Crypto Borrowing Overview
There are tons of uses for crypto tokens and crypto-specific technologies, but one of the most intriguing is crypto borrowing. This type of loan offers crypto enthusiasts the ability to take out a loan against the top cryptocurrencies at any time — and it happens in an entirely permissionless fashion.
Borrowers who take advantage of what the crypto lending space has to offer can use the borrowed tokens for a wide variety of purposes, including trading. What’s more is that borrowers also have the option to borrow fiat currency, which is regular dollar currency, by using your crypto as collateral. That way you can access fiat without having to sell your tokens. And, with the help of smart contracts, borrowers are able to lock collateral to protect against defaults while seamlessly adding to or closing their loans at any time.
While crypto lending can have big benefits for borrowers, it’s important to understand the nuances of how this type of lending landscape works.
By understanding how decentralized lending functions, and what the benefits may be for borrowers — as well as what the top crypto borrowing platforms are — crypto users can make educated decisions on how to navigate this unique part of the market.
- Crypto borrowing takes place on an exchange utilizing blockchain technology, which makes them safer and more secure.
- Any crypto user can quickly and easily take out a loan — and they won’t have to disclose who they are to a third party.
- With crypto loans, there is no need to transfer ownership of the user’s underlying collateral.
What are crypto loans and how do they work?
In general, crypto loans are similar to the loans you can get when borrowing through traditional lenders. The main difference is that rather than borrowing cold, hard cash, you borrow tokens temporarily for trading or other purposes, like accessing fiat. And, as with traditional loans, you pay interest on what you borrow in return.
Unlike traditional lending, however, it’s not really the exchanges that are doing the lending. Other crypto users act as the lenders for crypto loans by providing the tokens and liquidity to the exchange.
Another similarity is the collateral requirement. When a borrower wants to take out a loan, the exchanges will typically require collateral on the loan. With crypto loans, borrowers typically need to offer something more valuable than the loan amount to ensure that the borrowed tokens are returned. This could mean they’re required to deposit tokens that are of equal or more value than what they’re borrowing — which is done via a smart contract.
Let’s say, for example, that you want to borrow one Bitcoin for trading purposes. In that case, you may need to deposit other types of tokens that are equivalent to the current price of a Bitcoin. That could be Ethereum, DAI, or some other type of token all together.
Crypto lending terms are also similar to the terms you’d get with a traditional loan. For example, investors can lend their tokens out on “open term,” which means the tokens can be withdrawn at any time. Crypto users can also lock in for a fixed term loan in return for more lucrative interest or rewards. These terms vary, but can last from a few weeks to a few months or a few years.
As a crypto user, you can borrow crypto tokens on two different types of platforms: centralized and decentralized exchanges. We’ll go into depth on those two platform types below.
What are the crypto loan options?
Borrowers typically have a few different options when borrowing on crypto platforms. These include:
- Crypto-to-crypto loans: These loans allow you to use crypto as collateral to borrow another type of cryptocurrency. For example, you can use your Bitcoin as collateral to borrow Ethereum if you need it for trading or staking. That allows you to retain your Bitcoin if the price is down or if you want to hold it for a longer period while gaining access to the Ethereum you need.
- Crypto-to-fiat loans: Another unique type of loan is a crypto-to-fiat loan. This type of loan allows borrowers to access cold, hard cash (fiat) in return for using their crypto as collateral. This can be useful for a ton of different purposes, as there typically aren’t restrictions on how you use the fiat you borrowed against your crypto. The possibilities are endless.
- Fiat-to-crypto loans: You can also use your fiat, or cash, to borrow cryptocurrency. Rather than using crypto as collateral, you’d use cash. Otherwise, this type of loan works just like the other types of loans listed above.
The type of crypto loan that works best for you will depend entirely on your goals for the funds you’re borrowing. If you need access to cash for a bill, a purchase, or something similar, it makes sense to use a crypto-to-fiat loan. On the other hand, if you need crypto to trade or stake, it may make more sense to use a crypto-to-crypto loan instead.
Crypto borrowing platforms
Crypto loans are offered on both centralized and decentralized platforms. These platforms are commonly referred to as CeFi and DeFi platforms, and there are some significant differences between the two. Here’s what you should know about these options:
1. CeFi borrowing
Centralized platforms — which include the big exchanges like Binance, Crypto.com, and others — are required to validate their users’ identities as part of Know Your Customer. This process can be laborious, but there’s typically a less steep learning curve for users, which means that many new users opt to borrow from centralized crypto platforms instead.
