The Benefits of Pegged Loans and Their Use on ETHLend
The volatility of cryptocurrency creates an issue when the borrower wants to repay a crypto loan. Suppose, a borrower took a loan of 1000 crypto coins that are worth $100 USD and at the time of repayment, that crypto gained value and are worth $120 USD.
In the above case, the borrower is at a big loss if he is repaying the loan with FIAT-earned income: he has to pay the interest on the loan and the extra amount due to the volatility.
To avoid this, on ETHLend there is the possibility to take a pegged loan. Borrower can use FIAT currency, such USD or EUR as basis the loan. The borrower still gets the loan in Ethereum (ETH), but pegging the loan save them and the lenders from any fluctuation in the Ethereum value.
How do pegged loans with ETHLend work?
Suppose, if you are borrowing $500 USD worth of ETH at 5% interest rate, this would be noted down in a smart contract. At the end of the loan period, the borrower will have to pay $525 USD. So, the smart contract will do all the calculations at the time of the start of the contract and at the time of the end of the contract.
When the contract starts, it will calculate $500 worth of ETH that will go to the buyer. When it ends, it will calculate $525 USD worth of ETH that the lender will get back. All the calculations are made using real-time market data.
So, for instance, if the pegged currency is USD, then the borrower can borrow 100 USD worth of Ethereum and payback 100 USD worth of Ethereum plus interest. In this way, the borrower is unaffected even if the Ethereum price increases as he is repaying the loan pegged or tied against a non-volatile currency.
Are pegged loans a loss for lenders?
Pegged loans do not represent a loss for the lender. As for borrowers, pegged loans protect them against the volatility of the cryptocurrency: during the loan period, the crypto can move in either direction – it can gain or lose. If it loses value, then pegged loans are profitable for the lender.
On the other hand, if its value increases, the lender still gets the same value of Ethereum along with interest.
Pegged loans with ETHLend are good for both lenders and borrowers. They protect the involved parties from crypto volatility. For lenders, it is a good option to diversify to their portfolio, while for borrowers it is a good funding option with realistic interest rates.