Stablecoins play a significant role in the crypto market. Unlike many other crypto assets, which can go up and down in value, these virtual currencies are meant to have a fixed and stable value. Although there are different types of stablecoins, the most common are those pegged to the US dollar.
Since stablecoins can keep their value steady even when the market goes up and down, these crypto assets have been used in a number of different ways in the crypto space. For instance, most traders and investors use these crypto assets as a medium of exchange and store of value.
Also, a number of crypto-based investment firms are now giving traders who want to put their stablecoins on their platforms small to high interest rates. Leveraging this service, investors can earn passive income.
Most crypto lending platforms let users who have the necessary crypto collateral borrow stablecoins. More importantly, these crypto lenders allow users to borrow against their stablecoins. Sometimes, borrowers can even receive fiat loans using stablecoins as crypto collateral.
Compared to traditional loans, borrowing against a stablecoin is seamless and free of hassles. This guide will briefly consider how to borrow against a stablecoin.
How to Use Stablecoins As Crypto Collateral
Even though this process is similar to what banks have been doing for a long time, it is easy to borrow against a stablecoin. Follow these steps to get started:
- Create an account with your preferred crypto lending platform and complete the required registration process. This process is similar to setting up a new bank account.
- Like traditional loan companies, centralized crypto lenders always carry out comprehensive identity checks. As a result, ensure you complete the KYC (Know Your Customer) protocols to access all borrowing services on offer.
- Next, deposit your preferred stablecoin into the cryptocurrency wallet that your lending platform has assigned to you. Sometimes, you can purchase stablecoins from the crypto exchange on your preferred lending platform.
- Some lending platforms require users to transfer their stablecoins to a crypto wallet assigned for crypto collateral deposits. If your preferred lender insists on this option, move your stablecoins to the designated crypto collateral wallet.
- After making your deposit, you should be able to access your crypto loan immediately. Generally, the value of your stablecoin deposit will determine the crypto loan amount available to you.
- Once your stablecoin collateral has been deposited, choose the crypto asset you wish to receive as a crypto loan. Some platforms offer fiat currency loans in addition to their crypto loan offerings.
- Ensure you check the loan-to-value ratio, interest payments, transaction fees, and origination fees before picking any crypto loans on offer.
- After approval, withdraw your fiat or crypto loan and use it for its intended purpose.
The steps listed above serve as a general guide for how you can borrow against a stablecoin. However, lending platforms in this space vary in their approach.
Also, many of these platforms offer stablecoins and crypto-backed loans with different interest rates, transaction fees, loan terms, and loan-to-value ratios.
For instance, Nexo, a cryptocurrency lender, lets its customers borrow both fiat and cryptocurrency using stablecoin as collateral. Like other crypto lending platforms, Nexo requires borrowers to set up an account and verify their identity before they can get a crypto or fiat loan.
Additionally, you must deposit the stablecoin you wish to use as crypto collateral. As of right now, Nexo accepts digital assets like DAI, Pax Dollar, USDC, and USDT as collateral for stablecoins.
Nexo users can also purchase stablecoins via the native crypto exchange on its platform. Next, you can deposit the stablecoin into your Nexo crypto wallet and head to the borrow section of the platform to start your loan process.
On the page for the "borrow" section, click on the "collateral" icon and choose which stablecoin you want to put down as a deposit. Once this is done, input the amount of stablecoin you want to deposit as collateral. Also, select the digital asset you wish to receive as a crypto loan.
Nexo will provide a loan amount that matches your collateral deposit. Borrowers who qualify will get their fiat or cryptocurrency loans once their loan amount has been approved and collateral has been received.
Would you like to find out who offers the best stablecoin-backed loans? Read this in-depth review, 7 Best Stablecoin Loans of 2022
Conclusion
Due to their ability to keep the same value, stablecoins are being used as digital assets to lend money. The digital assets can also be used as collateral for crypto loans.
Borrowers can use stablecoin-backed loans to retain their crypto assets while receiving cash for immediate needs. If you want to earn interest while investing your crypto assets, borrowing against stablecoins is a great way to do so.
