If you need to pay down the loan quickly due to changes in regulations or market fluctuations, you may not be able to access enough crypto assets to avoid default. Crypto lending platforms are eager for you to use their services and hold assets with them. Although using crypto for loans is a new phenomenon, it’s causing a significant shift in how people think about borrowing and lending money, due to cryptocurrency’s decentralized properties. Learn what crypto lending is and how it differs from standard lending at a bank or credit union.

• Centralized platforms, such as BlockFi, and Nexo, integrate Know Your Customer (KYC) and anti-money laundering regulatory protocols to limit risk.
• Crypto loans, when properly handled, can be a quick and safe way for crypto holders to access additional funds by borrowing against their existing crypto holdings.
• Crypto lending means depositing cryptocurrencies for others to borrow.
• DeFi lending is a very large improvement for developing countries, since it simply isn’t available unless you have bank access and a minimum amount of money to lend.
• However, Jae Yang, founder of crypto exchange Tacen, says the decentralized nature of crypto lending means there is no government safety net.
• The loan-to-value (LTV) ratio is the ratio between the amount of the loan and the value of the collateral.

As soon as you open a vault on Maker, you can deposit up to 25+ crypto assets as collateral. Now, you have two options after putting your crypto asset as collateral. You can either borrow Dai and hold onto it or purchase additional collateral to increase your exposure. For the most part, yes, crypto lending is safe because your money is lent out through smart contracts.

Purposes of Crypto Loans

While DeFi platforms are liberal, CeFi offers you the benefit of regulatory oversight. Rather than the timeworn method of HODLing to make a profit, asset owners can put their tokens to work. Borrowers can also expand their portfolio, gaining more from the tokens they collateralized.

• Several people have a misconception that crypto is similar to stocks and only limited to that.
• With Celsius, users can earn up to 17% APY (annual percentage yield) by lending crypto, with payments made weekly.
• To borrow cryptocurrency, you have to make sure you choose the right platform.

Crypto research firm Arkham Intelligence put the figure in the region of $10 billion, for instance, while crypto lender TrueFi said at least $25 billion. Admin keys risk — Developers of DeFi protocols may control admin keys. If the admin keys are not decentralized or burnt, there is a risk that developers may drain the entire protocol fund. If the price of your crypto drops, you could lose it unless you can add more collateral within short notice.

Nexo (For non-US users)

Which you should use, therefore, is situational and dependent on your personal risk appetite as well as your technical knowledge. But regardless of which you use, there are some general advantages and disadvantages to crypto lending that you should know. Centralized platforms, such as BlockFi, and Nexo, integrate Know Your Customer (KYC) and anti-money laundering regulatory protocols to limit risk.

• For borrowers, Celsius has interest rates available as low as 1%.
• Some like Goldfinch are trying to address this issue, although it may prove challenging.
• You have full control over your account and execute processes using applications built on the blockchain.

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Trending Coins

Voyager Digital, which became one of the biggest casualties of the summer when it filed for bankruptcy in July, provides a window into the rapid growth of unsecured crypto lending. Alex Birry, chief analytical officer for financial institutions at S&P Global Ratings, said the crypto industry was in fact broadly seeing a trend towards unsecured lending. The fact that crypto was a «concentrated ecosystem» raised the risk of contagion across the sector, he added. Blockchain.com has since largely ceased its unsecured lending, which had represented 10% of its revenue, chief business officer Lane Kasselman told Reuters. «We’re not willing to engage in the same level of risk,» he said, although he added the company would still offer «extremely limited» unsecured loans to top clients under certain conditions. On the other hand, DeFi loans allow you to control your collateralization ratio and loan management fully.

• Platforms do have the chance to recover their losses most times though because they ask borrowers to stake 25-50% of the loan in crypto.
• While decentralized crypto loans usually take place on a decentralized exchange (DEX), centralized exchanges (CEX) allow for centralized finance (CeFi).
• As a result of crypto lending, almost every cryptocurrency now has far more utility, and therefore value, than it did before.
• For example, if a borrower wants to borrow stablecoin to buy a dairy farm, they can put up their more volatile crypto like Ethereum or Bitcoin as collateral.

Smart contract bugs and hacks — Smart contracts have the advantage of being completely automated and transparent. However, poorly written code may make the smart contract vulnerable to exploits. For example, the exploit on Cream Finance caused losses of over $34 million in cryptocurrency. DeFi or Decentralized Finance comprises financial applications that operate through a blockchain, thereby removing the need for users to trust any centralized entities. The primary benefit of using DeFi is that users control their funds and allocate them as they wish.

What Is Crypto Lending? (And The Best Crypto Lending Platforms & Rates)

For most of modern history, the only option people had to borrow funds was to apply for a loan through a centralized financial institution. Thanks to cryptocurrencies, however, more people have access to loans outside the traditional banking infrastructure. With your crypto lending platform of choice, you’ll make an agreement and will be expected to stick to the terms of payment. You can generally choose to repay a CeFi loan from three to 60 months, and upon repayment, you’ll receive your collateralized crypto back in return. Instead, traders receive stablecoins that can then be exchanged for cash.

