Getting crypto loans without collateral may sound like a miracle. Yet, it is possible thanks to blockchain technology and smart contracts that ensure the repayment of the debt in a fully automated way.
Traditional crypto loans offer a much simpler funding procedure in comparison with banks and other centralized financial institutions. Yet, they usually require their users to pledge some other assets as collateral to ensure the repayment of their debts. In some situations, even this solution may not be a fit.
This is exactly where crypto loans without collateral come forward to save the day. Read this article to learn about crypto loans in general, how it is possible to bypass the collateral requirement, and which platforms offer such a solution.
What is a Crypto Loan?
In a nutshell, crypto loans represent a blockchain-based financial service that makes it possible to get funds without an intermediary. What is the most common use case for their application?
It may not always be easy to get a loan from a bank. Centralized financial institutions impose high requirements on borrowers. Not only do you have to provide a large set of documents, but you also have to show a perfect credit score to get better conditions.
In contrast, crypto loans significantly reduce barriers by offering a streamlined alternative. If you have some digital assets at hand and you don’t want to sell them for some reason, you can pledge these assets as collateral and get an instant loan in a highly liquid currency.
In addition, crypto loans are borderless and they do not require credit checks. All that you need to get a crypto loan is a digital wallet and some crypto at hand to secure your loan in the form of collateral.
Why Do Crypto Loans Require Collateral?
Crypto loans typically require collateral to mitigate the risk for lenders. How does it work?
In short, the collateral acts as a security deposit that automatically gets liquidated in case its value drops below a predefined level or if a borrower doesn’t repay the loan in time.
What’s more, it is the collateral that eliminates credit checks for borrowers and secures the loans for lenders. In case a borrower fails to repay the loan, smart contracts liquidate their collateral automatically and send the funds to a lender.
Different services support different assets for this purpose. For example, large centralized platforms such as Binance, make it possible to pledge a huge variety of digital assets including some really rare coins. DeFi solutions such as Aave, on the contrary, only work with low-risk assets such as BTC or ETH.
LTV and Overcollateralization
Perhaps, the overall volatility of the crypto market is the key factor that makes crypto loans particularly risky. You may pledge $10,000 worth of BTC as collateral and get your position liquidated right on the next day if the Bitcoin value abruptly drops.
To avoid such situations and provide both borrowers and lenders with some sort of safety cushion, crypto loans are usually overcollateralized. This means that the value of the collateral significantly exceeds the sum that you get in return.
The loan-to-value (LTV) ratio is a special index that comes in particularly handy when you want to estimate the potential size of the loan. Its formula looks as follows:
LTV = Loan Amount / Collateral Amount x 100%
Let’s review how LTV works in a real-life example.
Assume, you have $10,000 worth of BTC at hand. You pledge it as collateral and get $4,000 worth of USDT. In this case, the LTV ratio equals 40%.
If the Bitcoin price grows in time, the LTV ratio will decrease, and vice versa. If the LTV ratio increases and gets dangerously close to the liquidation level, you will receive a margin call.
Once the index crosses the line, your bitcoins will be sold automatically and the funds will be returned to the lender.
In many cases, liquidation may be an undesirable outcome for borrowers. However, the dropping rates of your collateral are not a reason to despair.
In case of such a situation, it is always possible to send more assets to the smart contract address to replenish the crypto backing up your loan. Once you receive a notification about LTV reaching high limits, it’s up to you to decide. You may repay the loan straight away or you may add more funds as collateral.
Can You Get A Crypto Loan Without Collateral?
As mentioned earlier, crypto loans require collateral in the majority of cases. Yet, there are some options to get funds without providing any other assets to safeguard your payments.
There are some services in the market that offer such an option, but it is only available to whitelisted investors. This means that they need approval from the lender to get access to funds.
One of the ways to secure such loans is to provide the so-called standby letter of credit (SBLC). This is a document issued by a reputable third party (e.g. a bank) promising to pay back the debt on behalf of the borrower in case the latter is unable to fulfill the obligation.
Non-whitelisted investors can participate in non-collateralized crypto loans, too. Yet, they will still need to lend their assets to those third-party institutions to guarantee their solvency. Thus, such a method is not very much different from a traditional collateralized crypto loan.
Platforms That Offer Uncollateralized Crypto Loans
Goldfinch
Goldfinch is a non-custodial DeFi lending platform that revolutionizes crypto borrowing via off-chain collateral. The platform comes up with game theory incentives motivating its members to follow the rules.
Founded in 2020, the company focuses on financial markets, trying to transition lending activities to the blockchain. Additionally, it enables reliable applicants to get cryptocurrency loans without collateral. Goldfinch successfully provides financial access to a wide range of customers, with borrowers located in more than 28 countries across the globe.
