AVAX Lending: What to Know About Rates, Exchanges, Risks, and Benefits

Best lending rates available from top lending platforms for October 7, 2022

If there’s one phrase used regularly regarding the 2022 crypto market, it’s “crypto winter” — or, more specifically, the fear of a crypto winter occurring. A crypto winter is typically marked by token prices that have dropped significantly and then stayed low for long periods of time. Considering the crypto market has been extremely volatile since late 2021, and losses have been estimated at around $2 trillion, the current concern makes sense.

As such, you may wonder what you can do with your tokens right now to maximize your profits. After all, selling when the values are lower than average doesn’t make much sense — and many people are in it for the long haul. Well, you have options, including lending the AVAX coins you have in return for interest from borrowers while you wait out the market. But what are the benefits and possible downsides of doing so — and what exactly is AVAX lending, anyway? Here’s what you need to know.

Key takeaways

  • There are currently no exchanges offering rewards for lending AVAX, but you can stake AVAX for around 9% APY.
  • There are numerous exchange options to lend your AVAX tokens to borrowers.
  • The interest rates for AVAX lending can vary significantly based on the protocol and other factors.

What is AVAX lending?

Just like there are banks that offer loans with fiat currency to borrowers, there are crypto exchanges that offer lending services to crypto users. However, when it comes to cryptocurrency, the lenders aren’t the exchanges or big banks — they’re other crypto users.

When it comes to borrowing and lending tokens, crypto exchanges tend to play the role of middleman between the lender and borrower. When a crypto user has tokens that they want to earn interest on through lending, they can log on to these exchanges and offer their tokens up to other users, or borrowers, who pay interest to the lender or lenders in return for using the borrowed tokens temporarily for trading or other purposes.

This process allows AVAX holders to take advantage of opportunities to earn passive income on the tokens they don’t need in the near future. And, what’s awesome about these opportunities is that they can be lucrative for the lenders who offer up their tokens to borrowers on both centralized and decentralized exchanges.

How does AVAX lending work?

As noted above, a large number of crypto users choose to “lend” their crypto to others on a crypto exchange. By doing this, they’re offering other crypto users access to their token assets in return for interest payments.

There are options for lending AVAX and other tokens on both centralized and decentralized exchanges — commonly known as CEX and DEX, respectively. The more user-friendly option, however, is to use a CEX, as these exchanges tend to be a lot more user-friendly than decentralized exchanges can be.

CeFi AVAX lending

In general, if you’re using a CEX to lend AVAX, the process is pretty simple. You’ll need to create an account and validate your identity, as CEXs are required to follow Know-Your-Customer (KYC) requirements.

Once you’ve completed the KYC process, you can offer your assets to other users through the exchange. In some cases, you may have to agree to “lock” your tokens during the lending process, which means you lend your tokens for a certain period of time and they are inaccessible to you. In other cases, you may be free to remove your tokens from the lending pool at any time. It all depends on the exchange.

Either way, when you lend on a CeFi exchange, you aren’t directly offering your tokens to other users. Rather, the exchange accepts the tokens from lenders and then distributes them to borrowers on the exchange, which keeps the dirty work out of the hands of the lenders. The exchanges also verify the authenticity of the users who are lending their tokens as well the identities of the borrowers.

Once your tokens are offered to borrowers on a CEX, the borrowers will access them and pay interest in return. The CEX, acting as the middleman, takes a portion of that interest. The rest is paid out to the lenders who offer up their assets to the borrowers on the exchange.

Pros and cons of CeFi AVAX lending

Pros

  • Easy enough for new crypto users
  • Interest-earning opportunity without much hassle
  • Customer support can be beneficial

Cons

  • Exchange temporarily takes control of your tokens
  • Tokens are only as safe as the exchange
  • Lending is not available on all exchanges

Pros of CeFi AVAX lending

It’s simple

Lending AVAX through a centralized exchange is typically a lot more user-friendly than lending through a DeFi exchange. From the user’s perspective, you’re essentially losing access to your tokens for a time period in exchange for some percentage return on those locked coins.

Opportunity to earn interest

When you lend your AVAX tokens on a CeFi exchange, you’re earning interest in return, and there isn’t much hassle to the process. You simply log on, offer your tokens to borrowers, and rake in the interest payments. This can benefit you when the market is up — but can be a big relief when profits are down and you want to find ways to compensate for losses or declines in value

Customer support

One of the big benefits of using a CeFi exchange is that you get access to customer support. This can be a big benefit for new users, who aren’t typically as accustomed to the crypto market as experienced users are. A direct line to customer support can also be a helpful tool for any users, should there be mistakes or errors that take place during a trade, a token deposit, or lending.

Cons of CeFi AVAX lending

Token custody is temporarily given to the exchange

When you offer your tokens to a CEX for lending purposes, the exchange temporarily takes custody of your tokens. When you remove your assets from lending on the exchange, you’ll be returned the custody of your tokens again. Still, this is less than ideal for many users, who prefer to retain custody of their own assets whenever possible.

Exchange failure risk

You have to store their AVAX in these exchanges while you’re lending your tokens to borrowers, which means you’re at the mercy of the exchange. If the exchange folds, your assets will go with it — and there’s very little protection in place if this happens. In many cases, there may be no insurance for your tokens at all, so your assets may be at risk if you go this route

Not available on all centralized exchanges

Because lending isn’t necessary to the underlying function of a centralized exchange, many don’t offer lending opportunities to users. As such, you may have to move your assets from one exchange to another to create passive income through lending.

