Cryptocurrency

What is Crypto Lending; How Does Crypto Lending Work?

What is Crypto Lending

Snapshot:

  • What is Crypto lending?
  • What are the types of crypto loans?
  • How does crypto lending work?
  • What are the types of crypto lending platforms? 
  • How to borrow cryptocurrency?
  • How to lend your cryptocurrency?
  • What are Crypto Lending Rates?
  • What Are The Benefits Of Cryptocurrency Lending?
  • What Are The Advantages & Disadvantages Of Crypto Loans? 
  • What Are The Things To Consider Before Buying A Crypto Loan? 
  • What Are The Most Popular Types Of Cryptocurrency? 
  • Top Crypto Lending Projects

Summary of Crypto Lending (TL,DR)

Crypto earning avenues have evolved over the years despite the long debate on their reliability and volatility. Today, investors can easily lend their liquid cryptocurrencies to earn interest. As crypto lending is simple, easy and fast, people can easily opt for a crypto loan without collateral. To be able to lend and borrow crypto, a lender, a borrower needs to be linked to a platform to execute a crypto loan. 

Introduction to crypto lending

When one thinks of crypto investing the first thing that comes to anybody’s mind is the volatility and risk involved in the crypto market. Yet, everyone likes the idea of making a profit on one’s crypto holdings. Crypto lending is one of the most common, tried and tested ways to earn crypto. The returns on crypto lending are also called ‘Crypto Dividends’. A crypto lending process involves a lender, a borrower, and a crypto trading platform. 

What is Crypto Lending? 

  • Crypto lending allows lenders to stake their crypto assets on an exchange for a certain amount of time.
  • Lenders earn an annual percentage yield on the crypto they have lent and the returns depend on the amount they have staked.

For example, an investor has 15 Ether coins to stake. So the investor can choose a crypto investing platform to lend Ether. The yields can vary from 3% to 7%. Sometimes the yields may go higher as well.

What Are The Types of Crypto loans?

There are two types of Crypto loans: Flash Loans and Collateral backed loans. What are those? Let us take a look!

Flash Loans: Flash loans are given to borrowers without any collateral. It is called a Flash loan because all of the transactions take place within a single block. (That means the movement of the crypto happens on connected platforms) The process of a flash loan is simple

  • A borrower applies for a flash loan
  • He/ she receives the crypto loan
  • The loan is repaid by the borrower

In a scenario where the borrower is unable to pay back, the transaction on the network is flagged and the crypto amount is traced and seldom deposited by the network. 

Collateral-backed crypto loan: In a collateral loan, the borrower gets more time and room to make use of the crypto loan as the borrower receives the loan in lieu of collateral. The flipside of crypto being volatile also reflects on collateral-backed defi loans. If the borrower’s collateral value drops below the loan amount, the crypto platform is fully authorized to sell a borrower’s collateral to return the lender’s funds. 

Also Read: How does Defi Lending Work?

How Does Crypto Lending Or Crypto Loan Work?

Crypto lending and borrowing is available on both centralized and decentralized exchanges. To lend one’s crypto assets the first thing one needs to do is find a reliable crypto exchange or investment platform. To lend crypto, one can either add his excess crypto to a liquidity pool or can simply lend crypto funds by choosing the amount one wishes to lock and the tenure of crypto lending. 

What Are The Types of crypto-lending platforms?

There are two types of crypto lending platforms:

Automated crypto lending platforms 

Automated crypto lending platforms are decentralized and automated by smart contracts. These platforms function like Cefis’ – Centralized Finance Exchange but without any intermediaries. The lending of crypto assets is executed only when the terms of the contract of the platform are met. Right from the disbursement of the loan to repayment and even recovery of any lost funds in case the borrower fails to repay is fully automated by the DeFi platform. 