Investors, Borrowers, and Auditors represent three key categories of Goldfinch users. Here are the roles that they play:
Investors can be Backers or Liquidity Providers (LPs), who invest in pools for higher yields, while LPs prioritize diversification.
Borrowers, in turn, use credit lines to obtain stablecoins, which they convert to fiat and lend further to local borrowers.
Auditors check Borrowers at a human level to make sure they are legit and to protect the protocol from fraudsters.
Thus, Goldfinch leverages global capital access while relying on local businesses for loan origination and servicing. At the same time, loans on Goldfinch serve various goals such as personal expenses, debt consolidation, home improvement, business financing, education, and more.
Atlendis
Atlendis is an innovative lending platform that combines the benefits of DeFi with real-world applications. Founded in 2021 by former ConsenSys employees, it addresses the limitations faced by blockchain projects by offering uncollateralized loans.
Through a credit scoring process, Atlendis enables borrowers to access loans without the need for collateral, opening up new possibilities for their growth. The platform connects borrowers with lenders with respect to their preferences, allowing lenders to control borrower selection and loan duration.
To ensure efficient liquidity management, Atlendis creates dedicated asset pools for each borrower, facilitating recurring crypto lending. Also, the platform plans to incorporate non-fungible tokens (NFTs) to represent lenders' loan positions and underlying assets.
Atlendis provides both lenders and borrowers with significant advantages:
Lenders earn interest through trusted third-party protocols, actively providing liquidity and receiving rewards on idle capital.
Borrowers can set their own lending rate limits and find the best solution for each requirement.
Beyond its lending capabilities, Atlendis aims to revolutionize the industry by bridging the gap between DeFi and real-world applications. By leveraging blockchain technology and open banking, the platform empowers Fintech and institutional players to create dedicated liquidity pools and access one-time loans and revolving lines of credit.
What Are Flash Loans?
Flash loans represent another way of funding that doesn’t require collateral. What makes them different is that users borrow and return funds literally in a flash since the whole procedure usually takes just a few seconds.
Borrowers can use these funds for various purposes. The use cases include arbitrage, collateral swapping, refinancing, or other time-sensitive opportunities in the DeFi ecosystem.
Upon approval, a borrower receives the requested funds almost instantly. At the same time, this type of financing requires repaying the loan within the same transaction. The borrower may still fail to repay the loan. However, in this case, the entire transaction will be automatically reversed, ensuring that no funds are permanently lost.
Thus, flash loans provide users with instant and uncollateralized access to substantial amounts of capital, which can be leveraged for trades or liquidity provision.
Platforms That Offer Flash Loans
There are many platforms that offer flash loans amidst other DeFi services. Check our pick of the most reliable solutions below.
Aave
Aave is a popular DeFi platform running on Ethereum. It serves as a lending and borrowing protocol enabling cryptocurrency holders to earn interest on their assets. At the same time, it helps borrowers get funds by using their crypto holdings as collateral.
The platform supports a number of different blockchains including Avalanche, Optimism, Polygon, Arbitrum, and Metis. Aave allows borrowing and lending 15+ cryptocurrencies, such as ETH, MANA, BAT, etc. The platform fees are variable, while flash loans charge a 0.09% fee per transaction.
In addition, Aave comes with such benefits as strong community governance, a high level of security, and innovative services including flash loans. The last one enables users to engage in various financial strategies and arbitrage opportunities within the Aave ecosystem. To use it, though, one needs to have some blockchain knowledge as the solution is not a good fit for total newbies.
Equalizer Finance
Equalizer Finance is another decentralized lending marketplace that connects borrowers and liquidity providers.
It allows users to generate passive income and provides them with access to liquidity tokens for various purposes. Thus, it serves as a one-stop-shop solution for affordable crypto lending services. It mitigates risks and enables such financial activities as arbitrage, rebalancing, liquidations, and collateral swapping.
The platform offers dynamic fees, incentives for liquidity providers, a wide range of token options, and easy integration with other protocols. For example, it supports Polygon, Binance Smart Chain, and Optimism. With its help, users can lend and borrow ETH, LINK, USDC, UNI, BAT, and DAI.
However, Equalizer Finance lacks a mobile app. Also, at the time of writing, it has not yet been launched on the mainnet.
As a key service of Equalizer Finance, flash loans allow borrowers to access uncollateralized loans that must be repaid within the same block transaction. To guarantee the repayment of these loans, the platform features the reversal of transactions in case users fail to return the borrowed funds. The service eliminates risks for lenders and doesn’t charge any fees for all vaults on all chains.
What Are the Risks of Uncollateralized Crypto Loans?
Uncollateralized crypto loans come with certain risks that borrowers and lenders should be aware of. The list includes the following:
Credit Risk. Since uncollateralized loans do not require borrowers to provide collateral, lenders bear the risk of default. If a borrower fails to repay the loan, the lender may face a financial loss.
