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

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

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When it comes to tokens outside of the OG Bitcoin, crypto users have thousands of options to choose from. But one crypto, in particular, Solana (SOL), has grown to one of the more popular cryptocurrencies available to traders. The SOL token, which is the native token for the Solana platform, is primarily used for staking and transaction fees on the network — and is the 9th most popular coin based on market cap.

But while SOL has grown to become a top 10 coin, recent hacking attacks have dominated the Solana-related headlines. The issue occurred in early August 2022 when hackers attacked thousands of Solana and Nomad wallets, wiping out millions of dollars worth of users’ crypto assets — including SOL.

Interestingly, the hacking issues don’t appear to have caused any sustained drops in SOL’s price — or any declines in demand for the token. Like most other cryptos, the token value has declined compared to November 2021, but it remains an in-demand token among crypto users. If you’re holding SOL in your wallet and aren’t planning to use it in the near future, it may be worth considering whether you want to capitalize on that high demand by lending SOL to borrowers in return for interest payments. Before you do that, though, here’s what you may want to know.

Key takeaways

  • Users who want to earn reliable returns on their SOL tokens can use a DEX or CEX exchange to lend their tokens to borrowers.
  • In return for lending SOL, investors are paid interest on the tokens they lend to other crypto users.
  • While lending can be lucrative, staking Solana is also an option to earn rewards.

What is SOL lending?

SOL lending is making your Solana tokens available for borrowers to use and then pay back, with interest. When investors lend SOL tokens, they are deposited into a supply pool on decentralized protocols or an earning account with centralized platforms, where they earn interest for the investor. Because investors make their tokens available for borrowers, they receive rewards in return.

How does SOL lending work?

SOL lending works similarly to lending other cryptocurrencies or stablecoins. Investors make their SOL funds available for borrowers, and in return, are rewarded in interest. However, SOL lenders don’t give their tokens to borrowers directly; instead, they deposit their tokens in an account or pool made available to borrowers and traders. Over time, rewards are paid out either in SOL tokens or in tokens native to the exchange, whether it be a centralized or decentralized exchange. Investors can either re-invest their SOL tokens to compound their investment or trade their rewards tokens for another crypto. SOL lending rates fluctuate based on demand and availability, so it's important to compare options for the best SOL lending platforms and protocols.

There are two options to consider when lending SOL: centralized exchanges and decentralized exchanges. Here’s how they work:

CeFi SOL lending

One of the ways that a user can lend their crypto is similar to how we think of loans now — that is, someone accepts a loan and returns that amount plus interest and any fees. Centralized exchanges (CEX) often offer these services and act as the middleman in the interaction — accepting the money from one user and lending it out to another. This takes the burden off of the initial investor and creates the opportunity for passive income.

There isn’t a point at which the user lending out their tokens is required to do more than choose the amount of SOL to deposit into which exchange — the CEX does the job of verifying identities, payments, and any of the other complicated parts that come along with it. As a payment, the middleman receives some of the interest.

Pros and cons of CeFi SOL lending

Pros

  • Borrowers are vetted by the exchange during account setup
  • Easy to navigate for new or inexperienced users
  • Easier tax reporting

Cons

  • Confusing interest structures
  • Not available everywhere
  • Exchange has custody of tokens

Pros of CeFi SOL lending

Borrowers are vetted by the exchange

Central exchanges are required to verify user identity before engaging with them. There is a relative amount of safety and peace of mind that comes from working through a system where the identity of users is known — though not necessarily to other users.

Easy to navigate

Tokens on CeFi exchanges are verified and specifically added to better benefit their users and themselves. Furthermore, CEXs tend to invest in making their lending interfaces easy to navigate for beginners. For example, Gemini offers a calculator tool that helps potential SOL lenders understand how much they can earn lending SOL over time. This feature is few and far between on DEXs.

A screenshot of Gemini's lending calculator for Solana and projected interest.

Tax reporting

Centralized exchanges typically provide investors with the tax forms needed to file yearly taxes in the United States. This makes it much easier to report gains from lending SOL and calculate any offsets from losses. Furthermore, if you lend and trade SOL on the same platform, your trading information is included as well.

Cons of CeFi SOL lending

Confusing interest structures

CEXs can have misleading or hard-to-understand schemes for interest rates. Many times, advertised interest rates are only for lower investment amounts, so whale investors don’t get to reap the benefits of higher rates. Because higher interest rates are usually reserved for lower investment amounts, your SOL lending deposit may not grow as quickly as advertised rates may lead you to believe. For example, an exchange may advertise 5% for investments up to $10,000, but 3% for investments between $10,000 and $50,000.

Not available to all

There’s a chance that the identity verification process may not even work for a certain user — whether that be because of an ID issue or a recent address change. Furthermore, many centralized exchanges with SOL lending products aren’t licensed to operate in every state, so investors in certain states are barred from lending.

Other party has control

CeFi exchanges have custody of your tokens while you’re lending, so trust is a huge factor. Users are essentially placing their trust in these companies when investing with them — as the tokens are no longer just theirs. There is always some amount of counterparty risk at play and should be considered when deciding where to invest.

