Is Stablecoin Lending Safe?
Stablecoin loans are an integral part of the digital financial services offered by crypto lending platforms. Most crypto lending platforms provide their users with various ways to borrow stablecoins. This provides an excellent opportunity for investors to attract additional liquidity secured by cryptocurrency. Due to their lack of volatility, stablecoins are considered the best digital assets to borrow.
Despite the popularity of borrowing in stablecoins, many crypto investors fear for their safety. So let's consider all the advantages and disadvantages of stablecoin loans.
Stablecoin Loans Pitfalls
Possible Crypto Lender Insolvency
This is a significant risk attached to all crypto platforms. Unfortunately, even with the insurance, you might not be able to get your crypto collateral back if a crypto lender goes bankrupt—however, the same situation with banks. There have been many cases where banks went bankrupt and customers could not get their money back.
Limited Insurance Coverage
Most crypto lenders offer insurance for assets held on their platform. But unlike a regular bank account, insurance policies for crypto platforms only cover a few things. However, some platforms, such as CoinDepo, provide full insurance for all deposited assets.
Unexpected Changes to Government Regulations
The crypto lending industry is still in its building phase. Subsequently, most governments have yet to devise appropriate regulations for crypto institutions.
In some rare cases, the provision of cryptocurrency lending services has already been suspended due to government regulation. For example, a popular exchange, Crypto.com, had to stop its lending service in March 2022.
New Borrowing Opportunities in Stablecoins
CoinDepo is the first crypto lending platform that provides loans in stablecoins without the need to open a collateral account, since all your assets held in CoinDepo Interest Accounts are collateral for your credit line. The main difference between the CoinDepo Instant Credit Line and traditional crypto loans is that you can borrow stablecoins an unlimited number of times within your credit limit (50% LTV) and repay the loan in part or in full at any time.
With CoinDepo, you can borrow three different types of stablecoins:
Additionally, CoinDepo fully insures all of your assets held on the platform and provides you with the tools to monitor the health of your portfolio and credit line during market downturns. Thus, you are protected even in extreme market situations.
What are the Benefits of Borrowing in Stablecoins?
Professional Custodial Services
Cryptocurrency, which is the collateral for loans in stablecoins, is stored with professional reliable third-party custodians. The types of custody services offered vary depending on the platform you choose for your stablecoin loans.
Even though different platforms offer different custodial services, most of them will store your cryptocurrency collateral in an offline wallet. In addition, custodial service providers usually provide insurance for crypto assets kept in their cold wallets.
Some of the best lending platforms sometimes give their users more than one access key. These keys allow users to access their accounts directly, even if their lender goes bankrupt.
The Federal Deposit Insurance Corporation does not provide insurance coverage for crypto assets. As a substitute, the best crypto lending platforms use third-party custodians with private insurance policies.
Such insurance coverage helps protect the borrower's crypto-collateral from security breaches or theft. Third-party custodians typically offer direct insurance coverage for assets held in their cold wallets. Also, borrowers sometimes have the opportunity to purchase additional asset insurance coverage, but this option is not available in all cases.
Overcollateralization is another borrower protection method used by the best crypto lending platforms. As a general rule, the loan-to-value (LTV) ratio for all crypto loans, including stablecoin loans, should be 50% or less.
Simply put, borrowers must provide a cryptocurrency collateral amount that is twice the stablecoin loan amount. In some cases, the borrower can get a loan in the amount of up to 70% or more of the collateral amount. However, when this happens, borrowers must pay higher interest rates for using the loan.
Overcollateralized stablecoin loans protect both the lender and the borrower from falling crypto collateral values.
If the value of your crypto collateral falls, the crypto lender will ask you to transfer an additional amount to the collateral account or repay part of the loan in order to raise the LTV to the required level. Otherwise, the cryptocurrency collateral may be liquidated to repay the loan.
CoinDepo is the first crypto lending platform that does not require opening a collateral account to receive a stablecoin loan. CoinDepo uses an innovative methodology to constantly monitor your crypto portfolio, which is the collateral for your credit line.
Along with overcollateralization, margin calls are another security measure used by leading crypto lending platforms. As part of the margin call process, borrowers are notified when the value of their collateral falls below a certain LTV level.
KYC protocol, which stands for "Know Your Customer," is a part of the sign-up process for all centralized crypto lending platforms. These crypto platforms adopt verification processes similar to those required for opening bank accounts.
Despite their similarities, the verification process on each crypto lending platform may differ. The goal of this process is to prevent money-laundering activities through crypto lending.
In general, crypto lending platforms ask new users for the following information before they can use some of their services:
- E-mail address
- First name, last name and date of birth
- Phone number
- Address of residence
- Scan or photo of your government-issued ID
Disclaimer: Please, note this article is not intended as investment, tax, financial or legal advice. Interested readers should seek out professional advice for their particular situation.