Crypto Lending in a Nutshell: Principles, rates, safety

"To the moon!" is a common saying among crypto enthusiasts who buy and hold their digital assets in hopes of price doing just that - shooting to the moon. However, if you keep your crypto assets intact for a long time, your profit will only come during their growth. Crypto lending offers another way where your digital assets can work for you.

Whether you want to earn interest on bitcoin tokens or use it as collateral to get more coins, several crypto loan platforms have a wide range of different offers. 

You have to go through an exhausting process to get a conventional loan from a bank. Upstanding credit is vital: the bank will be checking into your credit history. Crypto-backed loans are different - you can take out the loan instantly, no matter your credit history because the crypto loan is collateralized.

Crypto lending is relatively new. Despite the potential to be a handy tool to get quick cash or interest earnings, little information is available online.

The Principles of Crypto Lending

Say you have a few ETH in your portfolio that you're sure will be worth more in a few months. If the price rises substantially, you take your profit. But with a crypto loan, you can receive higher gains on your ETH tokens. Let's look at how crypto loans work and provide better returns. 

Loans Without Collateral

When you take out a traditional loan, the way the bank guarantees that you'll pay the loan back is by looking at your credit history and income. After applying for the loan, you have to wait several days or even weeks to receive rejection or approval. These are usually uncollateralized loans with a high interest rate. Crypto loans without collateral aren't as common, but they do exist. But don't forget to do your own research and choose a reliable platform.

Collateralized Loans

Most crypto loans require collateral as a guarantee of their repayment. Collateral is often higher than the loan value, making the lending process safer for the lender. At the same time, the borrower gets a lower interest rate compared to traditional loans. Furthermore, you can get instant loan approval.

Imagine you have 3 ETH in your portfolio. If you take out a loan at a 70% loan-to-value (LTV) ratio, you will receive 2.1 ETH in return for your 3 ETH collateral. However, many collateral-based loans require a borrower to stick to the chosen LTV ratio making it vulnerable to volatility and putting the funds at risk of under-collateralization. 

Collateralized loans are much more flexible than traditional loans. Crypto loan platforms like Celsius and CoinLoan offer loans at less than 5% APR. For instance, the latter also provides you with instant approval and the option to pay back loans in a digital asset of your choice without penalties for early repayment. 

Lending Platforms

You can get your crypto-backed loan from centralized (CeFi) or decentralized (DeFi) lending platforms. Both use blockchain, but an entity supervises centralized platforms. In contrast, decentralized platforms carry out loans through smart contracts. 

Centralized Lending Platforms (CeFi)

Crypto is the new way to invest your money, and traditional investors are taking notes. While decentralization is crypto's cornerstone, many conventional investors feel more comfortable with a centralized solution. These platforms usually require users to pass a KYC procedure to start lending and borrowing crypto.

However, with centralization comes good customer service and assets' insurance. Both Nexo and CoinLoan offer $375,000,000 and $100,000,000, respectively, cover for digital assets through BitGo. This can make an investor wary of crypto feel more secure. 

Centralized platforms also tend to offer more freedom when it comes to assets. You can use many different tokens as collateral, up to 20 different cryptos in some instances. Many also have fiat options like receiving a loan in a fiat currency of your choice.

Decentralized Lending Platforms (DeFi)

The other option for a crypto-backed loan is decentralized finance (DeFi) platforms. Instead of entrusting the lending and borrowing process to a controlled entity, DeFi crypto lending platforms like Aave and Compound use smart contracts to distribute crypto loans and interest rate payments automatically. 

DeFi lending platforms have no KYC procedure, which, provided you have enough collateral, means an instant loan payout. Trust is taken out of the equation - to understand whether a platform is reliable, you can analyze its protocols for built quality. 

Decentralized lending platforms also offer interest rates, but returns are usually smaller compared to centralized platforms. Since you aren't leaving your money with a company, many offer crypto solutions without any fiat options.

Both CeFi and DeFi lending platforms offer interest rates on your crypto, the chance to borrow and lend it, as well as the opportunity to open a crypto savings account, which we'll go over in the next section.

Crypto Lending Rates

On most crypto lending platforms, you have the option to earn interest on crypto by depositing your assets to a crypto savings account. When you're looking for a better deal, pay attention to the interest rates offered by each platform. A little research can go a long way - and you can find the best rate out there for your needs. 

Rates on Crypto Savings Accounts

Throughout the article, we've been describing ways to earn interest in the crypto you're currently holding. You can do so by opening a crypto savings account and depositing your crypto there. Each platform has a different rate that depends on the digital asset deposited. 

Platforms like Nexo allow you to earn up to 12% APY, but on stablecoins. Most other cryptos provide an 8% return. Celsius pays 8.88% APY for most stablecoins, but the rates for other cryptos are much lower, below 6% in some cases. CoinLoan has some of the highest rates on the market, offering 12.3% interest on stablecoins and fiat deposits. 

DeFi crypto lending rates are a little more complicated as they are entirely different from CeFi platforms in their genesis. When it comes to DeFi, the main liquidity source here are the funds that users deposit. The interest rate they get depends on several factors like the total amount of funds available on the platform, real-time market rate monitoring algorithms, etc. The APYs offered by their CeFi competitors, more like a classic traditional banks' model, turn to be more stable and higher. 

Another benefit available for the crypto loan platforms' clients, compared to those who borrow in traditional banks, is no need to prove their credit history. Once you can provide the collateral amount as a guarantee of future repayment, you can get the desired amount of crypto.

Safety

The biggest question any investor asks is the following: is crypto lending safe? Even with a centralized lending platform, your assets can never be 100% safe. However, platforms vary, with some even being licensed and regulated. When it comes to digital asset safety, there are usually two main issues connected to the type of platform.

DeFi Lending and Safety

The main safety concern when it comes to decentralized platforms lies in the code. Since the entire lending and borrowing process relies totally on the built-in protocols, bugs can create an issue for the users. And while the code can be freely available on Github, many regular investors don't have the coding experience sufficient enough to understand what they are reading.

Then there is also the issue of smart contracts. If there happens to be a hack, the smart contract may not hold up, and since there is no entity controlling the platform, no one will come for help.

CeFi Lending and Safety

Traditional issues prevail when it comes to centralized platforms, with scams being one of the most widespread. You can easily get a fake email or click on a fake link and accidentally give away your money. 

DeFi exists because many people have lost trust in the traditional centralized system - the platform could easily take your money or scam you with fees. Furthermore, if you signed up with a centralized platform, your identity is known. Should there be a hack, sensitive information could fall into the hands of the wrong people. 

When choosing a centralized platform, it's important to do your research and only trust licensed and regulated companies. Analyze how your digital assets are stored or insurance coverage - there are plenty of CeFi platforms that are trustworthy long-term market players.

Crypto lending, on the whole, is a young industry. Whether you choose centralized or decentralized lending, we're likely to see it evolve in the future, as digital assets have been becoming popular recently. But one thing remains undeniable - crypto lending gives digital asset holders a chance to earn more on the assets they hold and provides much-needed liquidity for investors that want cash. No matter your objectives, crypto lending is an innovative way to earn more on your crypto.

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