CeFi is the standard abbreviation for Centralised Finance. As the name suggests, a single authority controls and regulates a CeFi platform. In a crypto lending situation, there are three parties involved: the lender, the borrower and the facilitating platform.
Responsibility for the safeguarding of cryptocurrency deposited on a CeFi site lies with the platform itself, so there is very little risk involved as a user. Most platforms have stringent security protocols in place and additional insurance in the event of a breach.
CeFi platforms enable easy conversion from one cryptocurrency to another, or to fiat currency and also enable crypto lending transactions to take place between different blockchains. However, CeFi platforms insist on knowing the identity of wallet owners, and they can also prevent transactions or impose limitations on users.
DeFi is the diminutive form of Decentralised Finance. Conversely, it is not under the control of a single entity and there are only two parties involved in any crypto lending transaction, the lender and the borrower.
On a DeFi platform, transactions are completed using smart contracts. A smart contract is a unique agreement between two parties, which defines the terms and conditions of a lending or borrowing transaction and enforces compliance.
Those using a DeFi platform are entirely responsible for managing their own crypto funds and activities they instigate. Decentralised finance does not have the same flexibility in terms of currency conversion and all transactions are completed on the same blockchain. However, DeFi platforms support anonymity and are entirely permissionless, which is more in-keeping with the preferences of many cryptocurrency users.
Some financial terms youâll need to understand
To engage with any financial product, you first need to understand some of the frequently-used terminology that goes with it. No matter which crypto lending calculator you choose, there are certain acronyms that you need to be familiar with. These are the three you are most likely to encounter:
APR â Annual Percentage Rate
APR is commonly used within loan agreements, regardless of whether it is fiat currency or cryptocurrency that is involved. The APR defines the overall cost of borrowing over a 12-month period. It takes into account the interest rate and any additional charges applied to the loan. Although itâs possible to calculate APR manually a crypto loan calculator is much quicker and more accurate.
AYR â Annual Yield Rate
Conversely, the AYR percentage allows crypto lenders to establish how much they can expect to earn over a period of time, so the higher the percentage, the greater the return. The AYR is calculated to include compound interest, which is effectively extra interest on interest previously earned, in addition to interest on the initial capital lent. Using a crypto lending interest calculator is a must, as the formula to calculate AYR manually is very complex.
LTV â Loan To Value (ratio)
The LTV ratio is the percentage of your collateral value that you can borrow against within a
crypto margin lending
agreement. This is most often seen as applied to a mortgage on a property, but the principle is the same. For example, if you deposited Bitcoin with a value of £10,000 and borrowed a further £5,000 worth, your LTV ratio would be 50%. One thing to bear in mind though is that the LTV will change if the price for your crypto goes up or down. Using a crypto lending calculator to explore different outcomes and the effect on the LTV ratio is essential to keep track and offset potential losses.
Crypto jargon â are you a whale or a shrimp?
A fishy ranking system
Itâs not entirely clear why crypto owners are defined by a hierarchy of sea creatures, but that is indeed the case. The main two youâll come across are âshrimpâ and âwhaleâ. Ranking is related directly to the number of Bitcoin owned â shrimps own less than one Bitcoin and whales own between 1000 and 5000 coins. Suffice to say that most lenders and retail investors found on a
crypto lending platform
are shrimps.
Hodlers are on the rise
The term âhodlerâ has been widely adopted by the world of crypto enthusiasts. Originally coming from a misspelling of âholdâ but latterly used as an abbreviation of âHold On for Dear Lifeâ. Hodlers are those who refuse to sell their crypto, regardless of market changes which suggest they should. Most of those engaging with crypto lending are hodlers and they are on the increase.
Are you a lender or a borrower? â getting the right crypto lending calculator
Crypto lenders
If you are a crypto lender, then youâll need a crypto lending interest calculator, which will make the task of establishing whether itâs worth using a crypto lending platform (based on its terms and conditions for lenders) a whole lot easier. For example, you could use it to find out how the AYR is affected in different situations or to determine the amount of interest you can expect over various periods of time.
Crypto borrowers
As someone who wants to borrow crypto, using an appropriate crypto lending interest calculator enables you to explore a number of potential loan options before making an application. It makes it quick and easy to assess factors such as how a different cryptocurrency affects the APR, or whether increasing the collateral improves the loan terms.
Collateral â what it is and how itâs used
Collateral is a big issue when it comes to cryptocurrency lending or borrowing, so itâs essential that you understand what it is, how itâs used, and why a crypto lending calculator is your friend.
Calculating a lending risk
Put simply, the higher the collateral, the lower the risk for lenders. So, if you are considering lending cryptocurrency, then collateral is a big part of assessing and offsetting risk. If you are a potential borrower, then the amount of collateral you are willing to deposit will determine the APR, amount, and repayment terms of any crypto loan available to you.
Collateral is calculated using the LTV (Loan To Value) ratio. The LTV represents the value of your collateral versus the value of your loan, which is shown as a percentage. By using LTV in a similar way crypto loan providers also use LTV as a way to define and reduce risk when offering crypto loans.
If you are looking to procure a crypto loan, it pays to test out a few different LTV scenarios using a crypto lending calculator online, to see how much you can borrow with the amount of collateral you have available.
