[Origination article written by: Dmytro Bobriakov. Dmytro is an investor with more than 10 years of experience in the field of financial analysis who has worked for all the Big Four companies in managerial roles. Featured image via Pixabay.]
Cryptocurrencies have proven to be useful for several reasons over the past few years. The assets started primarily as a means of sending money and value among people regardless of their distance. These same assets have been responsible for a financial revolution unlike any we have seen before, partly thanks to crypto lending.
From investments and payment processing to savings and staking, cryptocurrencies are everywhere. One area where their application has not particularly gotten much praise is with lending.
Although it has been left in the background, crypto lending has become one of the cornerstones of the industry. This is especially true thanks to the rise of decentralized finance (DeFi) lending platforms like Aave and Compound. So, what exactly is crypto lending, and why has it become so popular?
What Is Crypto Lending?
To get a proper glimpse of crypto lending, it is important to understand the mindset of a crypto investor. The crypto market has performed quite well over time, so much so that it hit a $1 trillion value in 2021 and has grown rapidly to at one point have a $3 trillion market capitalization that same year as institutional investors moved in.
With the market being especially bullish, investors have been increasingly optimistic about future performance. The Crypto Fear and Greed Index, a common tool used to gauge market sentiment, shows that investor sentiment is more volatile than crypto asset prices but tends to be bullish.
Sadly, this presents a bit of a problem. Many crypto investors would like to spend physical cash to meet their financial needs, but they do not want to convert their cryptocurrencies into it. They feel that the market still has a long way to go and would very much prefer to hold on to their coins, but they still need cash for spending.
(Source: Crypto Fear & Greed Index)
This is where crypto lending comes in. It offers investors an opportunity to hold on to their coins while also accessing the cash they need for spending.
Crypto lending is pretty simple; investors can lend out their coins to others who need cash. The borrowers in turn pay back the money they have been loaned plus interest. With crypto lending, investors earn very competitive interest rates on their coins.
These interest rates tend to vary and have been under 1% a year in some cases and in double-digit percentages in others. It all depends on supply and demand. There are even platforms like YouHodler that offer significantly higher rates for investors.
Investors can rest assured of excellent security because borrowers are usually mandated to stake their own cryptocurrencies as collateral. Some platforms may even require loans to be over-collateralized, meaning that a borrower needs to put up more collateral than the loan is worth. So, if a borrower is unable to repay their loan for some reason, investors could simply sell the collateral to cover most or all of the losses.
To protect against fraud, loan platforms require that borrowers stake at least a significant portion of the loan value in crypto. This way, platforms have a much easier time covering the losses and getting lenders their money back.
Crypto Lending Platform Examples
As crypto lending is becoming incredibly popular, traditional banks are beginning to feel threatened. This growth is attributed to the evolution of the sector, which has led to more competitive lending rates from both CeFi and DeFi platforms. Here are examples of some popular lending platforms that you may consider.
If you want to lend your crypto on a reliable platform and earn interest rates that are better than traditional banks YouHodler is an option. It is a centralized crypto lending platform (CeFi). This does not mean that operations are controlled by a central bank or government; it only means that all transactions and operations are channeled to a central exchange.
Through YouHodler, you can lend dozens of cryptocurrencies and earn competitive rates of up to 12% APY. And while doing this, you can also apply for crypto loans with your saved crypto as collateral.
As crypto lending continues to gain popularity, more CeFi platforms continue to thrive. Hodlnaut is yet another platform where you can lend a variety of crypto coins and earn competitive interest rates. Just like others, they control the accrual of interest and its distribution.
Hodlnaut has a reputation for digital asset security, although you should always take care of your account and monitor it for any irregularities to ensure that your investment remains safe.
This is a relatively new platform in the DeFi lending market launched in 2020 by DeFiner, which is a decentralized finance organization. According to Jason Wu, the CEO of DeFiner, Taurus had over $2 million locked deposits by the time it launched as a decentralized crypto lending web platform. Impressively, crypto investors can earn up to 20% APY on their locked assets.
A DeFi lending platform operates differently from a CeFi one in that no operations are channeled into a central location. Once you lend, the assets finance smart contracts that earn proceeds that are automatically distributed to the investors.
Compound is a DeFi lending platform powered by Ethereum, just like many others. This platform supports dozens of cryptocurrencies including ETH, BTC, USDC, and DAI.
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The operations are simple; investors lend their digital assets and earn interest in return.
There is no need to deal with an intermediary since it is a DeFi platform, which makes the lending and borrowing instant as long as you qualify.
