Last Updated on January 17, 2024 by Umer Malik
Cryptocurrency investments are on the rise these days. A large number of people are adopting cryptocurrencies because of their high return potential. Among many crypto investment opportunities, crypto lending is gaining momentum. So it’s significant to explore how does crypto lending work as it will help lend your assets and get stable passive income without having to wait for value appreciation. In this article we will walk you through the fundamental explanation about crypto lending and ways to invest in it.
Table of Contents
What is crypto lending?
Crypto lending is an investment strategy that allows investors to lend their cryptocurrency to borrowers in exchange for interest or crypto dividend. Crypto lending does not require any intermediaries.
Investors do not actually sell their crypto. Instead, they retain the ownership of their assets. Borrower has to offer collateral to get the loan. Crypto lending works for both crypto coins and stable coins.
How does crypto lending work?
To learn about how crypto lending works; the steps involved, you first need to learn about the parties involved in crypto lending.
Crypto lending involves lenders or investors, borrowers, and a crypto lending platform.
Lender lends his cryptos to the borrower who pays an interest to the lender. Crypto lending platform takes care of all transactions during the lending process.
Let’s move towards the steps involved in crypto lending.
- A borrower requests for a crypto loan at a crypto lending platform offering collateral in the form of cryptocurrency.
- The lending platform reviews his request and accepts the loan request.
- On approval, the collateral in the borrower’s account is automatically replaced by the loan, moving funds from lender to borrower’s account.
- Lenders receive interest on a weekly or monthly basis or at the end of lending period, as agreed.
- During the lending period, the borrower cannot use his collateral. Once he paid back the loan, he can use his collateral then.
Crypto lending can be different depending upon the platform you are using, but the general concept is the same for all.
Ways to invest in crypto lending
You can invest in crypto lending both as a lender and a borrower.
Crypto lending for lender
The concept of crypto lending for lenders is the same as discussed above. For further understanding, let’s consider an example.
Suppose you own 5 Ethereum and you are willing to generate some passive income with your assets instead of holding them to wait for earning profit in future. You deposit these cryptos in the wallet of a crypto lending platform to make them available for lending purposes. You will start receiving weekly or monthly interest on it.
The interest rate can be 3% to 7% for lending cryptos and can be a bit higher (up to 17%) if you are lending stable coins such as Binance USD, USD Coin.
Interesting thing about crypto lending is that crypto lending platforms provide security to lenders. If the borrower fails to pay back the loan amount, investors can sell the collateral to cover the loss. Moreover, the borrower has to stake collateral more than the loan value, to avoid lender’s loss.
Borrow crypto to buy more crypto
Many people are borrowing cryptos to purchase cars and homes, but some borrowers are borrowing cryptocurrency to buy more cryptos.
For example, Kris Kostadinov took out a loan of $14,000 in Tether stable coin from Aave platform and used it to buy Ether. He then used the ETH to trade in and out of NFT tokens. Now his investments are worth over $60,000.
Mr. Kris said, “If it was in a bank account, my money would just be going down, with inflation eating away at it.”
Pros and Cons of crypto lending
- Crypto lending is accessible to all since it does not require you to have any bank credit score.
- The funding of loans is fast. It takes only a few hours to a day to receive funds in your account.
- Crypto lending is rewarding. You can earn up to 17% interest on your idle assets.
- Cryptocurrencies are highly volatile. But you can choose to lend stable coins to avoid liquidity.
- The cases of crypto breaches are increasing; therefore, lending platform security can be a concern.
- Some crypto lending platforms require you to stake your assets for a certain period such as 30 days or 90 days, in order to receive on your assets. You can choose a platform that does have staking requirements.
Crypto lending is the hottest topic among crypto investments and is rewarding as well. But you need to do proper research before starting crypto lending or borrowing. Be aware of risks as well before time so that you can act accordingly.