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Crypto lending overview
Are you interested in maximizing the profits you make on your crypto investments? Most people are. After all, isn’t that what investing in crypto is all about? And the good news is that when it comes to money-making opportunities with crypto, you have tons of options to choose from.
Lending out your crypto in return for interest payments can be a lucrative way to earn returns on your tokens or coins. This type of crypto lending, which is done in a peer-to-peer fashion on numerous exchanges, can be an incentive for crypto users who don’t need access to their tokens in the near future. They may be waiting for the value of a token to increase, or they may be holding for another reason — and lending out the tokens in the interim can make sense.
But while crypto lending can have big benefits for lenders, it’s important to understand how this type of lending landscape works before you allow your tokens to be used by borrowers in return for interest payments. By understanding how decentralized lending functions, and what the benefits may be for lenders — as well as what the top crypto borrowing platforms are — potential crypto lenders will be armed with enough information to determine whether this earning route is right for them.
- Crypto loans are offered to borrowers using an exchange and blockchain technology.
- Any crypto user can quickly and easily offer their tokens to other crypto users as a loan — and there are a few routes they can take to do so.
- Interest is paid by the borrower to the crypto lender, much like it is with any other traditional loan product.
What are crypto loans and how do they work?
Crypto users have the option to lend their tokens to borrowers on decentralized or centralized finance platforms. These types of loans work similarly to the loans you can get when borrowing through traditional lenders, like banks or credit unions.
The main difference is that rather than a borrower gaining access to cold, hard cash, they borrow tokens temporarily for trading or other purposes. And, as with traditional loans, the borrowers pay interest in return.
This type of lending is done on either a decentralized or centralized platform, but it’s not really the exchanges that lend directly. Crypto users who have tokens available to borrow act as the lenders for crypto loans instead. To do this, users typically either provide their tokens as liquidity to the exchange via a liquidity pool or offer them directly to other crypto users via certain types of platforms. Either way, investors borrow the tokens and pay the crypto lenders interest in return.
Collateral and crypto loans
That may sound risky for the lenders, who are offering up their tokens to a third party without any verification processes in place, but it’s not. That’s because, with crypto loans, borrowers will typically need to offer collateral that is higher than the loan amount, which means that they’re much more likely to ensure that the borrowed tokens are returned. Collateral requirements vary by exchange, of course, but generally, borrowers are required to deposit tokens of equal or more value than what they’re borrowing — which is done via a smart contract.
Let’s say, for example, that you lend another user 1 BTC for trading purposes. In that case, the user may need to deposit collateral with another type of token that is equivalent to the current price of a Bitcoin (or higher, depending on the requirement). That collateral would be held until the tokens they borrowed from you are returned with the interest owed on them. When that happens, the collateral is returned to the borrower and you get your tokens back.
Lending terms with crypto loans
There are numerous lending terms available for crypto loans, and they’re similar to the terms borrowers would get with a traditional loan. For example, investors have the option to lend their tokens out on an “open term,” which means the tokens can be withdrawn at any time. Or, lenders can also lock in at a fixed term, which generally means they’ll get more lucrative returns on their tokens. The terms vary but can last from a few weeks to a few months or a few years.
How crypto loans are offered
Crypto loans are offered on both centralized and decentralized platforms. There are some significant differences between the two, so we’ll break both options down below:
Centralized crypto loan platforms
Centralized finance, or CeFi, platforms include big exchanges like Binance, Crypto.com, and others, and these exchanges tend to be the most new-user-friendly options around. These platforms tend to function more like a bank than anything. 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 lending platform for numerous reasons, not the least of which is the fact that the platform offers a loyalty program that can benefit lenders substantially. With Nexo, users can deposit stablecoins and other cryptocurrencies and make them available to borrowers to earn a return on their deposits. The interest rates paid to lenders are directly related to the loyalty level, and all interest payments are made on a daily basis. You can earn on both stablecoins and other tokens supported by Nexo — and you can earn on fiat money on this platform.
- Interest rates: Fixed
Why lend with Nexo?
- Rates are up to 12% on stablecoins, which lets lenders earn big interest on the tokens they offer to the platform.
- Other interest rates tend to be extremely high, making it even easier for lenders to earn on their tokens.
- Nexo also allows users to lend fiat money in addition to stablecoins and other tokens.
- Lenders can withdraw their deposited assets at any time.
- Interest payments are made on a daily basis and are tied to the loyalty level. That’s not the case with most other CeFi platforms.
Binance is another solid option for crypto lenders. It’s the world’s leading crypto platform, and it supports the lending of several 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 on this platform can be anywhere from 7, 14, 30, 90 or 180 days, and the interest is calculated hourly based on the hours borrowed. On the lending side, your tokens are stored on a timed deposit of 14 days, meaning you can’t withdraw them during that period — but that’s a shorter period than many other platforms require of lenders.
