Crypto Lending Glossary

The base rate refers to the interest rate that investors receive on a crypto savings account without any additional requirements other than investing in cryptocurrency.

This rate is typically paid out in the same cryptocurrency as the account. It does not include interest payments in Lending Tokens, bonus interest, or dividend distributions.

For crypto loans, the base rate represents the interest rate that borrowers must pay when securing loans with their respective cryptocurrency, without any additional conditions other than using the cryptocurrency as collateral.

A blockchain is a database technology that securely stores data in an encrypted form. Unlike traditional databases, a blockchain consists of multiple copies distributed across a decentralized computer network.

Whenever a user updates the database, all copies are synchronized, ensuring tamper-proof data.

This characteristic makes the blockchain a solution to a key challenge in digitization: it ensures the immutability of digital data.

CeFi, short for “Centralized Finance,” refers to the realm of centralized crypto lending platforms.

These platforms are owned and operated by centralized entities, typically private companies, and adhere to regulatory frameworks within their respective jurisdictions.

In addition to offering customer service, CeFi platforms also hold licenses that ensure compliance with applicable laws.

In the realm of crypto lending, borrowers are required to offer loan collateral in cryptocurrencies in order to secure a loan, be it in fiat currency or another form of cryptocurrency.

The specific Loan-to-Value ratio, determined by each provider, dictates the amount of collateral needed compared to the loan amount. Generally, a higher collateral deposit leads to a lower interest rate.

Crypto HODLers have the opportunity to earn a higher interest rate than the base rate, provided they fulfill specific conditions set by the crypto lending platform. For instance, they can opt to receive their interest payments in the platform’s native lending token or commit to lock-up periods.

On the other hand, borrowers have the potential to lower their loan interest rate by investing in a Lending Token or paying their interest in a Lending Token instead of a traditional fiat currency.

Compound interest refers to a phenomenon where not only the principal amount earns interest, but also the interest earned in the past is compounded and becomes part of the new principal for subsequent interest calculations. This means that savers not only receive interest on their initial capital, but also on the interest accumulated in previous interest periods.

With the power of compound interest, your money grows exponentially, allowing you to maximize your earnings and achieve greater financial success.

Crypto-backed loans, also known as “crypto loans,” are a type of loan that can be repaid using either fiat currency or cryptocurrencies. These loans are secured by collateral in the form of cryptocurrencies.

The Lending platforms determine the loan amount and the required collateral based on a specific ratio known as the Loan-to-Value ratio.

Crypto lending involves borrowing and lending cryptocurrencies. Typically, lending transactions require collateral in the form of other cryptocurrencies, similar to traditional securities lending. Investors or people who lend their cryptocurrencies earn interest in return.

Crypto lending platforms offer two primary services: cryptocurrency-backed loans and crypto savings accounts. These platforms can be categorized as either CeFi (Centralized Finance) or DeFi (Decentralized Finance).  

CeFi platforms are generally more secure, as they offer greater protection by being regulated and insured. DeFi platforms, on the other hand, are not regulated and rely on smart contracts for security. Both types of platforms provide users with the ability to access short-term loans without having to liquidate their crypto assets. They also allow users to earn interest in the form of cryptocurrency rewards on their crypto holdings through savings accounts or cryptocurrency staking. 

By using a crypto lending platform, you can take out a loan against your existing crypto assets, allowing you to access funds quickly while maintaining ownership of the underlying asset. You can also deposit your crypto into a savings account and earn interest over time – just like with any traditional bank account. And, with cryptocurrency staking, you can earn rewards for locking up your crypto in a specific blockchain protocol. 

No matter what type of platform you use, it is important to make sure that your funds are safe and securely stored. By doing your research beforehand and understanding the security measures in place on the platform, you can ensure that your crypto investments remain secure while accessing convenient financial services. Investing in cryptocurrencies can be risky – but taking precautions can help safeguard your assets and give you peace of mind as you build your crypto portfolio.  

