Crypto lending lets users borrow and lend cryptocurrencies for a fee or interest. You can instantly get a loan and start investing just by providing some collateral. This could be through a DeFi lending DApp or a cryptocurrency exchange. When your collateral falls below a certain value, you will need to top it up to the required level to avoid liquidation. When you return your loan plus a fee, your capital is unlocked.
You can also get collateral-free loans known as flash loans, which you must pay back within the same transaction. If you cannot do this, the lending transaction is reversed before it has the chance to be finalized. Crypto loans make borrowing and lending simple, and the process is completely automated by smart contracts. For many, it’s an easy way to earn APY on crypto assets they HODL or access cheap credit.
However, just like any project, smart contract, or investment on the blockchain, crypto lending also involves financial risk. For example, if you use a volatile coin as collateral, you can be liquidated overnight. Smart contracts can also be hacked, attacked, or exploited, which often leads to big losses.
Before borrowing or lending, understand that you will lose custody of your coins. This removes them from your control and reduces your liquidity. Take note of all the terms and conditions of the loan to understand when you can access your funds and any fees involved. You can start taking loans out with your Binance account today by heading to the Crypto Loans page.
What is crypto lending?
Crypto lending is an ingenious instrument to obtain the cash you need quickly, as it allows you to utilize your crypto holdings as security to get secure loans. If you are wondering how do I borrow crypto, collateralized crypto lending is a viable solution. It allows borrowers to use their crypto assets as collateral to get a fiat or stablecoin loan.
Crypto lending works by taking crypto from one user and providing it to another for a fee. The exact method of managing the loan changes from platform to platform. You can find crypto lending services on both centralized and decentralized platforms, but the core principles remain the same.
This enables you to get the money without having to sell your coins, use the cash to fulfill your objectives and then repay to get back the hold on your assets. Crypto loans allow you to use digital assets you hold to generate dividends by lending out part or whole of the holdings.
Crypto lending platforms play a key role in dispensing such loans. Generally, you can borrow up to 50% of the value of your digital assets, though some platforms might allow you to borrow even more. Crypto loans generally don’t have a concept like EMI and borrowers may repay when they can before the fixed term ends. As for the interest rates, it is approximately 4% on Celsius Network on popular non-stablecoin cryptocurrencies.
As for the question, is lending crypto profitable, it depends on a string of factors. If you default on your debts, you end up losing your assets. Inconsistencies integral to crypto assets have led to more takers to stablecoin lending. On Celcius Network and Nexo, stablecoin lenders can earn 8%, while on Compound Finance — a decentralized crypto lending platform — the lending annual percentage rate (APR) for Dai (DAI) and USD Coin (USDC) is 12% and 9%, respectively.
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How does stablecoin lending work?
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When it comes to interest rates, peer-to-peer (P2P) lending and borrowing models are closely influenced by the supply and demand scenario. A high volume of loans coupled with a low supply from lenders means high returns for lenders. However, if the demand for crypto loans is low and the supply from lenders is high, the interest rate for borrowers will be low to attract the borrowers.
If you are considering why do stablecoins have high-interest rates, this section may come across as quite informative. The principle idea of supply and demand leads to stablecoin lending, providing annual returns in double digits. Stablecoins are still a budding industry, being just 2-3% of the total crypto market capitalization.
On the lending platforms, a substantial amount of the lending supply comes from stablecoins. Many buy these coins only to lend them on these platforms, but it’s alarmingly low compared to the supply of the top cryptocurrencies. Take the case of Compound Finance, where Ether (ETH) has 50% more gross supply than DAI and USDC combined.
Contrast it with the demand and you will find the figures are staggering. On Compound Finance, the demand for DAI trumps that of ETH by nearly 40 times. Large institutional traders and cryptocurrency payment processors are behind the huge demand for DAI. Institutional traders include the hedge funds and market makers clubbing on crypto loans for speculation purposes.
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How does crypto lending work?
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Just like a securities-based loan, a cryptocurrency-backed loan collateralizes digital currency. Basically, it resembles a mortgage loan. You give hold of your crypto assets to get the loan and repay it over a predetermined time. These types of loans can be obtained through a crypto lending platform or a crypto exchange. Though you still retain ownership of the collateralized crypto, you forego the right to make transactions using digital coins.
Crypto loans come across as a viable option because of several advantages such as low interest rates, choice of loan currency, lack of credit check, fast funding and the ability to earn passive income on your crypto that is otherwise lying idle. Moreover, you can lend your own digital coins and receive a high APY (more than 10%) on several crypto platforms.
