System
- These details are then made available on the Public Loan Pool
- The borrower can choose from a list of cryptos with different LTVs
- The borrower must also provide a cover amounting to 25% of the requested loan amount
- Upon verification via CRS and approval from the Public Loan Pool, a Loan Contract is signed by the borrower
- The loan amount is then deposited to their wallet in the form of cryptocurrencies or stablecoins.
The Lending Process
- Lenders can offer liquidity to ByteX Lend by choosing from 2 different risk pools
- The Master Pool consists of globally accumulated assets from across the platform.
- The Master Pool lenders are the first to get paid out, earning the default or lowest interest rates.
- The Borrower Pool allows lenders to be more selective about who they lend to and the different forms of loans they want to fund.
- The Borrower Pool does offer higher interest rates, but it’s also riskier for lenders.
Having learnt more about crypto lines of credit, its benefits, and the pitfalls associated with it, you can take the call on whether or not a crypto loan is right for you. If you decide to take a crypto loan, stay tuned to ByteX’s page as we’re soon going to launch our own ByteX lend programme.
– Team ByteX
Certain statements in this document might be forward-looking statements, including those identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “target”, “seek”, “will” and similar expressions to the extent they relate to the material produced by Bytex staff member. Forward-looking statements are not historical facts but reflect the current expectations regarding future results or events. Such forward-looking statements reflect current beliefs and are based on information currently available to them. Forward-looking statements are made with assumptions and involve significant risks and uncertainties. Although the forward-looking statements contained in this document are based upon assumptions the author of the material believes to be reasonable, none of Bytex’s staff can assure potential participants and investors that actual results will be consistent with these forward-looking statements. As a result, readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results or events to differ materially from current expectations
The commentaries contained herein are provided as a general source of information based on information available as of MMMM DD, 2022. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or relevance of the information contained here. ByteX. makes no representation or warranty to any participant regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. Prospective participants must not rely on this document as part of any assessment of any potential participation in buying and selling of virtual currency assets and should not treat the contents of this document as advice relating to legal, taxation, financial, or investment matters. Participants are strongly advised to make their own inquiries and consult their own professional advisers as to the legal, tax, accounting, and related matters concerning the acquisition, holding, or disposal of a virtual currency. All content is original and has been researched and produced by ByteX.