Time and again, crypto holders are asked to patiently but alertly wait for the prices to go up or down in favor of their currency. This is the case; holders often are stuck with valuable crypto in their wallets because the market is unfavorable. But crypto, its revolutionary invention, has several profit opportunities without actively buying or selling. This is where crypto lending comes into play. The basic yet groundbreaking financial factors of credit and lending open doors to use cases like asset lending, flash loans, and liquidations. But what exactly are crypto lending platforms, and how does it work? You are about to find out!
- What is Crypto Lending?
- Different types of crypto lending
- How does crypto lending work?
- How to choose a crypto lending platform?
- Best crypto lending platforms
- Benefits of crypto lending
- Future of crypto lending
What is Crypto Lending?
Crypto lending is a process in which the crypto owner uses their cryptocurrency to borrow fiat or stable coin from a lender and pays the interest called “crypto dividends.” It is a brilliant way to utilize your crypto holdings without selling them or buying them for borrowers and lenders respectively. The principle is the same as a traditional mortgage or auto loan. Crypto lending can be carried out through crypto exchanges or CeFi and DeFi lending platforms. Borrowers use crypto assets as collateral to obtain funds from fiat money.
Related Article: How to Launch a DeFi Crypto Lending Platform
A person who owns cryptocurrency can passively generate a steady income through crypto lending by investing in a lending platform. When investors deposit the cryptocurrencies into the wallet of a crypto lending platform (adding to its liquidity), they receive weekly or monthly interests. For instance, if they own bitcoins, the interest ranges from 3% to 7%. Stablecoins like USD Coin, True USD, and Binance USD have higher interest rates, usually ranging from 10% to 18%.
Different Types of Crypto Lending
There are broadly two types of crypto loans as DeFi and CeFi. DeFi runs on a smart contract, whereas CeFi runs under an authority.
Custodial CeFi Crypto Lending
It is also known as centralized crypto lending, and everything from users’ onboarding is under the custody of authority or business. The authority implements KYC standards and lends cryptocurrencies or fiat currencies in exchange for an asset. Businesses can flexibly negotiate custom crypto lending contracts to build partnerships with others. CeFi-based crypto lending platforms offer attractive margins and interest rates in agreement with the crypto lenders.
Related Article: What are DeFi flash loans? How does it work?
Non-custodial DeFi Crypto Lending
Non-custodial crypto lending works similarly to DeFi exchanges. The lender and borrower are connected through a peer-to-peer network such as a crypto exchange or a DeFi crypto lending platform with the support of a blockchain. A smart contract handles the process, and no centralized entity controls it. Borrowers collateralize their crypto assets to borrow fiat money loans. These cash loans are then used as working capital.
DeFi platforms often do not need KYC and only accept cryptocurrency. The interest rates differ based on market supply and demand, but they are often lower than the rates of centralized lending services. Transactions in DeFi are stored in public blockchains, and it is open to anyone, thus more transparent than centralized lending platforms.
How does Crypto Lending Work?
As briefed before, decentralized crypto lending works with the help of a smart contract that connects lenders and borrowers and regulates the lending processes and interest rates. The smart contracts monitor both peers in a lending transaction. So there are three major players in DeFi crypto lending:
The Lenders in crypto lending platforms
The ones who lend their fiat currency in exchange for crypto and earn passively through crypto dividends are the lenders. They also earn through crypto investments where they lend their cryptocurrencies.
Related Article: What are DeFi flash loans? How does it work?
Blockchain for crypto lending platforms
A crypto exchange or a crypto lending platform manages all the transactions that involve lending and borrowing between two peers on a smart contract. The blockchain platform manages all the lending factors, such as interest rate and security, in case the borrowers do not pay back in time. Crypto lending on DeFi blockchain platforms works with the help of lending protocols that completely automates the process without any intermediaries. The identities of the lender and borrower are also concealed.
Borrowers in crypto lending platforms
Those who avail for a certain amount of crypto loan against their collateral of crypto assets are the borrowers. Borrowers sign up with a crypto lending platform, request a loan, and offer their crypto assets as collateral. The collateral is considered as the lenders’ security for the lending amount. The smart contract manages the loan processes, collateral blocking, loan approval, and interest rate. The borrower is required to repay the full loan before claiming back their crypto-assets blocked as collateral in the smart contract.
How to Choose a Crypto Lending Platform?
The major factor in selecting a crypto lending platform would be the interest rate offered. You do not want to be robbed in the name of loans, so choose a lending platform that offers a reasonable interest rate for the crypto asset.
Compare the costs assigned to different crypto assets. They vary from platform to platform; thus, choose the one that is best for the crypto asset in your possession.
You should also consider the platform risks before choosing a crypto lending platform. Risks could be in the form of impermanent loss when the asset’s price is locked up in the liquidity pool of the platform and changes after depositing.
These changes are because of the Automated Market Maker system used by the DeFi lending and exchange platform. Risks can be avoided by reading through a platform’s whitepaper or ensuring that a third party has audited it.
It is also essential to pick based on the lending duration when trying to discover the safest crypto lending platform for you. The lending duration could be fixed or flexible across various platforms.
Another crucial factor for choosing a crypto lending platform would be the collateral you need to borrow a particular amount. Certain platforms accept only specific cryptos; thus, make sure you have what they are asking or that they accept what you have.
Minimum Deposit Limit
Finally, check the lending deposit limits of the platform. Most platforms have a minimum deposit limit, which should match what you can afford.
