Best for crypto rewards
Best for DeFi yields
Best for DeFi borrowing/lending
Best for intermediate traders
As of October 2022, around $47.2 billion worth of cryptocurrency was locked in lending agreements. When borrowers use crypto lending platforms, other investors supply the coins needed to fund loan amounts and in turn, the investors get a portion of the interest charges as rewards. And Ethereum, the largest smart-contract blockchain, is lendable on both centralized and decentralized platforms.
Here’s what you need to know about lending ETH and earning rewards on your deposits.
- ETH tokens can earn around 3% to 4% in rewards when lent, but some platforms advertise higher rates
- Your earnings on ETH lending are taxable, and most CeFi platforms will provide the tax reporting forms needed to file taxes
- Risks of lending ETH should always be considered before committing tokens to any crypto-lending platform
What is ETH lending?
Lending any cryptocurrency is like lending money to a borrower: another person uses the funds you lent and then returns the balance, plus any accrued interest. When lending ETH, you can use a centralized, custodial platform or a decentralized, non-custodial platform. On the borrower’s side, your coins are then leveraged in trades — but they can use the funds for other purposes — to potentially earn more in Ethereum. Once the borrower pays back the ETH loan (plus interest and fees), your coins are available for another borrower.
Once you offer up coins for lending, they are locked in a smart contract or lent out on your behalf, depending on the platform you choose. With ETH lending, you can earn rewards on your cons passively and grow your balance over time.
How does ETH lending work?
There’s two kinds of platforms on which you can lend ETH: centralized finance (CeFi) and dentralized finance (DeFi) platforms.
With CeFi platforms, you temporarily give up custody of your ETH tokens for the lending platform to lend out and earn interest on your coins for you, which are sent to you every few days or so. In this method, your ETH tokens may be locked in for a predetermined time period. At the end of the period, your ETH and its earnings are released back to your wallet, so you can take your earnings and go or reinvest in the CeFi lending platform.
On decentralized platforms, you retain total control over your tokens and can pull your investment at any time, but you will stop earning rewards on your tokens once you do. While deposited on the Ethereum DeFi lending platform, your tokens are pooled with other investors’ tokens and lent out to borrowers. However, not just anyone can borrow ETH from a DeFi platform, despite its anonymity. Borrowers have to put up collateral for the loan, in the form of another cryptocurrency, stablecoin, or fiat currency. If they default on the loan, the collateral will cover the loss for the platform and lenders.
Lending ETH is beneficial, either with a CeFi or DeFi lending platform, because you can passively earn rewards on your deposited ETH. Furthermore, borrowers gain access to funds for trading (or other uses) without credit checks or a mountain of paperwork.
CeFi ETH lending
BlockFi and Crypto.com are two examples of the top centralized crypto-lending platforms that support ETH lending. With these two platforms, investors sign up using a KYC process, and create an account. Once that’s complete, they can send their ETH tokens to the deposit address from their external wallets, then navigate to the platform’s crypto earning service. Once you accept any terms and conditions, choose the amount of ETH to lend, and designate a term length from any options provided, you can then sit back and watch your investment grow. As of June 2022, Crypto.com advertises 4% p.a. rates on ETH lending with one-month, three-month, or flexible terms. BlockFi offers 3% on up to 1.5 ETH lend, but advertises no specific time period.
Pros and cons of CeFi ETH lending
- It’s an easy on-ramp and off-ramp for beginner investors
- CeFi platforms supply simple tax reporting forms for your earnings
- Higher rates advertised are typically for investing fewer tokens
- CeFi ETH lending is custodial, so you don’t have complete control of your tokens
- There’s risk of the platform failing, thus losing your tokens
- It’s not completely anonymous, most CeFi lending services require a KYC process
Pros of CeFi ETH lending
Accessible for beginners
Setting up your ETH tokens for lending is about as simple as setting up any other financial deposit product. Once you have an account and ETH tokens to lend, it takes just a few steps to start and there are no smart contracts to deal with.
Easy tax reporting
The crypto lending platform gives you the forms needed to file your U.S. taxes on your earnings every year.
Higher rates are reachable
The higher rates typically advertised for ETH lending are for smaller amounts. While this generally benefits the platform, it also means that investors can enjoy decent rates for less than 1 ETH.
Cons of CeFi ETH lending
Lending ETH on a centralized platform means giving up custody of your tokens temporarily, so you don’t have complete control over your investment.
If the lending platform becomes insolvent, crashes, or simply holds your crypto past the agreed-upon date, there’s no FDIC insurance on your deposit, so your ETH tokens are at risk.
Centralized platforms require identity verification to set up an account in accordance with U.S. regulations, therefore, a lengthy account creation process is unavoidable and you lose complete anonymity.