The big draw for users is that they are typically easy to navigate, offer slick user interfaces, and streamline the steps for buying and trading crypto. That’s generally the perfect setup for newer crypto users.
What makes CeFi loans unique
Here’s what you can generally expect when lending with centralized crypto exchanges:
- Exchange handles the lending: The loan transactions on a CeFi platform aren’t done in a peer-to-peer manner. The exchange acts as the middleman instead. This streamlines the transactions and may also give you access to more lending options, like multiple liquidity pools.
- Requires validation for account set-up: Centralized exchanges are required to validate their users’ identities as part of Know Your Customer. This means it can take a lot longer to set up an account than it otherwise would.
- Anonymity: As with DeFi loans, CeFi loans are anonymous, at least on the parts of the borrower and lender. While the exchange can identify who is doing what due to the verification process required for account setup, any crypto user can quickly and easily lend their tokens to other users.
- Interest payments: Crypto holders who lend their tokens to other users on a CeFi platform will be paid interest in return. Rates vary, of course, but it’s a good way to maximize the returns on your crypto.
- Easier for new users: CeFi exchanges are built to be easy to navigate. That makes them a great starting place for new crypto lenders who want to figure out how the crypto lending process works without having to learn an entirely new process.
- Higher fee structure: You typically pay for the privilege of using CeFi platforms. That comes in the form of higher fees on average compared to decentralized exchanges.
If you’re looking for a crypto loan on a centralized platform, the options include:
- Numerous others
The 5 top CeFi lending platforms of 2022
Nexo is the top CeFi borrowing platform, thanks in part to the fact that the platform offers a loyalty program that can benefit borrowers in big ways. With Nexo, borrowers can borrow both stablecoins and other cryptocurrencies, but what’s unique about the platform is that the interest rates you pay on borrowing are directly related to your loyalty level. That makes it possible to borrow at between 0% to 1.9% in some cases. That’s an excellent rate for any borrower. And, borrowers can also use their crypto as collateral for borrowing fiat — or plain old American dollars. That means if your borrowing rate is at 1%, you can borrow cash for a rate that’s lower than any traditional bank can offer you.
- Interest rates: Fixed
Why borrow with Nexo?
- Rates start at 0% for borrowing and never exceed 13.9% — which means that this platform is often the cheapest way to borrow.
- You have the choice between fiat, crypto, or a combination of both to repay your credit line.
- The platform offers more than 40 fiat currencies, and you can borrow instantly using USDT or USDC.
- Approval can be instant for borrowers and the funds are typically available within 24 hours.
As the world’s leading crypto platform, Binance is another solid option for crypto borrowers. With this platform, you can borrow several types of cryptos, including BUSD and USDT. As long as you’re a registered Binance user, you can lend your tokens to borrowers on this platform. The loan terms are flexible and the interest is calculated hourly based on the hours borrowed. Plus, the funds you borrow can be used for any purpose, whether it’s staking, trading, withdrawing, or something else entirely.
- Interest rates: Fixed or floating
Why borrow with Binance?
- The platform supports borrowing for numerous types of cryptos.
- Terms are flexible and borrowers can choose from terms that include 7, 14, 30, 90 or 180 days.
- There are no early repayment penalties if you want to pay back what you borrowed before the term is up.
- The borrowing fees are pretty low in comparison to other platforms.
Another option for borrowing crypto is BlockFi, which is the only independent lender with institutional backing. Interest rates for borrowing on this platform can be as low as 4.5%, which isn’t the lowest option — but is still significantly lower than many other platforms. And, you can borrow both stablecoins and other types of tokens on this platform. You can also access large amounts of tokens on BlockFi, as the minimum loan is $10,000. Funding happens the same day you’re approved, and there’s no prepayment penalty to deal with if you want to pay your loan off before the term ends.
- Interest rates: Fixed
Why borrow with BlockFi?
- Interest rates can start as low as 4.5%, which makes it relatively cheap to borrow crypto on this platform.
- Borrowers have the option to choose between stablecoins and other types of coins, with token options that include Bitcoin, Ethereum, and Litecoin, among others.
- Funding occurs the same day as the approval of your loan.
- There are no prepayment penalties to deal with.