Volatility Risk. Cryptocurrencies are known for their price volatility. If the value of the borrowed cryptocurrency declines significantly during the loan term, the borrower may struggle to repay the loan, potentially leading to liquidation or loss for the lender.
Counterparty risk or risk of non-repayment. Uncollateralized loans depend on trust between the borrower and the lender. There is a risk of fraud or non-payment by the borrower, which can result in financial loss for the lender.
Regulatory Risk. The regulatory environment surrounding cryptocurrencies and uncollateralized loans is still evolving in many jurisdictions. Changes in regulations or government actions could impact the legality or viability of crypto loans without collateral.
Market Risk. The crypto market as a whole can experience significant price fluctuations and liquidity challenges. These factors can affect the availability of funds for lenders and the ability of borrowers to manage their positions effectively.
Risk of getting scammed. There is a risk of getting scammed in the realm of uncollateralized crypto loans. The decentralized and pseudonymous nature of cryptocurrencies can attract malicious actors seeking to exploit unsuspecting borrowers or lenders. Common scams include phishing, fake projects, Ponzi schemes, and impersonation. This is the type of fraud where scammers impersonate legitimate lending platforms or team members, often through social media or messaging platforms.
High-interest rate. A high-interest rate in uncollateralized crypto loans poses risks for borrowers including increased financial burden, cash flow issues, limited profitability, default risk, and potentially missed opportunities.
It's important for participants in uncollateralized crypto loans to carefully assess these risks and consider risk management strategies to protect their funds.
Platforms That Offer Collateralized Crypto Loans
A safer and more accessible way of borrowing is available on platforms that offer crypto-backed loans. The backbone of their services is crypto collateral that enables borrowers to secure their loans by leveraging their cryptocurrency holdings. Also, it makes it possible for them to access funds without the need for traditional credit checks or extensive paperwork.
Another aspect of crypto loans is the automation of the loan terms through smart contracts. Such aspects as collateral valuation, loan repayment, and interest rates, are fully guarded by the code which eliminates the risk of human error or manipulation.
With the help of such services, borrowers can benefit from lower interest rates in comparison with unsecured loans. Also, they get the flexibility to choose longer loan durations that fit their needs.
There are many platforms that offer crypto loans. Below, we have listed some of those with the best reviews.
Binance
As the world’s largest cryptocurrency trading platform, Binance offers a versatile set of services striving to meet its users’ requirements. The company packs all possible features into one solution so that everyone would be able to find what’s needed without leaving the ecosystem.
Founded in 2017, the crypto exchange offers a wide range of altcoin trading options. It supports over 360 cryptocurrencies and virtual tokens, including BTC, ETH, LTC, DOGE, and its native coin BNB.
In addition, Binance provides a crypto wallet, various services for earning interest and transacting with cryptocurrencies, assistance for miners, and tools for better investment decisions. It features its own blockchain-based token, BNB, and has a global presence, although faces some limitations in certain countries like the US and the UK due to regulatory considerations.
Binance Flexible Loan provides borrowers with a wide selection of cryptocurrencies that can be used as collateral. As for the borrowable assets, one can make use of BUSD, USDT, BTC, and over 200 others with its help. The platform has even launched an NFT loan feature that enables borrowers to use NFTs as collateral. It charges a fee of 2% of the total borrowed amount. The procedure is transparent and doesn’t involve any other hidden fees.
Nexo
Based in Switzerland, NEXO is an all-in-one crypto platform that offers a number of financial products and services associated with digital assets. Using an advanced security infrastructure, the exchange offers an exceptional combination of features and services. The list includes crypto lending and borrowing, 3x leveraged trades, and a crypto credit card.
The platform operates across 200+ countries and offers more than 500 trading pairs. More than 4 million people use its services globally.
One of its notable offerings is the Instant Crypto Credit Lines. It enables users to borrow against their crypto assets at 0% APR, providing liquidity without the need to sell their cryptos.
NEXO is also known for its Earn Interest Product (EIP) which allows users to earn interest on their crypto assets. In addition, there are high-yield crypto savings accounts that provide up to 12% interest. Thus, NEXO aims to provide convenient and accessible financial solutions for crypto holders.
To get higher interest rates on NEXO, one may deposit the native token NEXO into the Nexo interest account. Additionally, the platform offers an opportunity to earn interest on stablecoins such as USDC, PAX, USDT, DAI, etc., and on fiat currencies such as USD, GBP, and EUR.
Final Thoughts
Summing up, crypto loans without collateral are an interesting alternative to get funds for your goals. However, you should build a good reputation as a reliable crypto investor first to be able to use them.
Flash loans and traditional crypto loans come forth as another nice alternative in case you have no means to get this reputation but need the funds right now.
Keep in mind, though, that crypto loans without collateral come with a number of serious risks. Therefore, you should thoroughly assess all the options before making a decision to make use of this innovative financial service.
