One-Stop Solution for Lending and Borrowing Crypto Assets

Various Cryptocurrencies / Photo by Worldspectrum from Pexels
Various Cryptocurrencies / Photo by Worldspectrum from Pexels

Holding crypto assets to wait for earning profit in the future with their value appreciation is not the only option you have for your idle assets. The Crypto industry is very broad, providing various investment opportunities. Crypto lending is one such opportunity that allows investors to earn interest on their idle crypto assets. Through this blog, we have provided you with a one-stop solution for lending and borrowing crypto assets.

What is crypto lending?

Crypto lending is almost similar to traditional lending. But in this case, you are lending different cryptocurrencies to borrowers instead of fiat currency (paper money). Lenders earn interest payments or crypto dividends, up to 17% in return. Several crypto lending platforms allow lending both cryptocurrencies and stablecoins.

Crypto lending requires borrowers to stake crypto collateral for getting a loan.

How does crypto lending work?

Crypto lending involves lenders/investors, borrowers, and crypto lending platforms. If you are interested in different types of investment, you must get insight into how crypto lending works as it will guide you through the whole process of getting stable dividends by lending crypto instead of investing in traditional stocks and bonds. Let us look at the step-by-step process of crypto lending.

  • A borrower requests a crypto loan through a crypto lending platform.
  • The platform accepts the loan request of the borrower. The borrower has to offer some crypto as collateral. He cannot use this collateral until he pays back the entire loan amount.
  • Investors fund the loan, but the entire process remains invisible to lenders, all taking place in the platform's back-end.
  • Investors start receiving crypto dividends weekly or monthly as per decided intervals.
  • Once the borrower pays back the whole loan amount, he can get back his collateral.

Every crypto lending platform has different rules and regulations but generally, the process is the same on every platform.

Let us understand it through an illustration.

Suppose you are holding 5 Bitcoins and you are interested in earning some passive income with these Bitcoins. You go to a crypto lending platform and deposit your assets in a digital wallet available on the lending platform. By doing this, your funds become available for lending purposes. The platform starts giving you interest payments which can be 3 % to 7%.

This is how crypto lending works for investors. Now, look at the other side of the picture, crypto lending for borrowers.

Suppose Alecia wants a crypto loan of $5,000. Crypto lending platforms require borrowers to stake 25% to 50% of the loan, Therefore, she will first need to deposit crypto worth $10,000 to $15,000 as collateral for a crypto loan in cash.

How to invest in crypto lending?

To invest in crypto lending, you need to start with a crypto lending platform. There are two types of crypto lending platforms: centralized and decentralized platforms. A centralized lending platform depends on a third party to manage the lending process, while a decentralized lending platform depends on smart contracts. There is also an option to choose between an automated or manual lending platform. The automated lending platform does not require you to handle the lending process but with a manual lending platform, you will have to do everything.

Once you have made up your mind to select among the platforms mentioned above, the next step is to check the parameters to finalize a platform. Check interest rate, supported cryptocurrencies, user feedback, tax, backup system, etc. Compare different platforms and finalize the one that best meets your criteria.

In order for crypto newbies to better understand the indicators, concepts of price patterns, and analysis, there are a lot of sources providing cryptocurrency terms and definitions you can use to fully understand the regulations and caveats concerning the transactions and trading terms.

When you have selected the platform, go deposit cryptos on your selected platform, and you will start receiving interest payments.

What are the risks associated with crypto lending?

Crypto lending is rewarding but it comes with some risks.

  • Cryptocurrencies are highly volatile. If the prices fluctuate, and the value of collateral goes below the loan amount, the borrower has to provide more collateral.
  • On some platforms, the borrowing requirement to apply for a loan can be high.
  • Some lending platforms do not offer any backup plan or insurance if the investor loses funds in a security breach.

The following are the most popular crypto lending platforms in the crypto industry.

  • Compound Finance
  • MakerDAO
  • Aave
  • BlockFi
  • Celsius Network
  • Nexo

Conclusion

Crypto lending is a broad sector offering huge return potential. Investors are coming into this sector to earn interest by lending their assets while some are borrowing crypto to buy crypto to earn profits. Cryptos are volatile, you can choose stable coins instead. The interest rate can be up to 17% for stable coins, which is quite high compared to cryptocurrency.

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