What is the concept of Crypto Lending?

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Some crypto traders advise others to hodl their crypto, or leave it unchanged while the currency’s price is unsatisfactory. However, crypto lending will help you develop your digital assets by earning interest on them or using them as collateral for a loan.

Crypto lending dApps account for half of the $7 billion tied up in the whole DeFi niche. To put this in context, DEXes total just $2 billion. So, what exactly are blockchain lending networks and how do you use them?

What is traditional lending?

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Lending in conventional economies is a fundamental phenomenon that has existed for many years, along with a description of debt, but in crypto everything is new. Summer 2020 saw an increase in the number of regular active users on projects such as MakerDAO, Hodlnaut, dYdX, BlockFi, Nexo, Compound, Aave, and Celcius – platforms that enable their clients to lend and borrow a variety of cryptocurrencies.

Let’s take a closer look at how these networks operate, but first, here’s how lending works in conventional markets.

A lender is a conventional financial entity that provides funding to you, the creditor, in the promise that you can return the funds with interest or fees within a certain period of time. When borrowing from a bank, the credit background and promised collateral would be considered.

Real estate or other types of properties that the lender will consider as collateral on a loan are examples of collateral. If you fail to make your loan payments, your creditors can seize your collateral in order to recoup some or all of the losses.

What is crypto lending?

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Why was the concept of traditional lending important to explain? Because it’s almost the same with the crypto markets, except… it’s not quite the same!

First of all, all of crypto lending services are based on blockchain, mostly on the Ethereum blockchain, although not necessary, which means no traditional banks or custodians.

In addition to that, market players manipulate with quite different assets and have to know where and how to purchase them.

And last but not least, the volatility in the crypto market is huge, so be prepared for your loans to be generally more than 100% collateralized.

This is what an ecosystem of the crypto-lending niche looks like:

Crypto lenders are not banks, they might be centralized entities, such as Genesis Capital, Unchained Capital, BlockFi, OTC desks or exchanges that use margin lending and trading, or decentralized ones.

The latter are protocols that rely on smart contracts to automate the distribution of loans and interest payments. These are the ones we will be talking about in this article: Maker, Compound and ETHLend.

Crypto borrowers normally wish to trade and can pledge collateral in the form of cash or crypto

Crypto lending platforms, interestingly, play the role of a middleman or a matchmaker in this game.

Although there are centralized crypto lending services, we’re going to talk about these platforms in DeFi since it’s a hot topic these days.

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What are crypto backed loan rates?

Crypto backed loans’ rates usually vary from platform to platform. However, in general, DeFi bitcoin lending platforms offer a higher APR – 9%. As for custodial bitcoin lending platforms, the usual interest rate starts from 4%. Loan repayments are also different depending on the platform.

Crypto lending rates: how can they be compared to traditional bank rates

Crypto lending rates are excellent in comparison with savings account at a traditional bank. Sometimes an interest up to 18% might be offered, which is really impressive compared to interest rates in banks – 0.03% annual percentage yield (in the USA).

One more difference here is that your interest rate on crypto lending platforms might be flexible. They depend on some factors, which are the following:

  • The amount of your crypto you’re going to put
  • How long are you going to keep there (1 month, 3 months, 6 months, etc.)
  • The amount of their cryptocurrency that you hold
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Top crypto lending platforms in DeFi

According to DappRadar, top crypto lending platforms in DeFi, as of writing, are Aave, MakerDAO, Compound, and dYdX.

There are many more crypto lending services out there, of course, which you can see for yourself if you go to DappRadar. But for educational purposes, it will be enough to get familiar with at least top three of them in terms of total value locked.

Aave ($1,54 bn of total value locked)

As their website states, Aave (from the Finnish word for “ghost”) is an open-source and non-custodial protocol enabling decentralized lending and borrowing. Lenders provide liquidity to the market, to earn a passive income, while borrowers are able to borrow in an overcollateralized or undercollateralized fashion.

Lenders earn on ERC20-compliant aTokens at a 1:1 ratio to supplied assets. Meaning, while lending 36 Dai, they receive 36 aTokens (36 aDai).

Interest rates adjust algorithmically based on supply and demand, but Aave lets borrowers opt in to and out of (at any time) a stable rate that changes less often. From borrowers, a 0.00001% of the loan amount is collected on loan origination and 0.09% from Flash Loans, a developers oriented feature that allows to borrow any available amount of assets without collateral.

