What is Crypto Lending?
Similar to the traditional lending, crypto lending is a process of one party (the lender) with certain type and amount of cryptocurrency lends the other party (the borrower) for certain amount of interest payment. Centralized finances (CeFi) and decentralized finances (DeFi) can be used to facilitate the lending process, but one should always keep in mind the different interest rates that are applies when using these two platforms.
How does Crypto Lending Works?
On Defi platforms, smart contracts are used to activate the lending process. These smart contracts payout loans and liquidate collaterals automatically. when using DeFi platforms, the custody of your crypto never changes and there is no third party involved in the lending process.
On the other hand, on CeFi platforms, there is no one individual you lend to, instead, your crypto will be moved into a liquidity pool to be lent out to multiple people simultaneously. Then these platform will supply you with bonds which you can latter use to redeem your initial crypto plus your interest.
How to Earn Money using Crypto Lending?
To be involved in crypto lending, there are necessary steps to follow. Centralized finances (CeFi) and Decentralized finances (Defi) each have different requirement before a person is able to lend crypto. Cefi platforms such as Coinbase and Binance has a more rigorous screen process than Defi platforms. Therefore, one must first complete the KYC verifications on these platform which involves providing identity and banking documents. Some CeFi platforms may ask for additional information before the verification process is fully complete.
Next, gathering information regarding the interest rates on these platforms is key. Depending on the type of cryptocurrency and overall economic state of the globe, interest rates differ on each platforms. For most cryptos the interest rates are anywhere between 1% and 20%. Finding interest rates that align with your financial goal is essential because APY/APR vary as the length of lending time change.
Understanding the smart contracts and the liquidity pools that are used by the platform is also crucial. When you have a very good understanding on how these contracts are used and how the liquidity pools function, deciding the right platform to use will become easier. Both CeFi and DeFi have their advantages and disadvantages so knowing how they function will help you when lending crypto.
The other most important thing to consider is the cryptocurrency itself. From Bitcoin to stable coins, there are a number of cryptocurrencies that you can use for lending. Hence, you have to choose the cryptocurrency that will have the interest rate you require, that has low volatility during the lending period and has to be the one you will not use for other better yielding investment.
It's all smooth sailing after this:
- decide the cryptocurrency you want to use for lending
- decide if CeFi or DeFi platform is right for you
- compare and choose the interest rates that align with your financial goal
- choose a trustworthy exchange that can provide you the desired services and interest rates
- lend your crypto and earn passive income
Conclusion
If you have cryptocurrency that is sitting idle in your wallet, crypto lending provides a great source of passive income. Interest rates are usually 1-20% for most cryptos so this could be a great way to generate additional money. Also being able to earn passive income quickly and easily makes this method ideal.
Although there are many benefits to crypto lending, there are few things to consider; Some platforms have been known to be part of Ponzi schemes therefore a thorough due diligence must be made before using a platform as your crypto isn’t protected by financial regulators. At the time of writing this post, the following platforms are considered to be reliable lending platforms.
CeFi Platforms:
- Binance
- Coinbase
- BlockFi
DeFi Platforms:
- MakerDAO
- AAVE
- Compound
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Disclaimer
I am not a financial advisor. The information found here are for educational purposes and cite my personal opinion and it should be considered as such. I do make use of affiliate links which may result in me receiving a small commission if used.