DeFi SOL lending

While a decentralized exchange (DEX) doesn’t always provide the same loan service as centralized exchanges, users can still gain a passive income through lending to one.

Definitionally, a DEX cannot act as a middleman — there is no central body through which tokens flow through. Instead, there are these structures called “liquidity pools” that serve as means for automated technology to move trades along. It’s helpful to think of a liquidity pool as a big pile of crypto tokens — if a user wants to buy these tokens, the automated tech can take from that pile and add to another one.

To keep these piles well stocked, users can lend to them — and receive a percentage of every trade that takes place in that pool as a result. This is how an investor can receive a passive income through a DEX. Furthermore, some DeFi lending exchanges do work like CeFi exchanges, except the identities of investors and borrowers aren’t verified, and smart contracts process the loans and determine interest rates by complex algorithms that take into account the total supply of SOL versus the amount borrowed.

Pros and cons of DeFi SOL lending

Pros

  • No KYC required
  • Smart contracts automate processes
  • Higher income potential with pools and loans

Cons

  • External wallet required
  • More complexity
  • No live user support

Pros of DeFi SOL lending

No KYC required

For many users, the cryptocurrency and web3’s draw is anonymity and freedom. KYC, or Know Your Customer, is a requirement of centralized exchanges that uses identity verification before interacting with that exchange. DEXs don’t have this requirement, and therefore users keep as much anonymity as possible. Plus, it's faster to get started. Simply navigate to the DEX lending platform of your choice, connect your wallet, and choose how much to lend.

Smart contract interface

Decentralized exchanges use a technology known as a “smart contract” to run trades without a middleman — therefore, users can pull their tokens at any time without initiating lengthy transfer processes like with a CEX.

More income potential

Because rates fluctuate based on borrower demand, it's possible to find better rates on DeFi lending protocols than with CeFi. Savvy investors can quickly move from platform to platform in the DeFi ecosystem to ensure they're getting the best rates on lending SOL. With CeFi platforms, they may have to wait a few business days to fully exit their lending position before heading to a company with better rates.

Screenshot of Solend's SOL lending interface with wallet connection for simple set up.

Cons of DeFi SOL lending

External wallet required

Many CEX lending platforms have a proprietary wallet or earning account available to verified users. However, DEXs typically don’t offer this product alongside its lending capabilities. Users must take the extra step of finding the best wallet and connecting it to the platform. Furthermore, users must practice safe connection habits and disconnect their wallets when they’re done trading, lest they be at risk of hacks or thieves going after their funds.

More complexity

On top of being required to use and manage their own wallets, beginner users may find the inner workings of DEXs are a lot more complicated than with a central exchange. Users who like to understand the ins and outs of their investments will face a larger hurdle here than they otherwise would.

No customer support system

There is no support line for decentralized exchanges. If there is an error, it’s oftentimes entirely left up to the individual to rectify or suffer the consequences. Additionally, DEXs don't supply users with tax forms required to report gains and losses to the IRS come tax season, making it difficult to accurately report net income from lending SOL.

SOL lending vs. staking

The difference between lending and staking is fairly minimal when viewing it from the perspective of a typical investor — they’re different terms for accomplishing a similar goal of receiving a passive income.

Lending is when a user temporarily gives their tokens to be used by other investors — whether that’s for loans through a central exchange or in a liquidity pool through a decentralized exchange. These loans accrue interest from the users that receive them and therefore, create that passive income that goes back to the initial investor.

Staking, on the other hand, is only used by blockchains that validate through the proof-of-stake (PoS) method. PoS uses staking as a mechanism to create new blocks and mint new tokens on the chain.

Users can choose to delegate or stake their SOL tokens to validators vying for the opportunity to verify transactions on the blockchain. The more SOL tokens delegated to a validator, the higher the chance of being chosen to validate. When transactions are properly verified and added to the blockchain, the validator receives SOL in return, which is then distributed among investors who have delegated their tokens to it.

If a validator doesn’t correctly verify transactions on the blockchain, its rewards can be slashed — or penalized — causing lower returns for investors.

SOL lending taxes

While it’s always safer to speak with an accountant who can take your personal situation into account, it's important to understand that you'll likely owe taxes if you generate income from lending SOL. The IRS defines crypto holdings as property, and are therefore subject to taxation like any other form of income would be.

Generally, if you generate any sort of income from lending SOL, you can expect to pay taxes on it. CeFi exchanges will help prepare the necessary forms to correctly report income from lending SOL, while users can expect to prepare that information themselves. It’s always important to speak to a tax professional to understand how lending SOL can affect your personal situation come tax season.

Final thoughts on lending SOL

Lending SOL can be a positive opportunity for those looking to gain a little bit of passive income. It's not a great option for investors who plan to buy and sell Solana at prime times to make profits, but investors can capitalize off long-term market trends through interest earned from lending SOL. Be sure you understand the risks and benefits to weigh them effectively before lending any crypto.

Frequently asked questions about SOL lending

  • Is SOL lending safe?

  • Should I lend my SOL?

  • Where is the best place to lend SOL?

  • What are the risks of lending SOL?

  • How much can I earn from lending SOL?

  • Will I owe taxes on SOL lending?