YouHodler is another option for borrowing from a CeFi platform, and it’s a good one. For starters, borrowers can use their crypto or their stablecoins as collateral for their loans, and in turn they can borrow either crypto or fiat — meaning cold, hard cash. And, the fiat options aren’t limited to U.S. dollars, either. The options for borrowing include fiat EUR, USD, GBP, CHF or crypto Tether, Bitcoin, Ethereum, Chainlink, and other popular currencies. Another benefit YouHodler offers is that at 90%, it allows borrowers to have the highest loan-to-value ratio of any platform. The minimum loan amounts start at just $100, and YouHodler accepts more than 50 top coins as collateral.
- Interest rates: Fixed
Why borrow with YouHodler?
- Borrowers can borrow either crypto or fiat, and the fiat options include fiat EUR, USD, GBP, and CHF.
- The loan-to-value ratio is up to 90% on this platform.
- Minimum loan amounts start at $100, so you don’t have to borrow a ton on this platform.
- The platform accepts dozens of coins as loan collateral.
The CoinLoan platform may also be a good option to consider if you want to borrow crypto. CoinLoan lets you borrow fiat (cash) and crypto, and it offers a handy rate comparison tool so you can compare the rates you’re offered with other platforms, allowing you to see how competitive your rate on CoinLoan truly is. In addition, the platform offers flexible loan terms, and as a borrower, you can set your own term length, repayment options, and other loan factors. The only requirement to borrow is to offer an asset as collateral.
- Interest rates: Fixed
Why borrow with CoinLoan?
- The annual interest rates for borrowers start at 4.95% and go up to 11.95%, which is lower than a lot of competitor rates.
- Crypto-to-crypto, crypto-to-fiat, and fiat-to-crypto loans are all options with this platform.
- The rate comparison tool is handy for borrowers and lenders alike.
- Borrowers set their own terms, including the loan length and repayment options.
1. DeFi borrowing
When borrowers or lenders engage in crypto loans on decentralized platforms, they’re interacting directly with the other person rather than relying on a third party to facilitate the transaction. When utilizing a DeFi loan platform, you also retain custody of your tokens, which is generally preferable to handing custody over to a third party platform.
The DeFi crypto loan platform options include:
What makes DeFi borrowing unique
There are a few different factors that make DeFi loans unique from other types of loans. These include:
- Peer-to-peer lending: One of the main factors that makes DeFi loans unique is the fact that they’re done in a peer-to-peer manner, but the transaction takes place over an exchange utilizing blockchain technology. This removes any hurdles that borrowers would face and makes it safer and more secure for lenders, too.
- Anonymity: Because these loans take place on a decentralized exchange, any crypto user can quickly and easily take out a loan — and they won’t have to disclose who they are to a third-party, nor will they have to go through the verification processes that traditional loans require.
- Interest payments: Crypto holders who opt to lend their tokens to other users will be paid interest in return for doing so. This allows them to grow their crypto holdings easily and safely, which is a big plus for many users.
- Borrowing pools: Exchanges aren’t relying on just one user to provide liquidity to a large number of borrowers; rather, lending is done through liquidity pools, in which crypto users “pool” their token resources together and are paid interest in return. Exchanges typically offer a few different liquidity pools that crypto users can opt into, and most have varying rates of return.
- Non-custodial: With DeFi loans, there is no need to transfer ownership of their underlying collateral. All funds are secured by smart contracts, with the borrower being responsible for maintaining that position.
- Secure: Major borrowing protocols have been rigorously audited, meaning that funds supplied to loans are backed by the most robust code in the world.
The 5 top DeFi borrowing platforms of 2022
As a borrowing platform, Aave offers the most diverse number of loan types — and has become a market leader in the DeFi sector as a whole. The platform offers borrowing for at least 20 of the most popular cryptocurrencies, including most major stablecoins and DeFi tokens like SNX, MKR and KNC.
In addition, Aave has become a primary source for Flash loans — which give users the ability to borrow an unlimited amount of assets so long as they are paid back in the same block. Users can also choose to lock in either a fixed or a floating interest rate, which provides a degree of flexibility that other lending platforms currently do not offer.
- Interest rates: Fixed or floating
Why borrow from Aave?
- Users have more flexibility with the choice of either a fixed or a floating interest rate
- Flash loans are an option, which can be useful for preventing Maker Vault liquidations and taking advantage of arbitrage opportunities.
- The platform offers a Risk Framework, which clearly displays a different rating (from A+ to D-) for assets on the platform. This gives users a clear idea as to which assets are the safest to take a loan on at any given time.
- Users can trade with leverage on Aave borrowing rates using Swap Rate.
- Borrowing fees are incurred at inception.