- Interest rates: Fixed or floating
Why lend with Binance?
- The platform supports lending for numerous types of cryptos.
- Security is top-notch with this platform, so you don’t have to worry about any safety issues related to your tokens while you’re lending them.
- Rates can be excellent on certain types of cryptos, meaning more rewards on the tokens you lend.
- The platform is pretty easy to navigate when it comes to lending, so it’s relatively user-friendly for new lenders.
BlockFi is another solid option for crypto lending. BlockFi’s mission is to redefine banking, and it’s the only independent lender with institutional backing, which is unique in and of itself — but the platform also offers a ton of benefits to lenders. As with most other CeFi and DeFi platforms, the interest rates offered to lenders will depend on the token and the amount you deposit. What sets the platform apart with lending, though, is that users can earn interest on stablecoins and other types of tokens. That’s not the norm with most platforms, so users who want to earn interest on stablecoins have the option to do so with BlockFi.
- Interest rates: Fixed
Why lend with BlockFi?
- APYs on tokens you lend can average up to 8.5% or more, depending on the type of token and amount you deposit.
- Stablecoins can be used for lending on this platform, which means that lenders have more options for maximizing interest returns.
- Token options for lending include Bitcoin, Ethereum, and Litecoin, among others.
4. Cake DeFi
Another option for CeFi lending is Cake DeFi, which offers some unique perks to users who want to lend their tokens out in return for interest. For starters, the base APY offered on lending tends to be higher than average, with rates that start at about 5%. Plus, the base APY is also guaranteed — so you'll know the minimum you can earn on a token from the start of the process. But what's even more of a draw is that you can get bonus returns when the price of the native coin goes up while your tokens are being used for lending, which means there are opportunities to earn above what the base APY is when you lend on this platform. Plus, the process of lending is simplified on this platform, and each lending period — or "batch," as the platform calls it — lasts just 28 days. After that 28-day period is over, you can choose to withdraw your tokens or allow them to be included in the next batch and earn compound interest instead.
- Interest rates: Fixed and guaranteed with a bonus return system
Why lend with Cake DeFi?
- The base APY offered on token lending is guaranteed — so you'll know the minimum you can earn from lending on the platform.
- You'll have the opportunity to earn bonus returns when the price of a native coin goes up while it's being used for lending, which means even higher returns on your tokens.
- The lending APYs start at about 5% and can be much higher depending on the token.
Gemini may also be an excellent option for crypto lending, as this CeFi platform gives lenders the opportunity to earn up to 8% or more on the tokens they lend to borrowers. That’s a significant rate of return on your tokens. And, what’s relatively unique about Gemini lending vs. other platforms is that Gemini lends tokens to financial institutions and borrowers on the platform. Lenders may also like that the interest is paid daily on this platform, and you’ll start accruing interest the day you deposit your tokens for lending.
- Interest rates: Variable
Why lend with Gemini?
- Pays up to 8% or more in interest to lenders who use the platform.
- Interest payments are made daily.
- Interest starts to accrue at 4 p.m. the day you deposit your tokens for lending.
- The platform lends to both borrowers and financial institutions.
Decentralized crypto loan platforms
When lenders offer their tokens for crypto loans on decentralized platforms, they’re interacting directly with the borrower rather than relying on a third party. When you offer your tokens to borrowers on a DeFi loan platform, you retain custody of your tokens, which is generally preferable to handing custody over to a third-party platform.
What makes DeFi loans unique
There are a few different factors that make DeFi loans unique from other types of loans. These include:
- Peer-to-peer lending: DeFi loans are completed in a peer-to-peer manner, but the transaction takes place over an exchange. This makes it safer and more secure for those who are lending out their tokens to other crypto users.
- Anonymity: These loans take place on a decentralized exchange, which means that any crypto user can quickly and easily lend their tokens to other users — and they won’t have to disclose who they are to a third party.
- Interest payments: Crypto holders who lend their tokens to other users will be paid interest in return. Rates vary, of course, but this is a big plus for certain types of crypto users who want to maximize their returns while holding their tokens.
- Borrowing pools: Lending is generally 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, all of which have varying rates of return.
- Non-custodial: There is no need for borrowers to transfer ownership of their underlying collateral to a centralized exchange.
- Secure: Funds supplied to loans are backed by the most robust smart contracts in the world, which makes the process a lot more secure than it otherwise would be.
