Crypto enthusiasts may Hold On for Dear Life (HODL), but there are many ways to generate an income without selling. For example, crypto lending makes it easy for investors to lend crypto assets to generate a yield while making it easy for borrowers to access liquidity instantly.
Crypto lending platforms have made the process more accessible than ever before. First, borrowers or lenders connect their wallets and select the terms of the loan. Then, the platform’s smart contracts automatically handle the actual transaction, interest payments, and other details.
Let’s look at what makes crypto lending so compelling and how to choose the best crypto lending platform to achieve your goals.
What is Crypto Lending?
Crypto lending enables borrowers to use their assets as collateral for a loan, while lenders can provide assets for an agreed-upon interest rate. While collateralized loans are nothing new, blockchain technology makes these transactions peer-to-peer. In addition, the programmatic nature of crypto lending platforms also opens the door to new use cases, like flash loans.
There are several reasons you may want to consider crypto lending:
- Suppose that you own Bitcoin and don’t want to incur a capital gain by selling it. Instead, you can use your Bitcoin to secure a loan and access short-term liquidity without selling.
- Suppose that you believe that Bitcoin will increase in price but don’t have the cash to purchase it. You can borrow to buy more Bitcoin using your existing assets as collateral.
- Suppose that you are concerned about inflation and don’t want to hold U.S. dollars. You may choose to purchase stablecoins and lend them to generate interest income.
- Suppose that you have a diverse crypto portfolio but want to generate income. You can lend out those crypto assets to create an attractive yield on your portfolio.
Crypto lending could transform the financial services industry. Since there aren’t any credit checks involved, underbanked consumers without a bank account or self-employed workers with fluctuating earnings can quickly and easily access the capital they need. Approvals and transfers also happen instantaneously with flexible repayment terms available.
While crypto lending has many benefits, there are also some risks to keep in mind. The volatility of cryptocurrencies means that you may need to put up much more than you receive in a loan, which means you could lose a lot if you default on the loan. Lenders may also only be entitled to a fraction of the collateral if borrowers default, depending on the platform.
How Crypto Lending Works
Most crypto lending uses decentralized finance (DeFi) smart contracts to match borrowers and lenders and manage transactions. For example, a borrower might deposit the current price of one Bitcoin in DAI into a smart contract. Then, when the loan comes due, the lender receives the DAI plus the interest into their account, and the borrower keeps their assets.
The process typically goes like this:
- A borrower requests a loan from a platform.
- The crypto lending platform calculates the collateral requirements.
- The borrower stakes the collateral on the platform.
- The lender deposits the requested assets into the platform.
- The lender receives weekly or monthly interest payments.
- Once the borrower pays off the loan, their collateral is released.
Crypto lending platforms that don’t use smart contracts are known as centralized lending platforms. These platforms follow KYC/AML procedures, have custodial protocols for asset protection, and loan agreements with businesses and financial institutions. In addition, companies determine the interest rates for each loan.
Crypto Lending Platforms: How to Evaluate Platforms
Crypto lending platforms simplify the process by providing the structure for these transactions and matching lenders with borrowers. While these platforms share many common characteristics, they may support different coins, minimum investments, lending durations, and yields. You should carefully consider these differences before deciding on the best option.
There are several factors to keep in mind when identifying the best crypto lending platforms:
- Interest Rate
- Lending Duration
- Minimums
- Collateral
- Fees
- Platform Risks
While it’s tempting to select the platforms with the best interest rates, you should also keep in mind that these platforms may have higher fees or unique risks that offset the benefit of these compelling interest rates. You should take a holistic approach when evaluating these different options and choose the best overall option for your needs.
The 6 Best Crypto Lending Platforms
There are a growing number of different crypto lending platforms that each have their unique specialization. While some platforms aim to be an all-in-one solution for crypto asset management, others are open-source protocols that maximize efficiency for borrowers and lenders. The right decision depends on your specific requirements.
1. Nexo
Nexo pioneered instant crypto-backed loans and amassed more than 1.5 million users who have processed over $1 billion in loans. With support for over 40 fiat currencies, the platform makes it easy for borrowers to access cash or stablecoins at a 6.9% APR while enabling lenders to earn daily interest of up to 12% annually on their fiat currency.
2. Celsius
Celcius is a UK-based crypto lending platform launched in 2017 as a crypto wallet and mobile application. With over 800,000 users and $15.6 billion in community assets, the network enables lenders to earn up to 17% yield on their crypto and borrowers to access cash at the lowest rates through its web, iOS, or Android applications.
3. BlockFi
BlockFi is a crypto lending and investment platform that aims to help investors do more with their crypto assets. Through its BlockFi Interest Accounts (BIAs), investors can accrue interest daily and earn up to 7.5% APY on their crypto assets. The platform also enables borrowers to access capital at rates as low as 4.5% APR.
4. SALT
SALT is a crypto lending platform that provides flexible personal or business loans and an upcoming SALT Credit Card. The credit card will enable Bitcoin-owners to spend anywhere with an adjustable credit limit and flexible terms determined by their bitcoin holdings. In addition, there are no credit checks required, and you can even earn rewards over time.
5. Aave
Aave is an open-source liquidity protocol that enables anyone to earn interest on deposits and borrow assets. With over $16 billion in liquidity, the platform provides attractive deposit APYs along with variable or stable APRs for borrowers across different markets. In addition, the wide range of available coins makes it a compelling option for many investors.
6. Compound
Compound is another popular open-source liquidity protocol that supports lending and borrowing. With an autonomous interest rate protocol, the platform maximizes efficiency for borrowers and lenders across many different crypto assets. Currently, it has about $13 billion in supply and nearly $6 billion in borrowing capacity.
Checklist of Popular Crypto Exchanges
| Name | Volume | Coins |
|---|---|---|
| Binance | $12 Billion | 374 |
| Huobi Global | $2.5 Billion | 330 |
| Coinbase Exchange | $1.5 Billion | 74 |
| FTX | $1 Billion | 230 |
| Kraken | $684 Million | 69 |
| KuCoin | $554 Million | 387 |
| Bitfinex | $577 Million | 140 |
Source: CoinMarketCap
The Bottom Line
Crypto lending platforms make it easy for lenders to generate yield on their long-term holdings and borrowers to access capital without selling their assets. Before choosing a platform, you should carefully consider the features and pros and cons, including the interest rates, supported coins, and fees involved with using the platform.
When using crypto lending platforms, you should also keep in mind your tax liabilities to avoid any year-end surprises. ZenLedger makes it easy to track and manage your tax liabilities across platforms, wallets, and exchanges. In addition, you can integrate with TurboTax or access fully completed tax forms to hand over to your accountant during tax season.