By investing with insight, using an insured service provider, or trusting a regulated DeFi platform, you will have access to reliable financial services without sacrificing the security of your crypto assets.

Cryptocurrency investors and traders have the opportunity to invest their digital assets in crypto savings accounts and earn interest.

These savings account providers typically generate the necessary funds to pay interest by lending the deposited cryptocurrencies to third parties. Cryptos Beginner provides a comprehensive list of different crypto savings accounts available today.

Additionally, we provide detailed reviews and helpful advice on how to select the most suitable platform for your needs.

DeFi, short for “Decentralized Finance,” refers to crypto lending platforms that operate in a decentralized manner. Unlike traditional centralized entities, these platforms are governed by blockchain-based protocols and utilize smart contracts to automate operations. It’s important to note that most DeFi platforms do not provide customer service and are generally not subject to regulatory frameworks.

DeFi has seen a significant rise in popularity over the past few years, with more and more users choosing to enter the world of decentralized finance. This is due to its many potential benefits, including increased financial freedom, lower fees, and access to a wider range of financial services.

One of the main advantages of DeFi is that it allows for peer-to-peer transactions without the need for intermediaries. This means that individuals can directly lend or borrow funds from one another without having to go through a bank or other financial institution. This not only reduces fees but also eliminates the potential for censorship and discrimination.

Another benefit of DeFi is its global accessibility. Traditional financial systems often have limitations based on geography, citizenship, or income level. However, in the DeFi world, anyone with an internet connection can participate and access financial services. This opens up opportunities for individuals in underserved or underbanked regions to access loans, savings accounts, and other financial tools.

One of the most popular use cases for DeFi is decentralized lending and borrowing. Through smart contracts, users can lend out their crypto assets to earn interest or borrow.

A fiat currency refers to a currency issued by a central bank, such as the US dollar, the euro, or the British pound.

The value of a fiat currency lies in its role as a universally accepted government-backed medium of exchange and store of value. It serves as a trusted means of payment, recognized by the public, ensuring its intrinsic worth.

Lending tokens are cryptocurrencies that are issued by providers of crypto lending services. These tokens are used by the providers to fund and operate their crypto lending platforms. Investors who participate in crypto lending can benefit from higher interest rates when they invest in these tokens.

When a borrower fails to provide additional collateral after receiving a margin call or if the Loan-to-Value ratio (LTV) surpasses a certain threshold (usually between 90 and 100 percent), their loan collateral may be liquidated. In this case, the crypto lending provider has the authority to sell (“liquidate”) the borrower’s collateral and use the proceeds to repay the loan until the agreed-upon LTV is restored. While some providers have the right to sell the entire collateral and repay the loan in full, this practice is not industry-standard.

The Loan-to-Value Ratio (LTV) represents the relationship between the loan amount and the value of the cryptocurrencies used as collateral. The LTV decreases when the collateral value rises or a portion of the loan is repaid. Conversely, the LTV increases when the collateral value declines or a higher loan amount is drawn. Most crypto lending providers require a minimum LTV of 50% for a loan. If borrowers choose a lower LTV, they must provide more collateral and typically receive a lower interest rate. If the LTV exceeds a critical value, such as when the market value of the collateral drops, the lender usually initiates a margin call.

When the Loan-to-Value ratio (LTV) reaches a critical threshold, indicating that the value of the crypto loan collateral approaches the value of the loan, the crypto lending platform will initiate a margin call.

The specific threshold at which this call is triggered varies between platforms and typically falls within the range of 60 to 80 percent LTV.

Upon receiving a margin call, the borrower is promptly notified by the crypto lending platform through email, text message, or phone, and is required to restore the agreed-upon LTV.

The borrower can either make a partial repayment of the loan or provide additional collateral. Usually, a time limit is provided for the borrower to restore the agreed LTV.

Failure to comply with this request or if the LTV continues to increase, the loan collateral may be partially or fully liquidated.

