Cryptocurrency continues to be a controversial topic. But despite some of its issues like safety and volatility, it has now found a new way to make a buzz – it offers cash loans. As a result, Crypto loans are now considered the backbone of the decentralized finance (also known as DeFi) market. However, for those who are only starting, finding the capital to provide collateral for a loan is highly challenging – cue uncollateralized loans.
But before any of that, it’s essential to understand the crypto loaning process.
What Is Crypto Loan?
Like an auto loan, a cryptocurrency loan is a lending process wherein you pledge an asset to get some cash. One of the most common examples is loans backed by Bitcoin. In this scenario, crypto assets are offered to a particular lender in exchange for money that the loaner will repay in a fixed period. And if the loaner can’t pay, the lender could liquidate their assets as another way to get their money back.
Decentralized finance (DeFi) has an exciting design that aims to perform functions like traditional banking. However, it can be accessed by individuals without bank accounts, making it more accessible to the masses. And because DeFI is a massive part of the entire crypto ecosystem, it only makes sense for some loans to be in cryptocurrency.
Are Crypto Loans Without Collateral Possible?
Although crypto loans typically require a certain amount of crypto assets, it’s also possible to loan without having assets to begin with. With this option, the borrower can get money from the lender without putting his assets at stake.
But how does it work?
Currently, cryptocurrency loans without collateral have two categories: semi-collateralized and uncollateralized. And although semi-collateralized loans aren’t entirely without collateral, they helped move the scale to the borrowers’ side. Thanks to it, borrowers can now access more funds than their pre-existing crypto assets could cover. Moreover, it does two critical things:
- It makes the entire system more accessible to newbies and non-experts
- Releases a considerable amount of “locked” cryptocurrency assets that are being used as collateral into the market
And it’s no secret that the entire market will experience dramatic growth and stability because of uncollateralized crypto loans – two crucial elements that the emerging crypto sector would benefit from.
Moreover, uncollateralized loans typically work on the principle of approval via consensus. Under this particular model, lenders would form a kind of decentralized governance. And with this, they’ll have the authority to vote on the worthlessness of new loans and borrowers based on the following factors:
- Total loan amount
- The risk involved in the transaction
- Loan conditions
- On-chair credit data
- Off-chair credit data
- The borrower’s previous activity
And just like getting a great credit score
Borrowers with excellent crypto loaning track records will prove their trustworthiness to lenders. All this data is stored within the blockchain – and can be accessed by lenders when it comes to approving or disapproving a new loan.
For example, a new crypto user might obtain a small unsecured loan of $1,000. Then, if they ever pay it on time and reapply for a $5,000 loan, they’ll immediately get it and continue to increase the value of which they can loan. It’s an intricate method of using debt to build wealth, as some would say.
On the blockchain, everyone can watch the new user develop their credibility. As a result, the new user’s capacity to borrow large sums of money grows along with their ability to obtain consensus approval. So, in a way, crypto loans without collateral don’t only depend on the loan conditions. They also rely on the five Cs:
- Character (mainly based on the borrower’s lending history)
- Capacity (based on the borrower’s debt-to-income ratio)
- Capital (the money that the borrower has on hand)
It’s safe to say that with all this data available to crypto lenders, uncollateralized loans would be more accessible than ever. Plus, it can improve how the crypto market works.
Where Could You Get No-Collateral Crypto Loans?
One of the trailblazers of uncollateralized crypto loans is Goldfinch, considered one of the most significant loan providers in the community. It’s a crypt organization that allows backers to provide capital. And on the other hand, liquidity providers donate some of their funds to the system’s liquidity pools.
Meanwhile, borrowers often utilize off-chain collateral loans, and the auditors are responsible for approving their applications. And in theory, this allows individuals with little to no digital assets to try out a crypto loan.
Moreover, Atlantis is another up-and-coming platform that provides crypto loans without requiring collateral. Borrowers enjoy their transactions because of the platform’s speedy process and safety guidelines.
In a nutshell, yes – crypto loans without collateral are possible. There are now numerous ways to do this, and it’s a process that makes cryptocurrency more enticing. Moreover, uncollateralized crypto loans can boost the entire crypto industry’s performance, so it’s worth exploring.
However, just like with any other loan, you should do proper research before dipping your toes in this aspect. Make sure to familiarize yourself with the ins and outs of the crypto world and its loaning process.
Written by: Chatty Garrate