What is Crypto Lending and How Does it Work?

(Last Updated On: November 2, 2022)

If you are a holder of crypto assets and don’t want to sell them, but you need money here and now — then it’s worth using a platform that gives out crypto loans. Cryptocurrency loans differ from a loan with a regular bank for the better and will bring additional profit. How it all works — let’s figure it out in this article.

What Is Crypto Lending?

With crypto lending, you can borrow the currency you need or lend your own and profit from it. Crypto loans are popular with holders of crypto assets who do not plan to sell these assets. Nevertheless, just lying in your wallet, these assets will not do much good. But using them as an investment or collateral, you can get additional profit, if you are a borrower, you can spend the loan for any purpose, whether it is usual purchases or trading on the exchange.

How does crypto lending work?

So how do crypto loans work? You can use DeFi or CeFi platforms to get a crypto loan. There will always be a middleman when applying for a loan to connect the lenders and the borrowers. Lenders may include individuals who are averse to selling their crypto assets or want to benefit from them.

Let’s say you have 30 bitcoins. You want to earn passive income, so you go to the crypto loan site. There you can leave that amount in your wallet and get interest.

If you’re a borrower, you go to that site, take stablecoins or whatever currency you need, leave collateral, and spend the loan on what you plan to use it for. Many sites offer low interest rates, which is very advantageous compared to, for example, a regular bank.

Types of crypto loans

Now, when you understand what crypto lending is, let’s talk about different types of loans that can be most advantageous depending on your original goal.

Collateralized loans

This is one of the most popular types of loans and probably the most convenient. Most platforms require loan collateral, in which the loan-to-value (LTV) ratio is usually quite low, as the volatility of the cryptocurrency is taken into account. The usual ratio is 50%, meaning that the collateral is twice as much as the loan itself. In the event that the collateral becomes below the value of the loan or a certain set value, it goes to the site.

You might think that there is no benefit to taking out a loan if you have to overpay more than you take out. In reality, however, you keep your crypto-asset and can make a profit.

The main advantage of secured loans is that you do not need to provide personal information, which speeds up the process of obtaining a loan.

Flash loans

If you wonder how to borrow against crypto and don’t pay the deposit, there are other options. For example, a flash loan. Such loans are issued and repaid within a single block. That is:

1. You take a loan.
2. You buy cryptocurrency with it.
3. Sell it.
4. Repay the loan immediately.

There are risks with this type of loan because the lending process is controlled by a smart contract and does not require human involvement. If you fail to repay the loan in time, the transaction will be canceled.

Uncollateralized loans

As opposed to collateralized loans, uncollateralized loans will require other guarantees. That means you’ll need to fill out an application, submit documents, and undergo a personality and credit check before you’ll be approved.

Crypto Lending Rates

Each platform has different lending rates. If you borrow in stablecoins, you can expect interest rates of 10% to 18%. For cryptocurrency, these rates are lower — at 3% to 8%. So when choosing which platform you are going to borrow from or want to invest on, you need to consider what specific income you are planning to optimize.

DeFI and CeFi lending

Wondering how to lend crypto, you’ll need to choose a site that belongs to one or the other type — DeFi or CeFi.

DeFi is decentralized finance. On such a platform, there will be no intermediaries between the investor and the borrower. The services are based on publicly available blockchain platforms and are completely transparent. You can manage your own money without relying on banks or other financial institutions. However, you’ll have full responsibility for what happens to your assets.

CeFi, centralized finance, offers more guarantees. That said, most sites will not require you to go through the KYC process. There are strict checks and security measures about the shop, so you can be assured of the safety of your asset. CeFi creates the potential for income through crypto accounts. Your crypto assets are used and lent to others in part or in full. These borrowers pay an interest rate to a central supplier, who then transfers some of the interest forward to you.

Other CeFi benefits:

• More flexibility in conversion;
• Variety of trading options;
• Confidentiality and transparency
• Risk sharing.

How to Borrow Cryptocurrency

When you wonder how to get a crypto loan, all you have to do is decide on the amount you require and select a secure site. Verify the website’s availability of the tokens you require and that the minimum yearly interest rate is acceptable to you.

Next, decide on the type of loan to collect — whether a collateralized loan will work for you, or you can use a flash loan to get a quick profit on the sale.

How to Lend Your Cryptocurrency

You can keep your cryptocurrency as an investment and receive interest from it, which will be paid by borrowers. You could compare such an investment to a savings account. You simply leave the money, and in return you get interest from other people.

You must choose a solid platform in order to accomplish this. Decide if you want a fixed or flexible exchange after that, and then choose the coins you’ll lend. You must compare risks, take into account market conditions, and your expected returns in order to achieve this.

When you provide a loan, you must wait for the borrower to appear and for the investors to fund the loan.

Is Crypto Lending Safe?

If you’ve never taken out a crypto-loan before, there’s no escaping your doubts and think — is crypto lending safe. However, there are now many secure platforms you can use. If you want more guarantees, choose CeFi.

For investors, the security of the loans is that even if the price collapses, the borrower’s collateral will be written off. And that is also a disadvantage for the borrower, but you always have the option to increase the collateral in the event of a change in the exchange rate.

Risks of Crypto Lending

Nevertheless, crypto loans have their own risks. This is mainly due to the volatility of the cryptocurrency market. Any changes there will affect both investors’ assets and borrowers’ collateral.

It is important for borrowers to consider margin-call, which is a situation where the LTV of your loan has become lower than the agreed upon rate. In that case, the margin will be written off. However, platforms warn their users when LTV levels go down. You can always increase your pledge to prevent liquidation.

There is more with DeFi than with CeFi because the loan tracking is almost entirely up to the borrower.

Now, when you understand how crypto lending works, you can choose any safe platform.

Closing thoughts

If you want your assets not to idle, but to bring you profit, then pay attention to cryptocurrency platforms. Whether you’re an investor or a borrower. In addition to being able to use the loan for the required purposes as a borrower, you’ll be able to create passive income as investors. Don’t ignore the risks, though, and select only secure platforms.