Why are crypto loans of central importance for the market for digital assets?

Celsius' decision to temporarily prevent its customers from lifting money has thrown a light on a group of crypto loan platforms that were an important engine for growth in innovative industrial projects.

These lenders served as a bridge between do-it-yourself small investors and the huge universe of decentralized financial or defi projects who are looking for financing to help them grow.

The core business model of credit platforms, which include blockfi and Nexo, is similar to a consumer bank. The platforms accept deposits from customers and then give this money for an agreed period to mainly institutional borrowers such as Market Makers. The loan platforms then make a reduction in interest for these loans and pay the rest of the interest back to the inserts.

consumers flock to these platforms because they typically offer interest rates of around 10-15 percent on their investments, much more than conventional banks and even many traditional investments. Celsius said last year that more than 1 million customers had used the system.

To make their promises to pay these excessive returns, crypto loans have branched into sometimes risky activities that go beyond simple lending. Some companies acted on cryptoma markets such as futures.

But part of the money was used to support new developments in the crypto industry. In particular, assets have flowed into DEFI projects, which mainly aim to reproduce parts of the existing financial system such as a stock market, but without the centralized authority that the system normally underpins.

Many have to be supported by pools by assets to operate their blockchains and will pay investors who are willing to put their money at risk for a long time. In return, the consumer receives an attractive return that can vary depending on which crypto-asset the customer has increased and likes to receive as a payment.

The total assets bound in defi project rose from $ 601 million in early 2020 to a maximum of $ 253 billion at the end of last year before it has decreased in the past few months.

However,

crypto-lending platforms are generally not subject to the same regulations as banks, which means that the funds of the customers are not secured by a state guarantee. And some activities of credit platforms contain a higher risk.

Defi projects are often susceptible to hacks, design errors or disputes about how to be operated. Critics of credit platforms say that some companies are in their defi portfolios excessive risks and are not transparent enough what they do with the money of customers to achieve their attractive interest rates.