Manual crypto lending platforms 

Centralized Finance or CeFi crypto platforms offer crypto lending and borrowing as an offering for users who wish to earn dividends on their holdings and for borrowers who are in need of crypto funds. Manual crypto lending platforms work like any other financial platform. The major difference between traditional finance and crypto lending is that the returns are calculated as annual yields.    

How to Borrow Cryptocurrency? 

Borrowing crypto is easy compared to traditional finance, all thanks to blockchain technology. Once a borrower finds a reliable crypto investing platform all one needs to do is check the annual percentage rate or interest as we know. One can also opt for a crypto loan with collateral. The accepted collateral may differ from platform to platform, so make sure to check all the policies and terms of crypto loaning before diving in!

How to Lend Your Cryptocurrency?

Similar to how doing your own research is important before investing in any crypto, it is equally important to know what type of investing you are getting into before investing. To lend crypto, firstly, one must find a trustworthy crypto trading and investment platform. Once the platform is set, it is important to conduct an analysis of the returns and features the platform has to offer. One must check the types of crypto assets one can earn returns on and find out the yield percentage on crypto lending before investing their funds. Keep a check for the tenure and the minimum amount that you can lend in order to earn on your crypto. 

What are Crypto Lending Rates?

Every platform has its own crypto lending rate or ‘interest’ on lending crypto. So the returns on lending depend on the crypto lending platform one chooses to invest from. Apart from the platform one chooses, the crypto lending rate also depends on the crypto category. Generally, one can expect a yearly yield of 3% to 8% on altcoins and on stablecoins, the yields can range from 10% to 18%.  Before choosing a crypto investing platform do thorough research about the reliability and the terms of the platform before lending any crypto.  

What Are The Benefits Of Cryptocurrency Lending?

Cryptocurrency lending may seem risky but it comes with its own benefits. If one is mindful of crypto lending, the benefits of it will seem worth the effort. Following are the benefits of cryptocurrency lending:

  • Low-interest rates: Crypto loans are less expensive than traditional loans. Generally, a crypto loan comes at an interest rate below 10%.
  • Loan is based on the value of the asset: In most crypto loans, a borrower can get a loan only up to 50% of their portfolio’s total value. Only a few platforms let borrowers get 90% of it.
  • Choice of collateral or currency as security: In most cases, a platform allows fiat currencies or selected crypto assets as collateral.
  • No credit check:  Traditional financing solutions perform a credit check which consumes too much time to pass and credit the loan. While in lending, a credit check is not required, which makes lending an easy and quick way to acquire a loan. 

What Are The Advantages & Disadvantages Of Crypto Loans?

According to experts, crypto loans are one of the best bets in Decentralized Finance. It is also one of the easiest ways to get a loan or get interest on one’s crypto holdings. But there are some pros and cons of crypto loans. 

Advantages of crypto loans 

  • Easy to acquire: Crypto loans can be provided to anyone who can offer collateral in lieu of the loan. Crypto loans do not require credit checks as often required for traditional finance.
  • No intermediaries: Whether a Centralized exchange or a Decentralized exchange, the crypto loan is executed by a self-executing smart contract that assures the tamperproof movement of crypto assets. 
  • Passive Income: With crypto lending, investors can earn better returns with APY.

Disadvantages of crypto loans 

  • Carries risk liquidation: Even though crypto loans are backed by collaterals, the volatility of the market can be a tricky situation to deal with.
  • Technical shortcomings: If crypto investment platforms are compromised due to malware attacks or a smart contract does not work owing to inaccurate code or terms,  then the possibilities are that an investor may lose funds. 

What Are The Things To Consider Before Buying A Crypto Loan?

While crypto lending can be a fruitful investment one need to consider the following factors before taking a call.

Margin call: A margin call takes place when the value of one’s collateral falls below the value of the total crypto loan. In a scenario like that, the lender will ask to add more collateral to match the loan amount for security. In some cases, the borrower’s collateral is sold out to pay the lender back. 

