Crypto lending from scratch? An easy-to-understand explanation

Maria Liveley

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The crypto industry is evolving very rapidly, providing additional options for making money. In traditional finance, users have a saving account with banks to earn interest on their money. The interest rate is less than 0.5% annually. On the other hand, through one of its latest strategies, crypto lending, the crypto industry allows users to earn APY ten to twenty times more than the interest rate with a traditional bank.

Let’s learn about crypto lending from scratch through an easy-to-understand explanation.

crypto lending

Crypto lending from scratch? An easy-to-understand explanation. Source: shutterstock.com

What is crypto lending?

As the name implies, crypto lending is a process of lending cryptocurrencies to borrowers in exchange for an interest payment.

Crypto lending is the best option for investors who do not want to sell their crypto. They can earn some extra money with their idle assets by lending them.

How does crypto lending work?

The lending process can be slightly different depending upon the platform, but overall, the process is the same.

If you are a great fan of gaining profit from different types of lending investments such as stocks, real estate, funds, you will most definitely be interested to know how does crypto lending work and what you need to do in order to earn more money. Moreover, when it comes to investing in cryptocurrency, you have to know a lot of key factors. Here is more about what cryptocurrency is, how to buy it and how to select the best crypto platforms.

Crypto lending involves lenders/investors, borrowers, and a lending platform. A lender offers cryptos to make them available for loan on a lending platform at a set interest rate.

A borrower will request a loan from a crypto exchange by providing collateral. The platform will examine his terms for the loan. Once the request is approved, he will instantly receive the loan amount transferred from the lender’s account.

The borrower cannot use the collateral until he returns the loan amount. Collateral act as a security to the lender’s amount. If the borrower does not pay the loan amount, the lender can sell the collateral to cover his loss.

The value of the collateral is always higher than the loan amount. For example, if a borrower requires a loan of $6000 via a crypto loan, he will need to first deposit $12,000 to $15,000 worth of crypto for receiving the loan amount of $6,000 in cash.

The entire lending and borrowing process is made trustful and smooth through the lending platform, which implements specific lending terms.

How to invest in crypto lending?

To invest in crypto lending, users need to choose a lending platform. There are two types of crypto lending platforms.

  • The centralized lending platform involves a third party to manage the loan transaction.
  • The decentralized lending platform depends on smart contracts to handle the entire lending process.

Users also have the option to choose between an automated and manual lending platform. The automated one does everything for the user, and in the case of manual, users have to do everything on their own, for which they must have proper understanding and experience.

Once the platform is selected, check all parameters such as interest rate, supported cryptocurrencies, user feedback, backup system, tax, etc. Compare different platforms and finalize the one that best meets the requirement criteria.

When all is done, users will deposit cryptos in the selected platform for lending purposes and start receiving interest payments. In this way, they can earn extra income while retaining their asset ownership.

How much can one earn from crypto lending?

The earning from crypto lending is directly related to the interest rate. Different lending platforms offer different interest rates depending upon the coin.

For cryptocurrency, the interest rate (APY) is usually 3% to 7%, while for stable coins such as USD Coin, Binance USD, etc., it can be up to 17%.

The more rewarding platform and coin a user chooses, the more will be his profit.

What are the most popular crypto lending platforms?

The following are the few most popular crypto lending platforms.

  • DeFi lending platforms: Compound Finance, Alchemix, MakerDAO, Aave, etc.
  • CeFi lending platforms: BlockFi, Celsius Network, Nexo, etc.

What are the risks associated with crypto lending?

The following are risks associated with crypto lending.

  • Cryptocurrencies are highly volatile. If the collateral price fluctuates and goes below the loan amount, the borrower must provide more collateral within a limited duration.
  • The borrowing requirement, the enough holding a borrower must have to apply for a loan, can be high on some platforms.
  • If a user loses his funds in a security breach, there will be no insurance or backup plan on some platforms.

Conclusion

Crypto lending is an easy way to make money. It is also advantageous for borrowers as they can instantly get the payment. However, one must be careful in crypto investments. It is always recommended to do some homework before making any decision in this industry. Crypto loans are backed by blockchain and crypto industries which are continuously evolving. Therefore, we can expect more out of crypto lending in the future.

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