Best Crypto Lending Platforms
CoinRabbit is a crypto lending platform with a simple interface and a non-KYC approach, making it the best choice for beginners. It carries out multiple security and AML checks, and the account can be protected with 2FA additional protection. The funds are separately withdrawn to the system of cold wallets. The APR is at just 1.2% per month and is supplemented by free withdrawals available anytime and unlimited time frames for loans. CoinRabbit also provides a system to decrease liquidation prices flexibly. It is in close partnership with such big market players as ChangeNOW, Guarda Wallet, Atomic Wallet, etc.
SpectroCoin is known for its crypto lending services. A loan-to-value(LTV) can be chosen from 25% to 75%. As collateral, SpectroCoin accepts BTC, ETH, XEM, and DASH, the highest being available for BTC and ETH. Nonetheless, if you choose a high LTV, it increases your interest rates, whereas a bigger loan decreases it. Withdrawals are allowed in EUR, USDT, BTC, ETH, and so on. SpectroCoin is best known for its flexible ranges for loans. One can avail as little as 25 EUR to up to 1 million.
Nebeus is a holistic crypto platform with an ecosystem for earning, borrowing, trading, and even insuring your crypto. It has the best rates in the market offered in four kinds of earning programs. One can rent crypto and gain 6.5% interest yearly or rent stablecoin and earn up to 12.85%. For crypto-backed loans, Nebeus offers two options; Quick Loans (suitable for smaller daily expenses) with 0% interest and Flexible Loans (for individual tailored requirements) with customizable terms up to 80% LTV.
Blockfi is a one-stop solution for earning, buying, and selling crypto. API can be expected to up to 8.5% on different cryptocurrencies. The platform requires no hidden charges or minimum balance conditions. You can even lend out cash from Blockfi for urgency by staking crypto assets at 4.5% APR.
Celsius is a big name in crypto lending, in which you can earn up to a 17% yield, and no fee is required for lending, transferring, or borrowing coins. The web and mobile application lending platform lets you earn a CEL token (exclusive to the Celsius network) and 25% extra incentives. The inbuilt calculator lets you see your gains based on different cryptos and duration. You can borrow money for interest as low as 1% APR for emergency funding.
Benefits of Crypto Lending Platforms
In contrast to traditional loans, crypto loans have features unique to the appeal of crypto enthusiasts:
Currently, 1.7 billion adults do not have a bank account, making it impossible for them to get traditional loans. Regardless, applying for a loan in a traditional bank is time-consuming, and many factors like credit score and income interfere. You may not get the funds you want if your credit score does not look good. In addition, the KYC needed to get traditional bank loans are also extensive. Cryptocurrency solves these issues. Most platforms do not consider credit scores and only ask for minimal and most important KYC details. The loan processes are made considerably easier and more accessible than traditional loans. Crypto offers financial freedom for everyone through the wide accessibility of crypto lending.
Flexible Loan Terms
When you borrow from traditional banks, you do not have much of a choice when it comes to the loan terms. The same goes for other financial institutions. Crypto loans are customizable. The borrower has the choice to determine the loan-to-value ratio (LTV). You even have the choice to choose the fiat currency or stablecoin of your choice. The loan amount depends on the amount of collateral you have, but other than that, you get to decide most of the loan terms. Crypto lending platforms have extremely flexible loan repayment terms. Some platforms lower the interest rates if you pay back in specific crypto.
Traditional banks can be heavy regarding loan interests. The exchange rate can also be large if you require a loan in a different currency. Ultimately, it sums up to you losing some money which is ironic to the intention of loans. Cryptocurrency lending has clearly laid out the fee structures that are generally lesser than banks. you can expect a one-time service fee, and that’s it. You can avail of the loan in cryptos and convert them later to the currency of your choice with minimal to no fee.
Some platforms give you choices to pick the fiat or stablecoin you want as the loan surpasses the high fee. Crypto loans may not be as cheap as mortgage loans, but they are cheaper than credit cards and personal loans. Crypto loans can be availed at interest rates lower than 10% One can borrow up to 50% of their portfolio value. Some exchanges give out up to 90%.
There are few chances that you can get a loan sanctioned and offered immediately to serve your rushed needs. Even if there is a way, it depends on many factors that not everyone can fulfill. Most crypto lending platforms approve loans within 24 hours, and you do not have to submit stacks of documents for approval. You have to have cryptocurrency or, in some cases, fiat currency to deposit as collateral. in addition, you also need a piece of government-issued ID. That is all it takes to get you instant funding.
Most crypto lending platforms lay out their security measures clearly on their websites. Ideally, 95% or more lent funds should be stored in cold wallets. This means that the crypto collateral is stored virtually and is impossible to hack. Some platforms even store 100% of the funds offline. Usually, platforms outline the security measures they have set up against DDoS attacks. Some platforms also insure the digital assets on the platform.
Future of Crypto Lending Platforms
Cryptocurrencies serve as excellent collaterals because of their ease of sale and liquidity. Crypto lending platforms consider liquidation as a key part of the crypto-lending ecosystem. Comparatively, the traditional mortgage system has an elaborate process for foreclosure and lending as a whole, for that matter. Meanwhile, crypto lendings take only seconds to process a loan and enable crypto liquidations that ensure the system’s efficiency. As the lending industry grows, it offers several opportunities for crypto holders to yield, gain liquidity and even increase their assets’ productivity passively.