The DeFi crypto loan platform options include:
The 5 top DeFi lending platforms of 2022
1. MakerDAO (Oasis)
The MakerDAO Oasis platform allows crypto users to lend out their tokens in order to generate DAI, which is a stablecoin pegged to the U.S. dollar. This network is built on Ethereum, and it can be a great way for certain crypto users to maximize the return on their tokens by lending out their crypto and earning a stable asset in return. As with other platforms, the rates paid to lenders can vary, but MakerDAO generally offers a flexible interest rate that has historically ranged from 0% to 8.75%.
- Interest rates: Floating
Why lend with Maker?
- The DAI stablecoin payments make it easy for lenders to know what their returns will be — and they won’t have to worry about volatility related to the coin.
- Asset management tools like DeFi Saver allow users to ensure Vaults are sufficiently collateralized, even when the market is volatile.
- Maker Vaults are integrated into other asset management tools for easier tracking.
The Aave platform is an open-source platform that offers access to liquidity pools in order for crypto users to lend their tokens to other users. This platform offers different yield and interest rates for each token, and the rates tend to vary based on the network. In general, though, the interest rates paid to lenders tend to average between 1% and 3%. That said, there are some tokens with much higher yields on the platform, but the rates change regularly, so it’s important to do your own research.
- Interest rates: Fixed or floating
Why lend with Aave?
- Users have more flexibility with the choice of either a fixed or a floating interest rate.
- Flash loans are an option, which gives borrowers more flexibility and makes this platform a top choice for borrowing.
- The platform offers a Risk Framework, which clearly displays a different rating (from A+ to D-) for assets on the platform.
- Loans can be insured using Nexus Mutual.
When you lend with Compound, the tokens you put up will go into liquidity pools with other users’ tokens. These liquidity pools are then accessed by borrowers, who later pay what was borrowed back, with interest, to the platform. Your share of the interest is then paid by Compound to you based on the annual interest rate set by the platform. And, with Compound, you earn interest in the same token you provided for lending purposes. While the rate you can earn differs by token on this platform, it’s not uncommon to see rates of 3% or higher on certain tokens.
- Interest rates: Variable and fixed
Why lend with Compound?
- Liquidity pools make it simple to lend to borrowers on this platform.
- Lenders earn interest in the same token that was offered to the liquidity pools, which isn’t always the case with other platforms.
- Loans can be insured using Nexus Mutual.
4. Notional Finance
Notional Finance is another DeFi platform worth considering if you want to lend your tokens in return for interest from borrowers. This platform is built on the Ethereum blockchain, and it offers a few unique perks to lenders. Lenders on this platform can lend two types of crypto: DAI and USDC — and, in turn, they will earn interest. What’s interesting about that is that if you want to lend your tokens at a fixed interest rate, you have the option to buy fCash tokens, which let you transfer value to a future date.
- Interest rates: Fixed
Why lend with Notional Finance?
- Two types of crypto are supposed on this platform: DAI and USDC.
- The exchange’s fCash tokens let you transfer value to a future date, which can be a great tool for maximizing your lending returns.
- Liquidity pools are an option for lenders on this platform.
The Sturdy platform offers a unique way for lenders to earn interest on the tokens they offer to borrowers, but unlike other types of platforms, this one doesn’t charge interest to borrowers. Rather, the platform stakes the collateral offered by borrowers and then passes the yield on to lenders — which changes the way that the lenders earn from the tokens they put up. While the returns to lenders vary, they can be a lot higher than competitor platforms — especially when it comes to stablecoins, which have hovered above 18% recently.
- Interest rates: Vary
Why lend with Sturdy?
- Interest payments aren’t charged to borrowers; as a lender, you earn returns based on the yields from the borrower collateral that’s staked by the platform.
- The rates on this platform tend to be a lot higher than they are with competitors, especially when it comes to stablecoins.
- The borrower-lender model keeps both parties happy; borrowers pay no interest and lenders still earn returns on the tokens they put up for lending.
Learn more about specific token lending
- USDC Lending
- ETH Lending
- wBTC Lending
- DAI Lending
- BTC Lending
- EOS Lending
- MATIC Lending
- USDT Lending
- AVAX Lending
- Stablecoin Lending
- GUSD Lending
- SOL Lending
- DOT Lending
Final thoughts on crypto lending
Crypto lending can have big benefits for lenders, especially when it comes to earning interest on the tokens they offer to borrowers. The risks are typically low too, thanks to numerous safety and security measures being in place. As such, crypto users who want to hold their tokens long-term have this option for earning returns on their coins without having to worry about whether their tokens are secure. If you want to take that route, just be sure to do your homework beforehand to make sure that you’re maximizing your returns while keeping your tokens safe.
Frequently asked questions
What platforms offer crypto lending?
Do crypto lending interest rates change?
What do borrowers use cryptocurrency loans for?
Will I owe taxes on crypto loans?