Compound ($621,2 mln of total value locked)

Compound is an algorithmic money-market protocol on Ethereum that allows users to borrow or lend funds and earn interest for providing liquidity. Rates adjust automatically based on supply and demand.

Just like in the Aave case, supplied asset balances are represented by ERC20-minted tokens, but on top of Compound, they’re called cTokens. Now, imagine you’ve accelerated a certain amount of cTokens on your account after lending funds, now you can borrow up to 50-75% of their cTokens’ value, depending on the quality of the underlying asset

The Compound protocol sets aside 10% of interest paid as reserves; the rest goes to suppliers.

C.R.E.A.M. Finance ($250.6 mln of total value locked)

C.R.E.A.M. Finance stands for Crypto Rules Everything Around Me. It is a peer-to-peer lending platform focused on providing lending, exchange, payment, and asset tokenization services.

The main feature of this platform is bringing liquidity to the underserved assets, such as stablecoins (USDT, USDC, BUSD, yCRV, etc), governance tokens (COMP, BAL, YFI, LEND, CRV, CREAM, MTA, SUSHI) and others such as ETH, LINK, and renBTC.

Since 1st September 2020, CREAM has made the switch from Ethereum to Binance Smart Chain (BSC).

Yield farmers who create and deposit assets into liquidity pools on Cream Swap’s platform receive Cream Pool Tokens (CRPT).

dYdX ($250 mln of total value locked)

dYdX provides both decentralised and centralised lending and borrowing services. The overall length of a crypto loan is 28 days, and interest rates fluctuate based on supply and demand. It is entirely decentralised and is based on smart contracts with Ethereum.

dYdX was founded by a San Francisco-based team that was backed by some of Silicon Valley’s most prominent investors. They opened in 2017 and have secured two rounds of funds to continue operating on their DeFi vision.

One of the benefits of using dYdX versus another DeFi lending site is that the prices are more affordable. However, it is best suited for those who are already familiar with decentralised finance, since dYdX offers nothing in the way of guides and assistance.

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Top custodial cryptocurrency lending platforms.

DeFi lending platforms might have their advantages, but custodial loan platforms may offer more in terms of security. Now let’s look at the top custodial crypto lending platforms like BlockFi, Nexo and Celsius.

BlockFi

BlockFi is a crypto asset management firm based in New Jersey. It was founded in 2017. BlockFi is a leading cryptocurrency lending network. You can collect interest or take out low-cost USD loans backed by cryptocurrency on this website.

BlockFi accepts a variety of cryptocurrencies, including BTC, ETH, GUSD, USDC, and LTC. Furthermore, a 50% loan-to-value (LTV) ratio on your crypto is available, so, for example, if you were to borrow $100,000, you would put down $100,000 in collateral.

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Bitcoin loans have an interest rate of 6% if the debt is less than 5 BTC, and 3.2 percent if the loan is greater than 5 BTC. Borrowing is available at a 4.5 percent interest rate. As a result, such a cost is ideal for borrowing from this cryptocurrency lending network. Furthermore, there is no deposit cap, which is a significant benefit.

Nexo

Nexo is yet another top cryptocurrency lending company that was introduced in 2017 by a FinTech company. It claims top-tier authentication (256-bit encryption) and allows users to obtain fiat loans while keeping their digital properties.

Nexo accepts crypto and fiat currencies such as BTC, ETH, LTC, XRP, USD, GBP, and EUR. A loan has a one-year term, but it can be extended if necessary. Nexo does not charge any platform fees. Furthermore, the minimum loan amount is $500 and the highest loan amount is $2 million.

If you want Nexo tokens, you can earn an interest rate of 8%. However, the rate increases to 24.9 percent, which isn’t ideal for someone who has to borrow money.

Celsius

Alex Mashinsky, the founder of Voice over IP, founded Celsius Network in 2018. (VoIP). Its popularity has skyrocketed since its inception, with over 50000 users.

A crypto loan has a term of 6 or 12 months, and the lender may withdraw at any time. Furthermore, there is no deposit limit and no platform fees. For BTC, the interest rate is 4.95 percent. However, depending on the LTV ratio, it is possible to obtain a rate of 10%. The interest is paid weekly.

Celsius supports over 20 different cryptocurrencies, including BTC, ETH, LTC, USDT, PAX, GUSD, XLM, and CEL (Celsius Token).

The main feature of this crypto lending platform is that it works only as an app for mobile devices, and, unfortunately, there is no desktop version.

How to choose a bitcoin lending platform?

