Reposted from our blog here.
Are you someone who is HODLING to the moon? Or are you just looking to grow the value of your crypto without letting go of them? This article will list down the things you need to know about earning interest from your crypto!
What is Crypto Lending?
Crypto lending is an alternative investment form where investors can earn interest and get passive income on their cryptocurrencies. Lenders will receive interest payments from the borrowers in exchange for the loan. On the other hand, borrowers pledge their cryptocurrencies as collateral to ensure security of the loan and pay an interest for the duration of the loan.
This works exactly the same as traditional finance where banks borrow money from depositors and repackage them as loans being offered to borrowers at an interest rate. Hence, it is possible for you to earn interest on your crypto deposits as you do in savings accounts. Platforms like Hodlnaut have made it easier for crypto hodlers to lend their assets to borrowers. Without the need to bear counterparty risks or manage the loan, all you’d have to do is deposit your assets and start earning instantly!
Why Should You Lend Your Cryptocurrency?
- Earn more cryptocurrency. The savings account allows investors to grow their crypto holdings with the high yields offered.
- Minimal exposure to counterparty risk. With custodial lending, the custodian indemnifies the lenders and ensures secure custody of the crypto assets which limits the counterparty risk from the borrowers in the event of default.
- Grow assets with minimal volatility. Through lending stablecoins, investors will be able to earn a passive income with little variation in the value of their stable holdings. However, as much as how stable the prices of stablecoins are, there is no definite zero risk in the world of investments.
Is Crypto Lending Suitable for You?
If you’re someone who believes in hodling to the moon or want to earn some passive income with your crypto holdings, then crypto lending is for you! Do ensure that you are comfortable with the level of risk you are exposing yourself to. In the crypto world, there is a clear absence of regulation which makes crypto much of a speculative instrument. Without regulations, it is definitely worth a thought before entrusting your crypto assets onto custodial platforms.
Given how cryptocurrency is just another form of digital currency, investors are also exposed to the risk of hacks. However, this risk can be mitigated through the purchase of insurance from platforms such as Nexus Mutual. Essentially, crypto or not, it is important for all investors to perform their due diligence before investing and ensure that they do not risk what they cannot lose.
How to Start?
If you haven't already, get your hands on some cryptocurrency with popular crypto exchanges such as Coinbase, Binance and more. These exchanges allow investors to kick start their crypto journey using fiat currency to purchase crypto. Each platform has their own unique selling point that presents an edge over their competitors.
For instance, many retail investors opt for Binance for their low fees, Gemini for their high level of security feature, and Coinbase for their beginner friendly interface. Therefore, do your own research on which platform is able to fulfill your individual needs!
Which Platform to Use to Earn Crypto Interest?
Centralised Finance (CeFi)
Cryptocurrencies’ decentralized structure was what made it attractive in the first place. By being decentralized, cryptocurrency can exist outside of the controls of central authorities which is what makes it trustworthy. However, people are still doubtful of such newly-introduced decentralization. Hence, having centralized services reassures these investors and encourages more to enter the crypto market.
Centralized platforms such as Hodlnaut, Blockfi and others (refer to the table below for comparison) act as a middlemen between the borrower and lender. Investors would have to deposit their cryptocurrencies to their platform in exchange for the interest payment to the address on their platform too. This means that they act as a custodian of your crypto assets until you withdraw from their platform.
One drawback of going through a centralized platform is that you would be required to submit personal information to complete their KYC verification. This can go both ways where it is deemed to be troublesome for having to submit several documents or it can be deemed as a more secure platform to park your crypto!
Decentralised Finance (DeFi)
DeFi platforms allow you to lend out your cryptocurrencies through the use of smart contracts. The smart contracts ensure that the transactions are processed accurately after it ensures that the predetermined conditions are met. The smart contracts are also available to the public and audited, which reassures those who are doubtful of the absence of a centralized platform. In this case, you are sending your crypto to the smart contracts instead, in exchange for a bond that proves the ownership of the cryptocurrencies.
One drawback of DeFi platforms is that smart contracts often limit the variability of cryptos available for borrowing/lending due to its limit to a single blockchain. Thus, know which crypto you would like to HODL and analyze whether DeFi platforms or centralized services are more suited for you!
By now, you should have a rough gauge on which crypto lending platform is most suited for you! Essentially, always remember to perform your own due diligence before entrusting your crypto assets with any platforms. Bear in mind to never invest more than what you can afford to lose. With that, HODL your cryptocurrencies and let it grow for you through the interest-earning accounts now!