Why HODLers Borrow Crypto With/Without Collateral? | DeFi Arbitrage, Flash Loans & Tax-Exempted Liquidity Opportunities Explained

3 min read

Why HODLers Borrow Crypto With/Without Collateral? | DeFi Arbitrage, Flash Loans & Tax-Exempted Liquidity Opportunities Explained

The crypto world was long shrouded in uncertainty, stirring skepticism in the general public. However, many experts and retailers have started to admit the benefits of smart contracts and Decentralized Finance over traditional lending.

Federal Reserve Bank’s May 2020 report provides an excellent example of the traditional lending industry’s shortcomings. A look at the report shows that mortgage debt has risen to 14.30 trillion dollars, $1.62 trillion higher than in 2008, which triggered the global financial crisis.

In this sense, blockchain-powered DeFi offers an easy and transparent solution available to everyone. Additionally, smart contracts provide a safe and secure cryptocurrency lending landscape with a number of use cases. The following are the eight primary use cases for loans in crypto:

What’s the purpose of crypto loans?

While trading cryptocurrencies looks like a dull service without prospect of future growth, crypto loans open a whole new world to users. There are many use cases for it, all backed by efficiency and cost-effective fiat money management. For example, you can fund a project, diversify your portfolio, or pay off your debts.

Of course, there’s a myriad of blockchain and lending solutions where the uses of crypto loans vary a lot. In this case, you should first verify that the platform you’re using will support your loan. Plus, knowing the basics of cryptocurrency loans is always a good idea.

Borrowing and Lending Crypto With/Without Collateral

By far, single-asset lending is the most rudimentary aspect of crypto lending. Typically, financial markets earn money by leveraging the difference in interest paid to investors and savers and the lending interest. However, the strict credit criteria and collateral requirements exclude many people from the opportunity to take a loan.

Thanks to lending protocols, users can directly access funds by interacting with a smart contract. In turn, the code defines and monitors the loan. In some cases, borrowers can even lend fiat money against crypto collateral and pay interest. Usually, reliable trackers like CoinMarketCap’s interest rate tool will help you find the best returns.

Passive Income Opportunities For Crypto HODLers

In September 2021, Experian reported a median VantageScore of 707, a 10 point increase compared to 2020. Still, more people complain about the low deposit interest rates. Besides, fewer people enjoy the best offers. In turn, many investors decide to turn to cryptocurrency lending.

Perhaps, the main reason is that it empowers both sides to utilize their funds more efficiently. In most cases, HODLers are unwilling to sell or liquidate their cryptocurrencies. Moreover, there’s a rising demand for crypto loans, which stimulates crypto lending platforms to offer crypto-collateralized fiat loans.

Arguably, those factors allow lenders to earn passive income. DeFi delivers cross-border, immutable and secure options with variable and often higher interest rates. Moreover, lending protocols transparently determine rates based on supply, demand and trading volume. Ultimately, crypto lending eliminates the middlemen, ensuring fair uniformity and transparency.

Profitable DeFi Arbitrage Opportunities

Typically, arbitrage takes advantage of an asset’s price differences in different markets. While it exists due to market inefficiencies, it’s an inevitable instrument that applies to crypto lending. That’s why DeFi is perfect for borrowing assets at a specific rate and lending them on another platform for arbitrage.

Of course, reputable exchanges always do their best to minimize the differences by borrowing from lending protocols. Still, maintaining steady liquidity is not a constant measurement. That way, arbitrage is still a viable option for borrowers.

Blockchain-Based Identity Privacy Solutions

According to LexisNexis Risk Solutions, the AML (Anti-Money Laundering) compliance costs have increased by billions since the Covid-19 pandemic. Indeed, the steady increase in expenses is inevitable no matter how many financial institutions approach AML.

In this regard, DeFi revolutionizes the sector by providing secure, transparent and privacy-prioritized identification solutions. Thanks to blockchain tech, users can safely share and access their credit history, identity, income and other financial info.

Make Money With Crypto Flash Loans

As the name suggests, a flash loan is a real-time and instant borrowing of assets. Typically, they are suitable for developers who need funds to execute blockchain operations. However, the borrower must return the loan to the pool within the blockchain block. Otherwise, the lending protocol will nullify all completed transactions with the loaned amount. Due to their nature, flash loans are not possible on UTXO-based blockchains like Cardano.

Non-Taxable Liquidity For Crypto HODLers

As already mentioned, HODLing is probably the most common strategy adopted by crypto traders. In some cases, people can hold substantial wealth in their portfolios. While there’s nothing wrong with that, fulfilling a sell order sparks a taxable event.

Of course, crypto legislations vary in different countries. In this regard, some investors can avoid taxes with the help of a tax consultant. Still, nothing can beat taking a dollar-pegged loan by using crypto as collateral. That way, everyone can cover their expenses without losing investment exposure and triggering taxable events.

Decentralized Crypto Margin Trading (Leverage)

The DeFi landscape has greatly flourished into many decentralized platforms in the past few years. The increasing demand for crypto lending has granted easy access to leverage without the need for centralized exchanges.

Arguably, gaining leverage by taking a loan with extra collateral can quickly boost your borrowed amount on a loop. Best of all, you can repeat the procedure until you reach the limit.

Crypto Collateral Liquidations With Bots

Liquidations are probably the least known use case in DeFi lending. Still, it can be a great source of income, especially for tech-savvy traders. Usually, a liquidator’s task is quite competitive, so he operates bots. They work by “sniping” the loans under the collateralization ratio. Consequently, they liquidate the collateral and reimburse the lender. In turn, for the service, the liquidator receives a reward fee.

The Future Is Crypto Lending

Indeed, the past few years have been fruitful for the smart contracts’ primary offering as it quickly outperformed traditional lending. But while DeFi presents entirely new use cases, it also solves some persistent problems that real-world finance keep overlooking. Surely enough, crypto lending will keep finding new ways to satisfy the increasing demand in the industry.

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Chris Munch

Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.

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