Why Crypto Lending Has Become So Popular
Crypto lending became a particularly popular trend in 2020 when the DeFi space’s popularity boomed. Taking out over-collateralized loans through smart contracts on the blockchain became easier to the extent that it caused demand to skyrocket. With it, interest rates rose for lenders, who jumped on the opportunity.
Crypto lending has continued to grow in popularity ever since. But what about it draws people in so much?
Crypto lending is especially popular because of its speed and flexibility. A borrower can log on to any crypto lending service and get a loan in a matter of hours. These platforms do not need to engage in any due diligence. As long as your information has been confirmed by the platform and you have your collateral ready, you will be able to get a loan.
The speed with which these platforms operate has so far been one of their greatest strengths. Compare this to traditional banks and lenders that will have to take significant amounts of time to evaluate and process a loan, and you will find that crypto lending is indeed beneficial.
-Flexible Payment Schedules
Crypto lending platforms are also much more flexible in how they structure your deals. You can take out a loan and pay it back in a couple of days, or you could even stretch your loan tenure to cover months.
-Maintaining Crypto Exposure
For borrowers, crypto loans mean having to pay interest. You might not be so comfortable since lending platforms require that you put up collateral in the form of crypto. Thankfully, some lending platforms allow you to actually keep your coins.
With some crypto lenders, you remain in control of your collateral throughout the loan period. You just will not be able to spend or move the coins. So, if the value of your collateral increases throughout the loan period, you still get to benefit from those price gains.
Most crypto borrowers need that cash liquidity without the drawbacks of necessarily missing out on potential gains in the market. With crypto lending platforms, they get the best of both worlds.
-Reasonable Interest Rates
Crypto lending also offers some attractive interest rates. You can find lending platforms that charge around 7% interest annually, which is competitive with the rates charged by traditional loan companies.
The Cons of Crypto Lending
The potential benefits of investing in cryptocurrencies are often blown out of proportion by numerous writers who hardly discuss the flip side. When considering crypto lending, you must know the possible risks that await.
Let’s not forget the sudden changes that have hit some cryptocurrencies in the past including Bitcoin, Ethereum, Dogecoin, and even the stablecoins. Frankly, one of the issues that should concern you is the volatility of the crypto that you intend to lend. In some situations, the value of your earnings could decline. The worst thing is that your investment might consistently lose value, especially if you lend to some platforms on a fixed-term basis.
While you lend your crypto coins to a lending platform, you should know that the operations are not regulated by either a government or a central entity. DeFi platforms are highly decentralized, and they rely on voted upon decisions. Although this is a benefit in terms of transparency and security of operations, decisions could turn against the investors, especially when things go wrong. Lack of central regulation may lead to the crumbling of a lending platform within a very short time. And there will be no central bank or insurance to save your investment.
-Prone to Hacking
Hacking cryptocurrency platforms has been common news in the past. According to the CNBC website, hackers stole crypto worth $600 million from PolyNetwork, which is one of the largest crypto hacks in history. Such a headline can send jitters to a crypto investor intending to lend their crypto to any platform. Well, it is a risk you should keep in mind.
-Hard Forks or Discontinuation
If you are a crypto investor, these are not new terms. For the sake of newbies, a hard fork is a radical change in a blockchain that requires you to adopt the changes or potentially be left behind. It is a risk you should expect while lending your money, and this could harm your savings. Actually, lending platforms that are not prepared could lose an investment in this case.
*Important Considerations for Crypto Lending
If you are looking into crypto lending, there are some things you should keep in mind.
Investigate the Platform
There are a variety of crypto lending platforms out there. You need to look into each and make sure you pick a legitimate one. Consider the platform’s track record, security infrastructure, and liquidity before you sign up.
It is worth pointing out that some platforms allow users to lend in a decentralized way. While non-technical users may not be able to review the smart contracts behind this process, it is important to always consider the platform’s track record and whether it is as decentralized as it claims to be. Finding out whether the contracts have been audited is also crucial.
Review the Terms
If you are borrowing, you also need to review the loan’s terms. Examine the interest rate, loan period, and other terms. Make sure you are comfortable with them.
Continue to focus on your coins’ security and privacy. Never let anyone have your wallet’s private keys, and examine the platform’s security infrastructure to give you that assurance. Decentralized platforms may be more secure than centralized ones because they, more often than not, require borrowers to over-collateralize their loans.
Monitor the Market
Even if the lender ends up holding the coins, keep an eye on price changes and coin performance. If the price reaches a comfortable point, you could clear your loan and get your coins back to sell them.
Crypto lending is only expected to continue to grow in popularity. If it is an opportunity in which you would like to participate, take the important information shared above into consideration. As cryptocurrency evolves, it is essential to stay informed about the latest developments.
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