Getting loans with cryptocurrency can often be simpler than the traditional bank route. But, what exactly is crypto lending?
Crypto enthusiasts are often encouraged to HODL their assets by storing them safely in their wallets. And when the price of their preferred currency appreciates, they go ahead and sell… That’s how it typically goes.
But, what if you don’t want to leave your cash sitting around idly in storage and want to actually make use of it? How do you make income using DeFi?
Let’s get into it!
What is Crypto Lending?
Crypto lending is the process of depositing cryptocurrency that is lent out to borrowers in return for regular interest payments. In a nutshell, it is a great way to reap passive income.
Not only does it enable servers to receive interest on their stash of Bitcoin (or any other cryptocurrency for that matter), but it also enables borrowers to unlock the value of their digital assets by using it as collateral for a loan.
One of the biggest problems one might face in investing is insufficient cash flow. And the number one rule is to avoid raiding your capital if you lack liquidity! So, let me introduce a potential solution!
Crypto Lending Scenario
Imagine this Bitcoin liquidity scenario. You have 4 bitcoins that you don’t wanna sell because you are confident that their value will increase substantially in time.
Another reason to hold on to the cryptocurrency is that you don’t wanna risk ending up with less Bitcoin when you decide to buy it back (at a later date) after selling. What can you do in this case?
Resort to crypto lending platforms of course!
Typically, you will be able to use your Bitcoin as collateral and receive a loan in Stablecoins. However, due to the volatility of digital assets, you’re going to have to ‘over-collateralize’.
Meaning, you have to lock up more Bitcoin than the overall value of the funds you’re receiving. Once you repay the loan + interest, your crypto assets will be returned in full.
Basically, you can make a generous profit if Bitcoin in fact ended up appreciating as predicted! On the other hand, only if you fail to keep up with the loans’ terms or if the value of Bitcoin depreciates will your crypto be at risk!
Benefits of Crypto Loans
- Speed: Crypto loans have a fast processing period and less time than traditional banking loans. And they can be almost instantaneous at times!
- Accessibility: Unlike the traditional banking route, crypto loans don’t rely on the assessment of your credit score. This makes it more accessible to individuals with no financial history.
- Transparency: Because of the decentralized nature of the Blockchain, all crypto lending transactions can be transparently viewed by all parties.
- Avoid taxable events: You can turn your cryptocurrency into liquidity without making it into a taxable event.
- Wider Opportunities: They are tailored upon an individual’s request, so you have the ability to adjust the loan to your specific needs.
Types of Crypto Lending Platforms
Lending platforms are a great way to earn interest on Bitcoin and several other cryptocurrencies and Stablecoins (USDC, USDT).
To put things into perspective, the best interest rate you can expect out of traditional banking systems doesn’t scrape the 1% APY (Anual Percentage Yield) mark.
On the other hand, crypto loans can reach up to 8% on crypto interest rates. It’s up to you to secure the best deal!
Do you want the value of your digital currency to grow?
If you answered yes, then taking out a crypto loan seems right up your alley. Here are your two options:
- Centralized lending platforms
- Decentralized lending platforms
Centralized Crypto lending platforms:
These centralized lending platforms record all deposits and withdrawals using Blockchain technology visible to anyone. And although there’s more paperwork involved in the lending via CeFi (Centralized finance) route, the environment is surely much more regulated, especially in the presence of avid customer support agents ready to assist a dial away.
- You have to create an account and fill out the KYC (Know your customer) procedure to prevent fraud and money laundering.
- These platforms use insurance to protect the crypto assets or keep the majority of the crypto assets in their custody in cold storage (Away from an internet connection).
Top CeFi lending platforms:
Uniswap is DeFi’s largest and most liquid decentralized exchange (DEX). It is best known for its automated market maker (AMM) which ensures that liquidity is always available to trade against regardless of order size or the presence of a counterparty.
Apart from its exchange services, Binance offers a range of other crypto financial products for users to lend, borrow, and earn passive income.
YouHodler is a crypto lending platform tailored to investors who want to borrow crypto fast. They offer a variety of options for collateral and provide a high loan-to-value (LTV) ratio of up to 90% for a duration of up to one year.
Nexo is a reputable financial institution that offers a crypto platform for lending and borrowing.
Decentralized Crypto lending platforms:
These platforms are completely decentralized and transactions are handled by code rather than individuals. The contracts use algorithms and protocols to initiate loan payouts.
In detail, anyone can access the protocols on the decentralized lending platforms which makes the process completely transparent as nothing can be hidden on the Blockchain. And there is no need for a financial regulator middleman.
Moreover, users of Defi lending platforms can apply for a loan of any size without having to confirm their identity to a third party. These loans can be supported in Stablecoins or cryptocurrencies.
- Interest rates often fail to reach that of CeFi interest rates.
- A quick way of getting any type of crypto loan using smart contracts.
- No need for a KYC verification process.
Top DeFi Lending Platforms:
Aave is a leading crypto lending platform that allows you to take loans by providing cryptocurrency as collateral or through flash loans without collateral, for arbitrage. Because the LTV rates are high, you can enjoy very low-interest rates.
Compound was one of the first platforms to offer decentralized lending and has played a significant role in shaping the DeFi market.
Cake DeFi is a reputable platform that offers a variety of investing strategies with generous returns. The platform has user-friendly products and low-risk options.
Fuji Finance is a cross-chain money market aggregator, allowing users to optimize their lending and borrowing positions.
Should You Sign Up For Crypto Lending Platforms?
Using either of these options, you can open a savings account, trade tokens, and take out a loan using your crypto assets.
And one thing is for sure, this new technology is opening doors for exciting financial prospects!
There’s plenty of potential in the land of lending and borrowing minus the hassle of the usual formalities needed via traditional banking.
Are you on board with this game-changer?