To escape risk, it is critical to choose the right bitcoin lending platform. The first thing borrowers should do is read and research all about the site, including what people say about it on Twitter, Reddit, and other forums.

Furthermore, before you take out a loan, double-check the loan-to-value ratio and the interest rate. You should also consider how much you need to borrow, since the sizes of crypto loans vary from one bitcoin lending network to the next.

Furthermore, certain bitcoin lending platforms may require users to have full identity authentication, which may be unsatisfactory for some borrowers.

Bitcoin lending advantages

Many crypto experts claim that crypto lending has a huge potential. What is more, there is a chance that it might take over the loans industry as we know it. If you’re still thinking whether crypto lending is that great, there are some benefits of it.

Speed

Borrowing from a conventional bank needs a few days to a few weeks of waiting. If you need a loan right away and don’t have much time, even a few days might be a challenge. Traditional loans are much slower than crypto lending. You save a tonne of time with cryptocurrency loans and you can get a crypto loan in minutes or even seconds without using any intermediaries. Furthermore, similar to peer-to-peer lending (P2P), where borrowers and lenders accept, investors lend money directly to borrowers in order to collect profit. The P2P website serves as the sole broker for borrowers and lenders.

Accessibility

After you found a bank that offers a loan, the next step is to create a bank account and provide them with a huge amount of information about you. Crypto lending solves all these issues – there’s no need for a bank account and a credit score. It makes getting a loan on cryptocurrency lending platforms more accessible than in traditional banking.

Transparency

Even though personal information might be hidden on blockchains, transaction details are always transparent and public. If you want to find out about the place and time of a transaction, you can do that easily.

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Low interest rates

As it was already mentioned above, cryptocurrency lending platforms usually have low interest rates. This is mainly because they don’t have to spend that much money, as financial institutions do.

Flexibility

Traditional banks do not have the loan number or interest rate that you desire. It is also more versatile for crypto lending. Borrowers will choose the length of their loan, the loan-to-value (LTV) ratio, and the currency in which they will be paid. You will also find and compare interest rates, since certain crypto loan sites have a lower interest rate if you pay in a particular cryptocurrency.

Crypto collateral

You can use crypto as collateral for fiat or stablecoins in crypto lending, so you can use BTC or ETH to obtain USD, gold, and other assets. And, conversely, you can put up USD and stablecoins as collateral. For example, if a person primarily holds BTC rather than USD, traditional banks won’t even look at that as a valid asset. So, with crypto loans you have more opportunities than in regular banks.

Risks of bitcoin lending

The volatility of cryptocurrencies, which is particularly evident when BTC is converted to fiat money, is one of the key risks associated with bitcoin lending.

For example, if a borrower receives BTC at an exchange rate of 1BTC to $30000, the exchange rate at the time of loan repayment may be 1BTC to $50000. As a result, the creditor will have to pay more in the end. Lenders can face the same problem if they convert BTC to fiat currency before lending. Unfortunately, no one can predict the actual exchange rate with certainty, which can result in a loss of funds.

The next risk is the safety of digital assets and collateral on bitcoin lending platforms. While the top crypto lending platforms are safe, there are also a lot of scammers, so it can be a big risk in that case.

Crypto loans in 2021

As of January 2020, the popularity of crypto financing has skyrocketed. Bitcoin’s price hit an all-time high of $41940 in January 2021. It implies that crypto lending has the ability to expand much more, transforming the market as we know it. Given the allure of passive income, crypto lending is expected to become much more prevalent and common.

Furthermore, more cryptocurrency lending sites emerge, with varying interest rates, allowing anyone to pick what they are comfortable with.

Summary

Summer 2020 saw an increase in regular active users on projects such as MakerDAO, Hodlnaut, dYdX, BlockFi, Nexo, Compound, Aave, and Celcius – platforms that enable their clients to lend and borrow a variety of cryptocurrencies.

Crypto lending sites account for half of the $7 billion bottled up in the whole DeFi niche.

Crypto financing services are focused on blockchain technologies, mostly the Ethereum blockchain, though not always, which ensures there are no conventional banks or custodians.

This summer, DeFi lending sites underwent a surge in popularity, drawing about $10 billion into their smart contracts.

Custodial crypto lending platforms like BlockFi, Nexo, and Celsius can provide greater security.

In contrast to conventional banks, crypto lending offers significantly more advantages: speed, liquidity, openness, low interest rates, affordability, and a broader range of opportunities.

Based on these figures, we can infer that the transfer of banking to blockchain seems to be an inevitable next phase for the whole crypto niche and would only occur in 2021.

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