Since years, crypto loans have been utilized frequently as DeFi methods. But despite their widespread use, they have certain drawbacks. Before you try out lending or borrowing, make sure to take a balanced look:
Advantages
1. Capital that is easily available. Anyone who can offer collateral or refund the funds in a flash loan is eligible for a cryptocurrency loan. Since they don’t require a credit check, they are simpler to obtain than a loan from a conventional financial institution.
Smart contracts handle loan management. The entire process is automated by a smart contract, increasing the scalability and efficiency of lending and borrowing.
3. It’s easy to generate passive income with minimal effort. HODLers don’t need to handle the loan themselves; they can simply deposit their cryptocurrency in a vault and start collecting APY.
Disadvantages
1. Depending on your collateral, there is a high risk of liquidation. Cryptocurrency prices can decrease quickly and force liquidation, even with debts that are heavily overcollateralized.
2. Attacks on smart contracts are possible. You risk losing your loaned money or collateral if the code is poorly developed or there are back-door exploits.
3. Your portfolio’s risk can increase as a result of borrowing and lending. While it is a good idea to diversify your holdings, doing so through loans will include additional risks.