Collateral as a security deposit
Unlike applying for a fiat currency loan from a bank, there are no credit checks required for crypto borrowers, which opens up a whole new world to those who do not have a bank account or a great credit history.
When applying for a crypto loan, you will need to put down some form of collateral, which is effectively a security deposit designed to offset the lenderâs risk. In simple terms, if you default on your loan, then your collateral deposit will be claimed by the lender to recoup some of the loss they will have incurred.
How much interest can you make? â using your crypto lending interest calculator
Of course, youâll be keen to know how much profit you can make from lending your crypto assets, and to do that the tool you need is a calculator that reflects the
crypto lending rates
for a variety of coins.
You can also assess the level of passive income you can expect to gain from various types of loans (more on those in the next section) and experiment with different levels of collateral to assess the level of risk you would be exposed to.
Types of crypto loan â instant or long-term?
So,
how does a crypto loan work? For those of you who want to borrow crypto, you first need to be clear about the type of loan you need, as there are two types. The crypto lending rates also work slightly differently too and this is where a crypto lending calculator is a must-have tool.
Instant loans
Sometimes incorrectly referred to as âflashâ loans,
instant crypto loans
are the easiest to obtain and you do not always require any collateral to procure one. You will pay a higher rate of interest for this type of loan though, so it will pay you to shop around and compare different offers.
Longer-term loans
Although there are other options, most often
DeFi crypto loans
offer the most advantageous interest rates. DeFi is an abbreviation for Decentralised Finance, meaning that there is no single authority in control of funding or any third-party intervention. The terms of your loan agreement are defined in advance by a smart contract, which is unique to you as the borrower and the crypto lender.
Flash loans
The true definition of a flash crypto loan becomes clear, as the entire transaction can be completed within just a few minutes. The only time thatâs appropriate to use a flash loan is when a lucrative trade is available. You wonât need collateral to obtain a loan, but it can only be used to trade using the liquidity pools available within a single block of the blockchain and the lender will extract a fee for taking on the risk.
1.
Players from United States of America accepted
2.
Players from United States of America accepted
Pros and cons
There are most certainly positive aspects to this increasingly popular aspect of cryptocurrency, but
is crypto lending safe? Here, we are going to take a look at the subject and give you an answer to that question.
Positives
As someone who owns cryptocurrency, youâll know only too well that it doesnât earn any money whilst itâs being held in your crypto wallet. However, crypto lending can lead to a useful passive income, provided you are willing to do some research and take on a small risk.
Negatives
There have been instances of hacking and interference with smart contracts or projects, but the security around those is improving all the time, as reflected by our Celsius Network review, so itâs not a huge threat. Naturally, if you opt to use a custodial platform, there is the fact that you are handing over your coins to a third party, so you need to be sure that it is trustworthy.
Tips for using a crypto lending calculator
CAs weâve explained earlier, there are two types of crypto lending calculators, so the first step is defining the correct one. If itâs unclear, a loan calculator will show the interest as an APR percentage and a lend calculator will show as AYR. It should immediately become clear how you use the calculator, with only a few entries to be made to get results. You shouldnât have to struggle to use it, if you donât like it, try another.Â
As many calculators are provided by crypto exchanges or trading platforms, do make sure that your preferred crypto is available as rates vary greatly between different coins. It is not something you can second-guess; you need the facts laid out right in front of you. Sometimes, itâs best to use a standalone calculator, a bit more data input may be required, but the results you find are likely to have more clarity.
Calculators found on comparison sites will often come pre-filled with information for a specific lending provider and the results of a calculation you make will lead to the âbestâ deals. It does not always follow that what you are seeing is the best, so itâs often better to find a good all-round crypto platform first. Our
Crypto.com review
will show you a good example of what we mean and it has its own easy-to-use calculator too.Â
Conclusion
We hope that our guide to crypto lending has given you some food for thought. Weâd like to think that you have gained an understanding of how both lending and borrowing vary on different types of platforms and you can now use that knowledge to its best advantage.
For those of you who are considering lending your crypto, we hope that you can see the value of using a crypto lending interest calculator to assess the potential passive income from various types of lending agreements. For the many who are considering taking out a crypto loan, then a crypto lending calculator online can be the difference between getting a mediocre deal, or finding the best options available.
Crypto Lending Calculator FAQ
đWhy use a crypto lending calculator?
With any crypto-related transaction, there are several factors to be considered, so there are multiple answers to that question. You can see all of the answers just by reading our guide to using a crypto lending calculator online. Youâll find itâs time well spent!
đHow do I know how much interest I can earn by loaning crypto?
Itâs really straightforward to find out how much you can earn by loaning out your crypto assets by using a crypto lending interest calculator. However, there are many other things to consider before you embark on a journey to earn some passive income. We highly recommend that you read our guides and crypto platform reviews before making any rash decisions you might regret later!
âłIs it easy to get a crypto loan?
There are many advantages for borrowers who are willing to take out a crypto loan, but there are plenty of decisions to make before you proceed. In our detailed guide, you can learn what crypto lending and borrowing is all about and discover the value of using a crypto lending calculator.
â How do I offset any risk if I loan my cryptocurrency?
Earning passive income from your crypto assets is appealing, but it has its downsides too. In fairness, there are a number of different steps you can take to reduce personal risk and you can find out how to calculate it by reading our in-depth guide to using the right crypto lending calculator.
