The essentials of digital asset lending and new money markets in one place.
- What is crypto lending?
- What is the difference between collateralized and uncollateralized lending of digital assets?
- What is the difference between retail and institutional crypto lending?
- What are Stablecoins?
- What are DeFi protocols?
- What are centralized protocols?
- Why are crypto prices so volatile?
- What is the difference between digital and traditional assets?
- How does crypto lending work? (KYC, DD, etc.)
- What are crypto wallets?
- What is the difference between overnight rate and prime rate?
- What is the difference between TradFi, CeFi and DeFi?
- What are money markets?
- What is asset tokenisation?
- What are security tokens?
- What are utility tokens?
- What are Non-Fungible Tokens (NFTs)?
- What are currency tokens?
What is crypto lending?
Crypto lending is the process of a borrower depositing a certain amount of cryptocurrency to a borrower, and in return receiving a yield on the loan. The yield is also known as APY (Annual percentage Yield), typically occur in either a daily, weekly, or monthly basis.
What is the difference between collateralized and uncollateralized lending of digital assets?
In order for the lender to be sure that the borrower has the ability to pay back the loan, a collateral is set up to pledge to security for the loan. In the case of crypto assets, the collateral for any given loan usually exceeds 100% of the initial loan, in order to compensate for the volatility of cryptocurrencies price.
What is the difference between retail and institutional crypto lending?
The difference between retail and institutional investors is that retail investors manage their own money, and thereby invest using their own capital, while Institutional investors use capital on behalf of a different entity, typically their clients. Institutional investors also tend to have a greater amount of capital at their disposal.
What are Stablecoins?
Stablecoins are crypto assets whose price is pegged to that of an external asset, in order to achieve price stability. The external asset ranges from fiat currencies, commodities, and other cryptocurrencies. Different Stablecoins have distinct ways of calibrating their price, some do it through a series of smart contract algorithm within their blockchain, others change the amount of Stablecoins available in the market in proportion to the price change, and others have a pool of collateral against each Stablecoin
What are DeFi protocols?
Defi (Decentralized Finance) protocols are exchange platforms which allow for peer-to-peer transactions within the platform and have no central governing authority. They typically rely on blockchain technology to keep the platform running. No financial intermediary is needed for transactions to occur.
What are centralized protocols?
A centralized protocol is a crypto trading venue, which acts as a financial intermediary between the buyer and the seller. The given protocol acts as the middleman for the transactions. These protocols tend to provide services which manage the whole transaction life cycle.
Why are crypto prices so volatile?
Cryptocurrencies are a notoriously unstable investment. Their volatility is an agglomeration of many factors working at a given time. Such elements are the constantly changing supply and demand of the asset, government regulations (or lack thereof) getting in the way of the market, and key market players entering or exiting the market.
What is the difference between digital and traditional assets?
Traditional assets are tangible investments which are widely spread in the current financial sphere. Amongst the traditional assets are stocks, bonds, cash, real estate, and equity shares.
Digital assets are assets which exist solely in a digital space and are thereby intangible. Amongst the digital assets are Cryptocurrencies, Stablecoins, NFTs and digital real estate.
How does crypto lending work? (KYC, DD, etc.)
Crypto lending between a borrower and a lender work the same on both centralized and decentralize protocols, as the protocol acts as the third party allowing for the transaction to happen in the first place.
The lender goes on the platform and requests a loan for a given amount of crypto. Once a borrower accepts the request, the lender has to give up the collateral require for the loan, or if the loan is collateralized then the borrowers doesn’t give up anything. Depending on the terms of the loan, the lender pays the interest rate until either the maturity date runs up, or until the principle is paid back. Once the principle is fully paid back (loan minus interest rate), the transaction is done.
What are crypto wallets?
Crypto wallets are digital store holders of your private keys, and also acts as venues for the buying and selling of cryptocurrencies. Cryptocurrencies are technically never owned by anyone, but rather solely exist on the blockchain their based on. The private keys are what allow for a given investor to access their crypto assets.
What is the difference between overnight rate and prime rate?
Prime rate: The prime rate is the interest rate that banks charge their most creditworthy customers, hence their “prime customers”. The prime rate is usually used as the basis to set the other rates.
Overnight rate: the overnight rate is the rate that banks use to lend to one another deposits from one day to another, hence its name the “overnight” rate. The overnight rate is typically the lowest available rate, as its usually only give to institutional banks.
What is the difference between TradFi, CeFi and DeFi?
TradFi: TradFi refers to Traditional Finance, which consists of retail, commercial and investment banks. These are the most common types of financial institutions currently.
CeFi: CeFi stands for centralized finance, in which case a crypto exchange is referred to. All financial transaction are handled through the platform, and they decided the given interest rate, currencies listed, and control the wallets of the users in place.
DeFi: Decentralized Finance is a newly emerging technology where the technology of distributed ledgers are used to create decentralized platform for crypto transactions. The advantage of this is that there is no third party managing the transaction.
What are money markets?
Money markets refer to short term debt markets where the span of the loan is under 1 year. Money markets are of significant importance to the financial ecosystem, as they are vital in providing liquidity from one institution to another.
What is asset tokenisation?
With the advent of blockchain technology, both fungible and non-fungible assets are now able to be tokenized. This means that a number of tokens represent an asset, which can therefore be sold fractionally. This allows for the fractional ownership of said asset. Given to what extent the asset is tokenized, meaning how many tokens represent the asset in full, then the asset can be diluted indefinitely.
What are security tokens?
Security tokens are tokens that represent the ownership of a given tokenized asset. These tokens are used for the transference of ownership of a tokenized asset.
What are utility tokens?
Utility tokens are tokens which have a specific usage determined by the issuer of the tokens. Utility tokens aren’t necessarily used for investment purposes, although their value may increase or decrease with fluctuations of supply and demand. Many decentralized exchanges issue their own utility tokens, for customers of the platform to use.
What are Non-Fungible Tokens (NFTs)?
NTFs are Tokens with a unique identification code, which distinguishes them from any other asset, and cannot be replicated. Due to their unique nature, they can be used to represent a variety of assets, most notably digital art.
What are currency tokens?
A currency token is the most common crypto asset. A currency token represents a single unit of a digital currency. Currency tokens are issued using blockchain technology, which makes them unique from traditional currency such as fiat money, as they run on a decentralized network, which differentiates them from currency issued by governments.