• Borrowers can often secure a crypto-backed loan at a lower interest rate than a bank loan, another advantage of crypto lending.
• No matter what crypto you are lending on the platform, you will see excellent rates.
• Instead of using overcollateralization or margin requirements, a flash loan provider requires borrowers to repay their debt almost immediately after taking it out (hence, «flash»).
• The concept of lending remains the same as the traditional one, but the only difference here is that an investor lends cryptocurrencies on some platform instead of the fiat currency.

While no exchange is 100% secure, CeFi exchanges often offer security features that make them less likely to get hacked. The crux of the process is connecting lenders and borrowers through a third party (crypto lending platform), which acts as an intermediary. DeFi loans allow users to lend their cryptocurrencies directly to someone else and earn interest on the loan through a lending protocol. This process is done through lending pools that replace the loan offices of traditional banks. Although crypto lending shares a few features with crypto staking, these what does hold mean in crypto services differ. Instead of lending cryptocurrency to borrowers, stakers lock a set cryptocurrency amount on a blockchain to secure the network.

Counterparty risk

DeFi platforms offer more transparency than CeFi platforms due to their open-source, decentralized nature built on blockchain technology. Flash loans offer an immediate alternative to borrowers by allowing users to borrow digital currency without collateral. These loans are provided and repaid within the same transaction in a single block on the blockchain. To better understand crypto lending before you get started, let’s take a look at how it works on various platforms and how it differs from traditional banking. The rise of microfinance and peer-to-peer lending points out weaknesses in traditional lending and borrowing products. Lending is only really accessible to people with developed financial infrastructure, so let’s talk about borrowing.

Self-repaying loans

Unsecured lending has become common across the crypto industry, according to the review of filings and the interviews. Despite the recent shakeout, many of the industry insiders said the practice was likely to continue and could even grow. «This is time sensitive so let’s sort if you’re available,» Odell said of the repayment. For borrowers, you may use this calculator on Nexo to see how much you can borrow.

Lend with Aave and Compound safely from your Ledger hardware wallet

In some cases, however, flash loans don’t require collateral (more on that in a bit). Not all crypto-based lending and borrowing products are decentralized. Many popular products are centralized companies that accept cryptoassets as deposits or collateral and lend out their customers funds just like legacy financial institutions. These companies suffer from all of the risks legacy finance lending and borrowing products. Once you’re confident you’ve chosen the right crypto lending platform, start an account and begin the application process. From here you’ll choose the type of crypto loan you want and the loan-to-value (LTV) you’re interested in, as well as payment terms.

Earn Interest

Finding the best crypto loans for your purposes begins with understanding the risks involved. Unlike assets held in traditional financial institutions, crypto accounts are not covered by the FDIC. A rising interest rate environment could boost crypto lending yields in 2023 as rates parallel traditional finance products. Currently, crypto lending rewards lenders with annual percentage yields (APYs) ranging from 1% to nearly 15%, with DeFi now offering some of the strongest returns. Keep in mind that each lending platform has different rates for different coins.

In a way, a smart contract is kind of like a thermostat that’s programmed to heat a room (the action) once the temperature drops to a predefined number (the condition). For example, if a borrower wants to borrow stablecoin to buy a dairy farm, they can put up their more volatile crypto like Ethereum or Bitcoin as collateral. Similar to BTC lending, you can make an Ethereum loan to earn interest. Crypto lending isn’t completely dissimilar to the process of traditional lending. «I think our risk-management process was one of the things that saved us from having any bigger credit events,» Hickey said.

Best crypto lending platforms summary

Compound is another big name in the world of crypto protocols for lending and borrowing. There are plenty of cryptocurrencies listed on the protocol, and you can deposit or borrow any of them. Compound also has its own COMP token that can yield better returns while lending your crypto to the platform to provide liquidity. Crypto lending is a way for you to earn some interest with cryptocurrency if you have it sitting in your wallet and don’t plan on selling your assets. This way, your digital currencies can offer you some value in return.

How can I use my SALT Tokens on the platform?

You can choose the currency in which you receive your loan from a wide range of options, and not just the local currency. There are a few exceptions, one of which is MakerDAO, whose members determine its borrowing rates through votes. “Some lending providers have been very generous with low collateral requirements, which then puts them in hot water when one of their customers defaults,” Huybrecht says. Based on 30-day trading volume, fees, cryptocurrencies available to trade, and average mobile app ratings.

They lend your crypto out on your behalf—the same way Airbnb finds renters for your finished detached garage—and pay you a little bit, called “yield,” for the trouble. Yield starts accruing immediately, paid according to your share of the lending pool. The amount of loan you can receive is calculated based on how much collateral you can stake using a loan-to-value (LTV) ratio.

Best DeFi Crypto Lending Platforms

Each platform has different rules, crypto assets they support, and rewards. You’ll want to shop around to find a platform or protocol that aligns with your goals. A lending platform is the middleman you’ll need to find borrowers. Don’t worry; we’ll cover a few popular platforms and how to choose in just a bit.