Shrimps are small-scale investors with lower deposit amounts, while investors with larger deposits are known as Whales. The majority of retail investors fall into the Shrimp category. Lending rates often vary based on the deposited amount.

Typically, lending platforms offer higher rates for lower deposits, making Shrimp rates more appealing compared to Whale rates. The specific definition of Shrimp or Whale can differ across platforms.

Generally, investors receive the Shrimp-rate for the initial investment amount and the whale rates for deposits exceeding that amount.

Smart contracts are designed to automatically execute specific operations based on predefined conditions. These contracts utilize an if-then function, which triggers an action when certain criteria are met. In the realm of crypto lending, smart contracts play a crucial role in automating processes such as loan payouts and interest payments.

For instance, consider the following if-then function: “If a borrower deposits 10 Bitcoin as collateral, they will receive a loan payout in USD Tether equivalent to 50 percent of the current market value.” DeFi platforms heavily rely on such smart contracts to facilitate their operations.

A stablecoin is a type of cryptocurrency that maintains a fixed value by pegging it to an asset with stable worth, such as a fiat currency, precious metal, or a basket of real estate.

The primary objective is to minimize the volatility typically associated with cryptocurrencies, making it a dependable medium of exchange and a store of value.

The term “token” encompasses various digital assets that are securitized on a blockchain. There are three primary types of tokens:

• Security tokens represent ownership of a security.
• Utility tokens grant the right to utilize a blockchain platform.
• Payment tokens serve as a medium of exchange.

It is worth noting that “cryptocurrency” is often used interchangeably with the term “payment tokens.”

Tokenomics refers to the underlying business model of a blockchain-based token. In the context of Crypto Lending, the tokenomics of a Crypto Lending token encompasses the business model of the platform issuing the lending token, as well as the yield development associated with it.

For individuals looking to invest in a crypto lending token, it is crucial to comprehend the tokenomics of the respective provider.

Whales are investors who deposit larger amounts, while investors with smaller deposits are known as Shrimps. Most professional investors fall into the Whales category. Lending rates often vary based on the deposited amount.

Typically, lending platforms offer higher rates for smaller deposits, making Shrimp rates more attractive than Whale rates. However, the exact definition of Shrimp or Whale can differ between platforms.

Generally, investors receive the Shrimp rate for their initial investment amount and the Whale rates for deposits exceeding that amount.

A liquidity pool, in the context of decentralized finance (DeFi), refers to a collection of funds locked in a smart contract.

These pools are used to facilitate trading by providing liquidity and are operated by a programmed algorithm.

The primary role of liquidity pools is to eliminate the need for an order book or a centralized exchange, thus enabling users to trade directly from the pool. Users who contribute to the liquidity pool receive liquidity tokens, representing their share in the pool.

These tokens can be used to reclaim their share, along with any trading fees earned by the pool.

Decentralized Exchanges (DEX) and Centralized Exchanges (CEX) represent two distinct types of cryptocurrency exchanges.

A DEX operates without a central authority, instead utilizing blockchain technology to automate trades. This decentralization promotes transparency and gives users full control over their funds.

Conversely, a CEX operates similarly to traditional banks, with a central entity controlling all transactions. While this centralization can offer faster trades and a more user-friendly interface, it may also introduce risks such as hacking and the potential for misuse of funds by the central entity.

Cryptocurrencies are blockchain-based tokens that serve as alternative payment methods, commonly known as “payment tokens”

Unlike fiat currencies, which rely on the banking system for transactions, cryptocurrencies operate through blockchain networks. For instance, when someone sends Bitcoin, the global Bitcoin blockchain records the transfer by deducting the amount from the sender’s wallet and adding it to the recipient’s wallet.

This process is automated through the use of smart contracts, eliminating the need for traditional banking institutions to oversee transactions. By storing all transactions in an immutable blockchain database, cryptocurrencies remove the necessity for banks or other financial service providers to monitor payments.