Lend Your Crypto
|— As more users turn to disintermediated ways of exchanging value, the demand for decentralized lending and borrowing platforms (called protocols) is growing rapidly. These platforms enable users to borrow money using their cryptocurrencies as collateral or generate revenue by lending their crypto.|
— Even if you own stablecoins such as USDT or USDC, you can lend them and get returns in the form of interest.
— There are several ways to lend your crypto assets, but the safest is to lend directly from a hardware wallet.
Crypto lending could allow you to grow your assets without much effort or risk. Here’s how to lend your crypto.
Staking is quite a thing. We explained in the previous article of our guide how you can stake your cryptos to grow your assets. That wasn’t all. If you recall, we said there were multiple ways to do that without much effort. So in this article, we’ll explain the concept of crypto lending and how you can do it to generate an additional revenue stream.
Lending and borrowing have long been a part of our economic infrastructure. However, with crypto changing the way we exchange value, we now have an alternative to the traditional and unprofitable paradigm. It’s called decentralized finance aka Defi.
If you own cryptocurrencies that are lying idle in your wallet, you can lend them directly to other crypto users and earn high interest rates.
Ready to explore how? Let’s dive in.
Why lend (or borrow) using crypto?
Think about the word ‘loan.’ What do you see? A queue at a bank? The face of a manager who barely listens to what you have to say? A ton of paperwork? Or, worst-case scenario, you see the bank using your money to sanction loans and make profits from it while paying you peanuts.
Whatever it is, it’s undoubtedly nothing pleasant.
In a world full of people who seek services that treat them well and are easy to attain, the traditional way of taking a loan from a bank surely doesn’t make the cut for many.
It is a terrible experience even for those who store money at these banks. The banks lend their funds to borrowers and only share a negligible portion of the interest they make from it.
For these reasons, we have a rising demand for platforms that can offer instant loans with the least paperwork.
And you already know what we’re about to say. Crypto solves that problem.
Defi protocols have gained massive exposure in recent times. They allow users to take instant loans without having to wait in a queue, read 50-page agreements, or sign a load of documents.
On these platforms, self-executing contracts called smart contracts replace intermediaries such as banks. They allow individuals to lend and borrow cryptocurrencies directly from each other.
As their name suggests, smart contracts are smartly coded to handle the operation process of lending and borrowing money; without human interference. This means, the process will be fully automated and you will be the main beneficiary of all the interests your crypto earns.
Lending is the best way to generate passive revenue if you’re someone who wants to invest in less volatile assets. You can own stablecoins and lend them to make between 1 to 11% APY, sometimes even more.
Say what? Up to 11% or more? Yes. Absolutely.
But what about the security of your funds in the absence of an intermediary to hold all involved parties accountable? How do you know that a borrower won’t take your money and run? This is where collateralized loans come into play.
What are collateralized loans?
Except for a few good friends, worthy of a special place in heaven, nobody would lend you money without a collateral that ensures the safety of their funds. For instance, if you go to a bank to get a loan to build a house on a land you own, the bank might use the land as collateral. By doing that, the bank can rest assured that in case you miss your payments, they will have the legal right to claim your land and get their money back.
Although we’re not talking bank loans today, collateralized loans in the crypto world work in the same way. However, unlike banks, most crypto lending platforms work with over-collateralized loans. For example, the lending protocol Compound requires you to collateralize your loan with a minimum of 150% Ether (ETH). So, if a borrower had to borrow $1,000, they’d lock at least $1,500 worth of ETH as collateral.
Also, there’s an added penalty for borrowers in case the value of the locked ETH falls below 150% of the total borrowed amount. To avoid this penalty, users often collateralize their loans way above the minimum requirement.
This over-collateralization of loans ensures the safety of the lent funds even if the borrower is unable to pay back the loan.
Well, that sounds “over-secured” now.
Already feel like partially ditching your bank? Hold your horses. Let’s explore how you can lend your crypto and grow your assets, without a bank.
Here’s how you can lend your crypto
All set to start lending your crypto to add an extra stream of revenue and grow your assets? You can do that in multiple ways. But choosing the way that best fits your needs will make your life easier.
Decentralized protocols such as Compound or Aave will lend your crypto for a set interest rate. Once there, you can transfer the crypto you want to lend and wait for it to generate interest for you. As there are no intermediaries involved to keep records, the smart contract assigns you bonds that act as proof of the amount you lent. For example, Compound offers you cTokens for the cryptocurrencies you lend, and more cTokens are added to your wallet when the lent amount earns interests.
If all that sounds a little too complex, you can also lend your cryptocurrencies through centralized platforms. But again, as we always say, with centralized entities you don’t really own your crypto, and they may also charge a service fee.
And how do I get my interest?
Simple. If you’re using Compound, for example, you can send the cTokens back to the smart contract, and the contract will return your initial cryptocurrencies along with the interests you earned. All that said, how you lend your crypto to grow your assets is a choice that still remains yours to make.
Lending is just one small part of a larger DeFi revolution, and be warned – things are about to get pretty exciting. You heard it here first. Let’s check out our School of Block episode on DeFi to see exactly where we’re headed!
Disclaimer: Exchange, lend, and other crypto transaction services are provided by third-party partners. Ledger provides no advice or recommendations on use of these third-party services.