DeFi AVAX lending

Decentralized exchanges (DEX), on the other hand, are anonymous, decentralized, and do not require users to go through the KYC process. When you use a DEX, there is no company to interact with. It’s user-to-user interaction only.

Users can still lend their tokens to borrowers on these exchanges, but the lending process works a bit differently. If you’re lending tokens on a DeFi exchange, you may be lending your tokens directly to borrowers, as the exchange doesn’t act as the middleman. Or, you may have the option to do so through a liquidity pool instead.

Liquidity pools are useful because they ensure that the transaction takes place in a timely manner. Rather than having to wait for a borrower to come along in real-time, you can contribute your AVAX tokens to a liquidity pool, which amounts to a token stockpile. This pool then automatically lends the tokens in the pool to users who want to borrow them.

Each trade that takes place in the liquidity pool will incur a fee on the traders. With the more popular DEXs, the fee hovers around 0.3% per borrower or user. Everyone who has contributed to the liquidity pool then gets a percentage of this fee, which is typically divided based on the proportion of tokens each user contributed.

Pros and cons of DeFi AVAX lending

Pros

  • You maintain control of your assets
  • No KYC process
  • Potential for significant gains from active trading pools

Cons

  • More complicated than CeFi lending
  • Little to no accountability
  • Receive portions of trades

Pros of DeFi AVAX lending

Maintain custody of assets

Because DEXs are decentralized, there is no point in which you are giving custody of your tokens to the exchange. In other words, you retain custody of your AVAX tokens when lending on these exchanges.

No KYC process

Unlike CeFi exchanges, DeFi exchanges aren’t required to verify customer identities through the Know Your Customer process. That means you can connect your wallet and get started right away, without having to give up anonymity in the process.

Potential for significant gains

Users can select which pool to lend to when interacting with a DEX – and this can have a huge impact on the returns.

Cons of DeFi AVAX lending

More complex

The decentralized nature of a DEX makes it a lot more complicated to navigate when compared to centralized exchanges. There are numerous steps and basic knowledge required to use a DEX, which can be off-putting, especially to new users.

Little to no accountability

When you’re interacting with a decentralized exchange, there is no company behind it. As a result, the issues that you might face are typically left up to users themselves to resolve. This can be a pretty big negative for less tech-savvy users.

Possibility of limited gains

Any gains you earn from lending on a DEX will be directly tied to the trade volume that’s taking place in an individual pool. That means the pools with less activity will result in lower returns. On the most popular DEX, Uniswap, there is usually a 0.3% per-trade fee, which is split among lenders — but if there’s little activity, there won’t be much in the way of per-trade fees to go around.

AVAX lending vs. staking

There tends to be a lot of confusion regarding the differences between staking and lending tokens, including AVAX.

When you lend AVAX, you offer your AVAX tokens to borrowers via an exchange, whether CeFi or DeFi. You typically have to lock your tokens for lending for a certain period of time, but not all exchanges require you to do so. The borrowers can use your tokens for a wide range of purposes, and you’re repaid the original amount plus interest when you remove your tokens from lending.

When you stake your tokens, you can also earn passive income on your crypto assets, but the mechanism behind these returns is different. With staking, your tokens are most often used for validating transactions that occur on a network via the Proof-of-Stake (PoS) or Proof-of-Work (PoW) methods.

The PoW method of validation uses computation power to validate transactions by solving for a correct hash value to create a new blockchain. The users behind the PoW validation methods are commonly referred to as “miners,” and they earn returns by helping to validate transactions and create new coins. Most common tokens, such as Bitcoin and Ethereum, use the PoW method of validation, but it has a large carbon footprint and requires a lot of energy. Ethereum is currently in the process of updating to a PoS protocol, but the network hasn’t solidified a merge date — but it should occur in September 2022.

The PoS method, on the other hand, works much like the process of voting does. Users hold a “stake” in a crypto asset, and they stake tokens to validator nodes for a chance to verify batches of transactions added to the blockchain. If validators attempt to change the blockchain incorrectly, there are redundant validators that will notice and penalize or slash their earnings. Validating correctly, however, creates rewards payments for people running the nodes and their staking investors.

In general, you do have to lock your AVAX tokens on most platforms when you stake AVAX, but you have a few term-length options, varying from a few days to a few months or years. Where the confusion comes in is that staking typically requires you to bond your tokens for a period of time, anywhere between a few days to a few weeks, before you can earn rewards.

That’s similar to what is typically required when you’re lending your AVAX assets, but it’s not the same. When you stake AVAX, you don’t earn interest on the assets you’re staking. You earn staking rewards based on the amount you staked, which are typically calculated as an annual percentage yield (APY).

AVAX lending taxes

In the U.S., interest or rewards earned on crypto is considered the same as any other income by the IRS. What that means for you is that you’ll owe taxes on any interest you earn from lending your AVAX tokens, just like you’d owe taxes on the money you receive from your day job or other routes of income.

If you want more information, the IRS website offers resources related to crypto and taxes.

It may also benefit you to consult with an accountant or tax professional who has knowledge of crypto, especially if you want information that’s specific to your personal situation.

Final thoughts on lending AVAX

Lending AVAX can be a solid way for users to gain a passive income on their crypto holdings. While not necessarily the only option, or even the best one, it’s almost never going to be a decision that users will regret if they would otherwise be doing nothing with their investment.

Frequently asked questions

  • Is AVAX lending safe?

  • Should I lend or stake my AVAX?

  • Where is the best place to lend AVAX?

  • What are the risks of lending AVAX?

  • How much can I earn from lending AVAX?

  • Will I owe taxes on AVAX lending?