Cryptocurrencies have become the next best thing, but they were only launched in 2009. This means they have got a long way to go and there will be a number of changes and developments that will happen in the industry. One of the innovations that have happened so far includes crypto lending, which pertains to the lending investment industry and has experienced significant growth in the last few years. The purpose of this kind of investment is to allow those with crypto assets to earn some dividends, which range between 14% and 17%, on an annual basis, simply by lending their cryptocurrencies.
Of course, this is a great deal more than what people can make through traditional savings accounts, due to which they have been drawn to this concept. There are crypto lending platforms that are established to facilitate the entire process, and these platforms are aimed not just at cryptocurrencies like Bitcoin, but also stablecoins like Tether.
How do crypto lending platforms work?
To put it simply, crypto lending platforms are online platforms that enable people to lend their cryptocurrency to other people in exchange of interest. There are two parties involved in crypto lending. First, there are borrowers who require physical cash, such as USD or EUR, who are willing to take a loan through these platforms in return of interest. Secondly, there are lenders, who are also referred to as investors, who own crypto assets and want to generate some passive income from them.
Borrowers use the crypto lending platform to request a loan and they specify the amount they need, along with the duration they need it for. The loan is then evaluated by the crypto lending platform in question in regard to security. Once the loan is approved, the borrower is required to stake a specific amount of their crypto holdings as collateral in order to get the loan. In most cases, platforms require borrowers to provide at least 50% of the total amount of the loan as collateral in the form of crypto.
These lending platforms then use the assets deposited by lenders for fulfilling the loan. As far as investors are concerned, they are given interest on a weekly or monthly basis, depending on the number of assets they invest. Once the borrower repays their loan, their crypto collateral is unblocked.
What types of crypto lending platforms exist?
There are 2 distinct categories of crypto lending platforms that you can find in the market. First, you will come across centralized crypto lending platforms that operate the same way as banks. You can use platforms, such as BlockFi, for earning interest on your crypto by depositing your funds on their platform. Your money is then lent to trusted corporate and institutional buyers. You are given a floating interest rate, which means that it depends on supply and demand.
However, in the past year, the APY for stablecoins has remained relatively stable between 6% and 12% on crypto lending platforms. Your interest rate also depends on the crypto you choose for funding your account. For instance, Bitcoin will earn you an interest of 6%, while you can get an annual return of 9.3% on stablecoins.
The second type of crypto lending platform are called decentralized finance (DeFi) platforms. These offer smart contracts for replacing centralized 3rd parties in lending transactions. For instance, rather than bank managing loans, it uses code and escrow accounts for managing money autonomously. Contracts made on the blockchain are called smart contracts. They hold crypto in escrow accounts until all specified functions are fulfilled. For instance, these contracts can be used for taking out a loan without credit. You can just add collateral to the smart contract and then select the crypto you want in your loan.
How to compare crypto lending platforms?
There are numerous crypto lending platforms that can be found these days and you need to consider a few factors in order to choose one. Depending on the crypto you wish to lend, you can take a look at the interest rate, lending duration i.e. whether it is fixed or not, deposit limit in case a minimum amount is needed, fees, the track record and history of the platform and the amount of collateral required.