Ethereum is a highly ambitious cryptocurrency and blockchain project, and is the second most valuable cryptocurrency by marketcap. Ether loans are crypto collateralised loans which means keeping ETH as collateral. Collateral is defined as ‘security pledged for the payment of a loan.’
It is a guarantee that you will do what you say, which in this case is paying back your loan, and if you don’t, you will lose whatever you pledged as collateral. In the ‘real world,’ there are loans which do not require any form of collateral such as credit cards, student loans, or business loans. These unsecured loans do not depend on guarantees in the form of an asset but rely on a person’s reputation.
In Ethereum, like all other decentralised blockchain networks, there is no reputation or personal identity attached to each account. Because of this, decentralized loans must use collateral to guarantee loans and crypto-assets such as Ether function as collateral.
By being able to transfer value through the internet using blockchain and setting it up so that agreements can execute automatically, we are able to have lending.
There are a number of lenders who provide loans for Ethereum. Typically, you just need to register using your email ID and then complete verification by providing personal information. Once approved, directly deposit Ether to your loan provider’s wallet.
Ethers are usually stored in offline multi-signature wallets. Following confirmation of your deposit over the blockchain, you are issued a loan in your chosen fiat or stablecoin currency according to the agreed LTV ratio.
Algorithms determine the loan amount, which depends on current and historical volatility and market liquidity of the particular assets. The LTV ratio is determined by the asset that you deposit.
In the following example, the loan-to-value (LTV) ratio may range from 20% to 50%:
If you stake $10,000 worth of ETH, you will be able to withdraw a loan of around $5,000, i.e an LTV less than 50%.
Placing a mix of assets, the LTV ratio is determined proportionately. With this loan, ETH holders don’t have to sell their ETH, but can achieve liquidity.
Ethereum is considered to be a cryptocurrency which should survive in the next few years, given the fact as it has been amongst the top 10 cryptocurrencies since its inception.
Ether holders can get the much-needed liquidity they are searching for without having to close their Ethereum position completely. Most investors use this to buy a home; fund a business or get rid of debt.
It is also an excellent way of lowering taxes by claiming interest paid on your loan, and avoiding capital gains fees.
Ethereum Advantages Over Fiat currency Loans:
- Getting a loan is a relatively simple process, with a number of benefits compared to a traditional fiat currency loan.
- It’s instantaneous. Payments are made and received in a matter of minutes, which is much faster than traditional loans.
- There is no requirement for documentation. No details required.
- Security. No human error is involved. Just smart contracts which rely on algorithms...
- No age limits. You don’t have to be a minimum age to take a loan.
- It’s cheap. The issuance cost is next to nothing.
- Crypto loans are open for business 24 hours a day, 7 days a week. No Bank holidays involved.
The use of lending and borrowing applications has increased during the most recent bear market, because many people who are currently holding crypto-assets do not want to sell them while prices are so low.
By using their assets as collateral, holders can spend money while also keeping their positions for the long term.
Borrowing against crypto assets seems to offer the best of both worlds with the only danger being a risk of the collateral’s value dropping too quickly and a loan getting liquidated.