DeFi ETH lending
On decentralized finance platforms like Compound and Aave, ETH-holders can provide ETH tokens to liquidity pools and earn passive rewards on the amount of ETH they deposit. It is non-custodial, meaning the user still holds and has responsibility for the Ether in their wallet. As of June 2022, Compound advertises 0.50% APY for supplying ETH. With Compound, the APYs are calculated on a Rate Per Block basis, explained in its documents.
On decentralized finance platforms, you need to connect a wallet to the platform in order to supply your deposit for lending. Some of the popular wallets include MetaMask, Ledger, Coinbase Wallet, Torus, and Frame. You can also use a browser-based wallet or software wallet with some DeFi platforms.
Pros and cons of DeFi ETH lending
- There’s no KYC process, so it’s easier to get started
- DeFi is non-custodial, rather than custodial, so you can keep tokens
- Rates update in real-time, making it easier to choose the best rates
- DeFi platforms only facilitate transactions, they don’t prevent investors from making mistakes
- Hacks and security breaches an ever-present risk
- Liquidity concerns make it difficult to fully trust DeFi as an investment vehicle
Pros of DeFi ETH lending
Because decentralized finance doesn’t require a KYC process, anyone can lend ETH to the liquidity without a lengthy verification check.
When lending ETH on a DeFi platform, you still have responsibility and control over your tokens. They do not transfer to a platform’s custody for the duration of your deposit.
Because cryptocurrencies are created and traded on a blockchain, everything is updated real-time, so you can make in-the-moment decisions about your investments. Additionally, deposits happen almost instantly, so you start earning rewards immediately.
Cons of DeFi ETH lending
Subject to investor mistakes
There are no guardrails in DeFi investing. If you fall victim to scam or a platform becomes insolvent, you have no recourse in getting your investment back.
The nature of DeFi ETH lending means it’s more prone to security risks. While not incredibly common, hacks are still a threat.
DeFi is not as established as traditional financing, so there’s a risk of the platform failing and you losing your investment.
ETH lending vs. staking
You might have heard or read about two different ways to earn rewards on your Ethereum: lending and staking. While there are a few similarities, lending and staking are vastly different.
When staking or delegating ETH, you are offering your ETH to help validate transactions and the creation of new ETH blocks on the blockchain. When these are validated, the validator earns ETH rewards, which is then shared with the investors who staked or delegated their coins. You can stake ETH on an exchange or join a staking pool, and they typically earn higher rates than lending ETH.
On the other hand, ETH lending is depositing your ETH into a liquidity pool that is lent out to crypto borrowers. There’s no validators directly involved in the process of lending your ETH, and the rates are lower than staking ETH. However, lending doesn’t require as much technical know-how, and most CeFi exchanges offer ETH lending as a product and will provide tax-reporting forms for your earnings.
Beginners will find that ETH lending is easier and more straight-forward than staking, but there are staking and validator pools that allow low-volume, beginning investors earn rewards, as well.
ETH lending taxes
Yes, you do have to pay taxes on the rewards you reap from ETH lending. Specific tax regulations vary based on your personal situation, jurisdiction, and country. Typically, when the rewards from ETH lending are distributed to you, the cost basis of the price of ETH at that time is considered income, and you must pay taxes on it when you file the next year. Then, if you sell the ETH, you pay additional taxes on any gains from an increase in the cost of ETH. If the price decreases when you sell, then you report capital loss from the ETH.
For example, let’s say you earn $100 in ETH from lending — or around 0.00086 ETH, depending on the price, you pay taxes on the $100 worth of ETH you earned. Then, let’s say you sell when the price of ETH increases from when you received the ETH reward and your 0.00086 ETH is now worth $200, you will pay taxes on the additional $100 in capital gain. If your 0.00086 ETH is worth $50, then you report it on your taxes as a capital loss.
The IRS provides more information on digital currency and tax reporting:
- Form 1040, 1040-SR, and 1040-NR reporting virtual currency
- IRS frequently asked questions about virtual currency transactions
Final thoughts on lending ETH
Earning passive income on Ethereum is one of the most popular ways to make your cryptocurrency work for you. However, always research the platform on which you choose to lend, determine if you’d rather use a centralized or decentralized platform with custodial or non-custodial lending, and what amount of Ether you’re most comfortable lending. Remember, you also have to pay taxes on your rewards, so make sure you don’t negate the value by getting hit with IRS fines for failing to report your earnings.
Frequently asked questions about ETH lending
Should I lend my ETH?
What are the risks of lending ETH?
How much can I earn from lending ETH?
Will I owe taxes on ETH lending?