Ever since the first modern cryptocurrency was introduced in 2009, crypto as a whole has grown by leaps and bounds – and shows no sign of stopping. You may not be able to use it to pay for regular living expenses like with fiat currency (yet), but the number of use cases for cryptocurrency is increasing every year.
Most people want to know how they can use popular cryptocurrencies like Bitcoin to pay for goods and services, but they can go way beyond just paying for pizza night from their crypto wallet. Other common use cases include asset tokenization, store of value, and crypto lending.
In this article, we’re taking a deep dive into crypto lending and how crypto loans without collateral work.
Speaking of crypto lending, there are already several options for those who want to take out crypto loans. However, many are saying that the current approach is barely scratching the surface of crypto lending’s potential to provide access to nearly anyone in the world. Why? Because the vast majority of them require a large amount of collateral.
Of course, you can’t exactly blame crypto lenders for asking for some form of security; that’s the modus operandi of lenders everywhere. The problem is that this excludes so many people from taking advantage of crypto loans. To illustrate, here’s how the average crypto loan works:
As you can probably tell, the process is much the same as getting a loan from a traditional bank. However, this means that most candidates for this type of loan are margin traders and other crypto experts who already have enough cryptocurrency to cover over-collateralized loans. What about all the people who don’t have sufficient collateral for a crypto loan? That’s where uncollateralized crypto loans come into the picture.
Once you’ve found a trustworthy crypto lender who offers uncollateralized loans, you can expect a couple of things:
At this point, most crypto loans without collateral work as credit funds. Crypto lenders extend lines of credit to lending businesses, which in turn provide the infrastructure for issuing and collecting on loans using fiat currency.
As much as uncollateralized crypto loans deserve positive attention, the fact is that most of them are actually scams. The “lenders” might be after your account numbers or passwords, for example; in some cases, the borrowers will lose access to the funds as soon as they’ve shared enough sensitive information. Just like many of today’s cryptocurrencies don’t deserve your absolute trust, you have to watch out for the collateral-free crypto loans that seem too good to be true.
If you aren’t sure, check for reports of fraud and negative customer reviews, and never hand over your personal details. Also, pay attention to the interest rates. If someone’s offering uncollateralized crypto loans with unbelievably low-interest rates, it’s probably an attempt to lure in people who simply don’t know any better.
While you have a fair amount of control over avoiding scams, there’s one risk you can’t avoid with a crypto loan, with or without collateral. You could take out a loan, and find your debt suddenly increased due to fluctuations in the price of the cryptocurrency. Unfortunately, there isn’t much anyone can do about this, but for many, the benefits still outweigh the risks.
It’s been suggested that in the future, uncollateralized crypto loans could be directly financed by smaller lenders, or even individuals using self-serve lending tools. Offering loans without collateral through lending businesses is a great first step, but according to some, the end goal should be a decentralized network that’s available to everyone.
Just like with any other kind of loan, the main concern around crypto loans without collateral is ensuring that they get paid back in full. In order to minimize risk to the lenders, it would make sense to establish an evaluation process for specific criteria, such as:
Following this model, the lenders would vote on whether or not to issue loans using a form of decentralized governance. First-time borrowers would likely have to start with smaller loans. Once they’d proven that they could be trusted to pay the money back, they could apply for slightly heftier loans, working their way up to significant amounts of money if needed.
Most crypto loans require so much collateral that they effectively exclude the people who could benefit most from them. Without the need for collateral, the possibility of crypto loans is opened up for millions of people across the globe. The money could be used to start a small business, grow one that already exists, or fund an education that would otherwise be out of reach. The possibilities are practically endless, and they’re an amazing way to demonstrate the versatility of cryptocurrency.
Blockchain technology means that security isn’t a problem with uncollateralized crypto loans, but there are still risks involved for both lenders and borrowers. That being said, it would be small-minded to focus on the risks without also considering the huge potential of crypto loans without collateral. They can facilitate access to capital for those who need it the most, which could ultimately position cryptocurrency as an influential player in the global debt market.
