Do you want to make more money from cryptocurrencies? Lending and borrowing cryptocurrencies might be the way to go.

Many crypto enthusiasts believe in buying, holding, and selling cryptocurrencies to make some profit. However, many do not know that they can also use their holdings to get loans or even lend out cryptos for more profit.

What exactly is crypto lending? Is it an option you should explore? Keep reading to learn more.

What Is Crypto Lending and Borrowing?

Crypto lending allows crypto holders to lend out their cryptocurrencies to borrowers. By doing this, they will gain some interest as profit. It is more like putting money in a savings account, which yields some interest.

You can give or get a crypto loan through a Decentralized Finance (DeFi) lending platform or a cryptocurrency exchange. The interest rate and conditions for lending vary from one crypto lending platform to another.

How to Lend or Borrow Cryptocurrencies

The process of lending cryptocurrencies involves three parties: the lender, the receiver, and the decentralized exchange or crypto exchange that offers the service. The lender is the person giving out the crypto loans; the receiver is the borrower, while the exchange is the platform that facilitates the transaction. We will briefly look at how these parties relate during the process.

To get a crypto loan, the receiver (borrower) must have deposited an amount that would serve as collateral for the loan. He would then request a loan from the lending platform. Once the terms are met, the lending platform connects the lender and the borrower. The lender then starts to receive interest from time to time on the loan he has given. However, the borrower will not be able to get access to the amount he used as collateral until he pays back the loan completely.

Using an example of a borrower who wants to trade Ether (ETH) but does not have the cash. If, at the same time, he has some investment in, let’s say, Dogecoin (DOGE), he could use the DOGE position as collateral to get the loan to invest in ETH. At this point, he won’t have access to his Dogecoin until he returns the borrowed loan. Also, note that the borrower can use the borrowed loan for whatever he wishes; this includes withdrawing it for use outside the platform he borrowed it from.

crypto coins partially buried into sand

The collateral that the borrower deposits is usually more than the amount he wants to borrow. You might be wondering why you should take a loan if you have to provide collateral that is more than the amount you want to borrow. "Since I have the value, why should I borrow it?" Most people who take crypto loans take it to add to a particular position they have been holding, meet expenses without having to touch their current trading positions, or have new investments.

The expected yearly yield for crypto lending varies from platform to platform, but it is usually around 3% to 15% per annum. The coin you are lending also determines the rate. Information about the expected yield per coin is usually on the lending platform. Not all platforms have cryptos available for lending; you need to research to know if your desired crypto is available and the expected yearly return.

Liquidation can also occur when the borrower’s collateral can no longer cover the loan value – if the collateral reduces in value or the amount borrowed increases in value against the collateral. To keep a borrowed loan active, the value of the borrowed amount always has to be lower than the collateral value. Borrowers have to ensure this by adding more to their collateral or repaying a part of the loan when it reduces.

Types of Crypto Loans

There are two main types of crypto loans, they are; flash loans and collateralized loan.

Flash Loans

With flash loans, you can borrow money for a short time without any need for collateral. They necessitate that the liquidity has to be returned within one block of the transaction. To carry this out, you need to build a contract that requests a flash loan, executes the required steps and pays back the loan plus the interest within the same transaction.

Technical knowledge is required to execute a flash loan, making it better suited for developers. However, tools like CollateralSwap and DeFiSaver help users benefit from flash loans without the need for coding skills.

Collateralized Loans

The collateralized loans are the more popular ones and the main subject of this write-up; they are more available for everyday crypto users. They require collateral and allow users to use the borrowed funds for a longer period. Borrowers typically get loans of up to 50% of the amount they use as collateral.

Some Crypto Lending Platforms

There are many crypto lending platforms. Some of which will be mentioned below.

Aave

screenshot of aave frontpage

Aave is a decentralized non-custodial liquidity market protocol where users can lend or borrow cryptocurrencies. The protocol is completely open-source, allowing its users to interact openly and securely on the Ethereum network. Being open-source allows its users to build third-party services that interact with the protocol.

Compound

a picture showing compound website homepage

This is another DeFi lending and borrowing solution. It is also based on Ethereum and uses smart contract functionality for transactions.

Compound and Aave are completely decentralized; no central authority controls them. You can read our short guide to decentralized finance to better understand how they work.

BlockFi

a picture showing blockfi homepage

The company was created in 2017 to provide credit services to markets that have limited access to simple financial products. It aims to bridge the world of traditional finance and blockchain technology.

Binance

A picture showing binance crypto loans options

Binance, which was also founded in 2017, offers crypto financial products for its users to lend, borrow and earn. It gives crypto-collateral loans across many tokens.

BlockFi and Binance operate like banks; they are central authorities responsible for taking custody of your deposits. The platforms usually take security measures like offering two-factor authentication, cold storage solutions, among others, to ensure that users’ funds are secure. The main thing here is that the system is run under human governance; you do not have to worry about taking many security measures.

Advantages of Crypto Lending and Borrowing

Now that you know what crypto lending and borrowing are, you also need to know some of their benefits. Below are some advantages of crypto lending and borrowing.

Procedures Are Simplified and Fast.

As long as borrowers can provide collateral, they will easily secure a loan. It is as simple as that. The process is not hectic and does not require long procedures as the traditional banking system does

High Yield For Lenders

Banks do not offer high interest on saving accounts. Keeping your money in a bank for a long time will only make it depreciate because of inflation. However, crypto lending offers a similar saving method with higher interest rates than banks.

Low Transaction Fees

The fee for lending and borrowing transactions is usually a one-time service fee. It is usually lower than those charged in traditional banks.

No Credit Check

Cryptocurrency platforms usually issue loans without doing any credit checks. You only need collateral to get a loan. Once you can provide that, you have the loan.

Possible Setbacks in Crypto Lending and Borrowing

Even though crypto could be a profitable activity, there are some setbacks that you might encounter. We will explain some of them below.

Activities of Hackers

Since lending and borrowing activities happen online, your asset is susceptible to the actions of hackers and cybercriminals. Hackers can hack into a smart contract or take advantage of badly written codes, leading to loss of funds. Read on how to protect yourself against crypto hackers to know actions you can take to curb the activities of hackers.

Liquidation

We have explained this earlier, but we will repeat it for emphasis. Liquidation happens when the collateral price drops to the point that it cannot cover your loan. Since the crypto market is volatile, the price of your collateral can drop suddenly and lead to the liquidation of the asset.

Crypto Volatility

Volatility is one of the drawbacks for lenders. The value of the cryptocurrency you lend out may reduce, leading to losses that are greater than the earnings from interest.

Make Passive Income With Crypto Lending

Crypto lending helps you get some interest on your cryptocurrencies. If you do not plan to withdraw your crypto positions, you can lend them out and make more money by doing almost nothing. However, a borrower must ensure that the collateral value remains intact to avoid liquidation. It is also typical for lending platforms to send a notification (a margin call) when the collateral becomes low.

Kindly note that this is not financial advice. We urge you to seek the guidance of a licensed financial adviser before making any investment or major financial decisions.