All crypto lending transactions have two distinct parties: the borrower and the lender. It is for the borrower to deposit crypto assets as collateral to secure the loan from the lender. The arrangement works to mutual advantage, as the borrower receives an immediate loan in return for their crypto assets while the lenders earn interest on the amount released as a loan. If the borrower defaults, they dispose of the underlying crypto assets to realize their money.
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Famous crypto lending projects
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Aave
Aave is an Ethereum-based DeFi protocol that offers various crypto loans. You can both lend and borrow, as well as enter liquidity pools and access other DeFi services. Aave is perhaps most famous for its work in popularizing flash loans. 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 project that allows users to stake their interest-bearing tokens as collateral. Users gain interest-bearing tokens when they deposit their funds in a lending pool or yield optimizer. Holding the token gives you access to your original deposit plus the interest earned.
You can further unlock the value of your interest-bearing tokens by using them as collateral for a Magic Internet Money (MIM) stablecoin loan. One strategy would be to deposit stablecoins in a yield-farming smart contract and then use the interest-bearing tokens to generate MIM. As long as your stablecoins don’t experience volatility, the chances of liquidation will remain low.
Binance
Apart from its exchange services, Binance offers a range of other crypto financial products for users to lend, borrow, and earn passive income. If you don’t want to access DApps and manage a DeFi wallet yourself, using a CeFi (centralized finance) option can be much easier. Binance gives access to simple crypto-collateral loans across many tokens and coins, including Bitcoin (BTC), ETH, and BNB. Funds for these loans come from Binance users who want to earn interest on their HODLed crypto.
Should you lend crypto?
You may be eager to know if crypto lending is safe. Before you go active on a crypto platform as a lender, make sure you are well-versed with the specifics. When you move your crypto to any platform for lending, they hold access to the keys to the cryptocurrency — not you. You just have the bond issued by the smart contract. Check the auditing standards of the smart contract, the history of the project and its team can help you guide your decisions.
If you begin lending with your eyes closed, do not be surprised if your crypto disappears. QuadrigaCX, for instance, is nothing less than a horror story. A Netflix documentary discussed the suspicious death of Gerald Cotton, the founder of QuadrigaCX, the Canadian cryptocurrency exchange and how he misappropriated customer funds. About $190 million worth of digital assets kept on the exchange were lost.
To sum up, you need to do your due diligence before taking a call on the platform you’d be using for lending and borrowing. Regardless of the lending platform, knowing your game and limitations is extremely important when it comes to successful innings. A mistake might prove costly, so better put in the best of your exploratory skills to work.
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Closing thoughts
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When done responsibly, crypto lending platforms provide value to both the borrower and lender. HODLers now have another option to earn passive income, and investors can unlock the potential of their funds by using them as collateral. Whether you choose a DeFi or CeFi project to manage your loans, understand the conditions involved and make sure to prioritize using a trusted platform. Blockchain technology has made it easier than ever to access and provide credit, making crypto loans a powerful tool for those who are interested.
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Top comments (1)
It's a fascinating concept that's been gaining traction in recent years. Essentially, crypto lending allows individuals to borrow or lend digital assets like Bitcoin, Ethereum, or other cryptocurrencies. But before you dive in, there are a few key things you should know. First off, understanding the concept of collateralized lending is crucial. This means borrowers provide collateral – usually in the form of another cryptocurrency – to secure their loan. It's a bit like offering up something valuable as insurance in case you can't repay the loan. If you're curious to learn more about collateralized lending, I stumbled upon this informative resource here rocko.co/learn/what-is-collaterali.... Now, onto some additional facts. One important aspect to consider is the risk involved. While crypto lending can offer attractive interest rates, it's not without its risks. Market volatility, regulatory uncertainties, and security breaches are all factors that can impact your investment. So, it's essential to do your due diligence and only invest what you can afford to lose. Furthermore, it's worth mentioning that crypto lending platforms vary in terms of their offerings and terms. Some platforms may require minimum deposit amounts, while others offer more flexible options. It's essential to research different platforms and compare their features before committing to one. Another point to keep in mind is taxation. Depending on your jurisdiction, earnings from crypto lending may be subject to taxation. It's crucial to familiarize yourself with the tax implications in your country to avoid any surprises come tax season. Lastly, security should always be a top priority. When choosing a crypto lending platform, opt for one with robust security measures in place, such as two-factor authentication and cold storage for funds.