No access to your holdings: Once a lender has lent a certain amount of crypto-asset and there is an equal amount of collateral as security against the loan, the lender cannot access the assets even if it is an emergency. So, always have an emergency fund in place to avoid a situation like this.

Interest account funds aren’t insured: Most crypto platforms do not have security insurance to cover for any damages or loss of funds. If a crypto platform loses its funds, there is very little or no chance that crypto funds can be recovered. Hence, it is best to bet on an amount that an investor is willing to risk.  

What Are The Most Popular Types Of Cryptocurrency?

There are more than 12,000 crypto assets in the market but only a few of them have gained enormous popularity. Following are some crypto types that have made it to the A-list.

  • Bitcoin (BTC) Bitcoin is the OG of crypto assets. Invented in 2008 by a pseudonymous creator Satoshi Nakamoto. The coin needs no introduction as everyone has heard the story behind the asset and why it is worthy.
  • Ethereum (ETH): Ethereum is the second crypto asset after BTC. Founded by Gavin Wood, Ethereum is an open-source blockchain that uses Ether (ETH) as its native coin to run, create and deploy dApps. Ethereum is the second-largest blockchain by market cap. 
  • Tether (USDT): Tether was originally named ‘Realcoin’ and is deemed the best in stable crypto assets. With bearable volatility, the coin has garnered a liking for its existence. Being a stablecoin it has earned a lot of respect as the value of Tether is pegged to the U.S dollar. 
  • Cardano (ADA): Cardano is a public blockchain with proof of stake consensus mechanism with ADA as its native coin that facilitates the working of the blockchain. Founded in 2017, the blockchain has found a ground for itself as it is a great platform to build smart contracts, decentralized platforms and protocols for layer 2 platforms. 

With minimal transaction costs and speedy transactions, Cardano makes the cut! Not only is its tech cutting edge, the chain also offers lucrative rewards on staking. Through Cardano’s native desktop wallet, investors can stake ADA to earn ADA making it a greener DeFi platform as well!

Top Crypto Lending Projects

Aave 

Aave is a popular  DeFi platform that offers a boutique of investing options, including crypto loans. Investors can lend, borrow and invest in crypto liquidity pools and other DeFi investing options to make the most of their crypto holdings. To lend funds, you deposit your tokens into Aave and receive aTokens. These act as your receipt and the interest you earn depends on the crypto you are lending.

Abracadabra 

Abracadabra is a multi-chain, DeFi platform that allows users to stake tokens as collateral to earn yields. Users earn tokens as interest when they deposit funds in a lending pool. Holding the interest tokens gives users access to their original deposit and the interest earned on it.

Bottom line

Crypto lending is feasible for investors who wish to earn interest on their crypto holdings. One can earn a good return on crypto lending if the lending process is well researched and well planned. If one has some funds that are not being put to use, then one may consider crypto lending as an avenue to learn. In addition, borrowers who require liquidity in crypto can easily get access to a crypto loan depending on the loan requirements and the appetite to take risks on the amount one wishes to loan.


Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. In case you have any queries, write to [email protected].

The above information represent the independent views of Primestack Pte. Ltd, Neblio Technologies Pvt. Ltd, and/or their affiliate entities and are for informational & educational purposes only. The content, information or data provided above is not an offer, or solicitation of an offer, to invest in, or to buy or sell any interest or shares, virtual digital assets/ crypto products or securities, or to participate in any investment or trading strategy. Any statement or communication made above shall not be treated as a legal, financial, investment or tax advice by the reader. The calculations, data, risk-return formulations, performance or market capitalization indicators captured above are based on the independent data sourcing including collation of public information and/or analysis performed by analysts, advisors or employees of Primestack Pte. Ltd/ Neblio Technologies Pvt. Ltd and/or their affiliate companies and/or any third party. Past performance is not indicative of any future results. The reader(s) are hereby advised to consult their financial/ legal/ tax advisor(s) before making any investment.


 

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