- Loans can be insured using Nexus Mutual.
Maker is a permissionless lending platform that was responsible for the creation of DAI, the first decentralized stablecoin. The platform is built on the Ethereum blockchain, and allows users to borrow with a loan on a stable, trustless asset. Users can also opt to lend their tokens to borrowers in return for interest payments.
Using Oasis Borrow, users can lock collateral — which currently includes ETH, USDC or BAT — to mint Dai. Locked collateral incurs a “stability fee,” which can be paid back at any time.
- Interest rates: Floating
Why borrow from Maker?
- As a stablecoin, it’s easy to know exactly how much debt will be owed on any given loan.
- Users can easily re-collateralize or draw additional Dai directly from the Oasis dashboard.
- The platform offers asset management tools like DeFi Saver, which allow users to ensure Vaults are sufficiently collateralized, even when the market is volatile.
- Maker Vaults are integrated into other asset management tools like InstaDapp or Zerion for easier tracking.
Compound is a leading platform in the DeFi lending space, and has long been established as having a strong foundation for trusted cryptocurrency loans. The Compound platform supports fewer assets than Aave, but it offers very liquid capital pools in return. The platform is also a trusted option across the board for other interest-earning opportunities, and it offers a wide range of tools for asset management and other functions.
- Interest rates: Variable and fixed
Why borrow from Compound?
- Compound has proven itself to be a reputable provider with a strong reputation and backing.
- This platform currently offers the most underlying collateral of any lending protocol – which means the capacity for loans is quite high.
- With tools like Swap Rate and Opyn, users can hedge against variable interest rates and lock in fixed rates on loans.
- Borrowers can insure their loans using Nexus Mutual.
- Users can leverage asset management tools like Zerion and DeFi Saver to manage their loans.
dYdX is a hybrid DEX, making it a unique platform in this space. It offers functionality for lending and margin trading with low fees attached — and opening a loan on dYdX does not come with transaction fees. As such, it’s a great way for users to “borrow” cryptocurrencies to open leveraged loans on Ethereum and Bitcoin.
- Interest rates: Floating
Why borrow from dYdX?
- Opening a loan on dYdX does not incur a transaction fee
- Users can borrow USDC, DAI or ETH to open up to 5x leveraged positions on ETH.
- dYdX also offers perpetual futures, which means that users are able to open up to a 10X leveraged position on BTC.
- dYdX uses cross-margin so that users can pool together all their assets on the platform rather than using just one.
Alchemix is another decentralized platform that allows borrowers and lenders to capitalize on the crypto lending space. What’s unique about Alchemix is that borrowers can borrow up to 50% of the collateral they put down, and it won’t lock your deposit or charge you fees for borrowing — and your funds are accessible 100% of the time. You can also repay your debt whenever you like, and the platform won’t liquidate your deposit. It also offers a wide range of collateral types, which makes it easier for borrowers to take advantage of what the platform offers.
- Interest rates: Vary
Why borrow from Alchemix?
- Borrow up to 50% of your deposited collateral.
- You can choose to self-liquidate your own loan at your own discretion.
- The platform doesn't lock your deposit or charge you fees.
- The funds you put up for collateral are accessible 100% of the time.
- The debt can be repaid whenever you like.
The top cryptocurrency collateral options
Now that you know where you can put up collateral to borrow cryptocurrency, it’s time to decide what coins and tokens you want to use to secure a loan. Here are some of the most popular collateral options, and why they may work for you.
Ether is the fuel that powers Ethereum — the second-largest blockchain — and is primarily used as payment for transacting on the network, which is totally congested round the clock. There’s a liquid nature to ETH, and the vast majority of borrows are dominated by users putting up ETH as collateral. It is supported by virtually every borrowing platform and has quickly emerged as the leading asset to supply as collateral for a cryptocurrency-based loan.
Bitcoin is also a big name in crypto borrowing, and solutions like Atomic Loans allow users to post BTC as collateral and receive stablecoins like USDC or DAI in return. Users who opt to lend Bitcoin typically want to capitalize on the vast market size Bitcoin offers because it’s the leading cryptocurrency.
Final thoughts on crypto loans and borrowing
Crypto lending can have big benefits for borrowers who take advantage of it. Borrowing can give users access to the crypto they need for trading or other purposes, while lending can offer big interest payments in return. As long as you know what you’re getting into with this part of the market — and know what platforms may be the best option for you — it can be a great way to maximize the returns you make on your token holdings.
Frequently asked questions
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