The BEST Crypto Lending Platforms
Crypto lending has been around for years, but it’s really only in 2020 that it’s taken off.
In this article, we’ll look at how crypto lending works, the best crypto lending platforms, and what the risks of taking out a crypto loan are.
What is Crypto Lending (What are Crypto Lending Platforms)?
There are two types of crypto lending platforms.
Centralized platforms like BlockFi decide who can take out a loan and what the interest rate will be. These centralized platforms often require KYC, and they may block certain users from using their service.
Decentralized platforms like MakerDAO are governed by smart contracts. Anyone in the world can earn interest or take out a loan, so long as they have crypto. There is no KYC, and nobody can block a loan from being originated.
Is Crypto Lending Safe?
Each type of platform has its advantages and disadvantages.
Decentralized platforms are great because anyone can use them, but they can be buggy, are not always easy to use, and some users have even lost funds.
Centralized platforms tend to be more secure and have insurance against loss, but they restrict who can take out loans and may charge a higher rate for a loan than a decentralized platform.
How Do Crypto Lending Platforms Work?
Traditional bank accounts offer a meager interest rate. $10,000 in a bank account for a year might generate enough interest to buy two cappuccinos and a bagel with cream cheese. It’s no wonder that investors are looking for an alternative.
That alternative is happening in crypto, and the returns can be really good. The rates are changing all the time, but on average it’s possible to earn 6 to 8% interest per year. That same $10,000 deposited with a crypto lending platform? After a year, you may be able to buy a new phone instead of an insubstantial breakfast.
Crypto lending platforms work both ways, as they also enable borrowers to deposit crypto and then take out a loan. This is called a collateralized or secured loan, because there is an asset securing it. These terms are not unique to crypto.
A mortgage is also a secured loan, as the value of the house secures the loan. A credit card is an unsecured loan, since the credit is not secured by any asset.
How Do Crypto Lending Platforms Make Money?
Although different crypto lending platforms use different models, the general idea is that a platform makes a profit by collecting a middleman fee.
Here’s an example.
- Investor A deposits crypto with a lending platform and receives an annual 8% return.
- Investor B takes out a loan from a crypto lending platform and pays an annual 10% interest rate for that loan.
- The crypto lending platform keeps the 2% difference between the price the borrower pays and the interest that the saver earns.
Let’s look at some of the most popular crypto lending platforms.
Top 5 Crypto Lending Platforms
MakerDAO is the first DeFi (Decentralized Finance) platform to accrue $1 billion worth of assets. Although the math that supports MakerDAO is complex, the idea behind the platform is surprisingly simple.
Traders deposit crypto, mostly Ethereum (ETH), and in return, they can mint the stablecoin DAI, which mirrors the value of 1 US dollar (1 DAI = 1 dollar). The minimum collateralization rate is 150% so for each $1.50 worth of crypto a trader deposits, they can mint $1 worth of DAI.
However, it’s recommended to maintain a collateralization rate of 300% or more. Recently a lot of traders had their loans closed out when the price of Ethereum collapsed on black Thursday.
Currently, the cost of borrowing on the Maker platform is 0% which is great for borrowers. However, this rate fluctuates wildly and has been as high as 20%.
MakerDAO also allows investors to deposit DAI to earn interest. The current interest rate on deposits is 0%, but this will rise as the borrowing rate rises. To find out more about MakerDAO you can check out their website, which is loaded with information.
Next up in the top crypto lending platforms is BlockFi, a crypto lending platform for a person with a lot of crypto. For example, an investor who has 10 Bitcoin and wants to use his or her BTC to collateralize a car loan.
Like other cryptocurrency lending platforms, BlockFi requires the loan to be overcollateralized. For example, a $50,000 loan on BlockFi would require at least $100,000 worth of ETH or BTC. The minimum loan amount on BlockFi is $5,000.
BlockFi also pays interest on crypto deposits. They’re currently paying 8.6% on deposits and they accept the following assets,
3) Celsius Network
Celsius promises some of the lowest borrowing rates out of any crypto platform. Currently, it’s just 1% interest to take out a crypto loan on their platform. Lenders also have it good as it’s possible to earn up to 10% on crypto deposits with Celsius. As with every platform, these rates can change quickly based on supply and demand.
The advantage of using Celsius is that they support so many crypto assets. The picture below shows just some of the assets that can be deposited to earn interest with Celsius.
Nexo is another crypto lending and borrowing platform that’s quite popular, especially in Europe. Currently, the borrowing rate on Nexo is 5.9% while the saving rate is an awesome 10%.
Unlike other platforms, Nexo is fully insured against losses which is a very desirable perk. Nexo also offers a crypto banking card. This makes their platform ideal for investors who want to easily spend their crypto.
5) Compound Finance
Recently, Compound has become one of the most popular crypto lending platforms thanks mainly to the distribution of the COMP token. In order to decentralize their platform and get more people involved in governance, Compound decided to airdrop (give for free) COMP to lenders and borrowers on their platform.
This incentivized investors to use the Compound platform and proved to be one of the major drivers of the “yield farming” craze.
Yield farming aside, Compound originates loans and pays interest on deposited assets just like any other crypto lending platform. At the time of writing, Compound pays 3% on DAI deposits and charges 4% for a DAI loan. Current market rates are available here.
If you aren’t super familiar with DeFi platforms, such as Compound, you can use solutions like Exodus to easily access Compound.
Bitcoin Lending Platforms
BlockFi is the most popular Bitcoin lending platform since they store the Bitcoin securely and have insurance to guarantee against losses.
However, another option is to convert BTC into an Ethereum token like WBTC and then use that in DeFi. Since smart contracts cannot yet be written on top of Bitcoin, there is no possibility of the Bitcoin network developing its own DeFi network.
Is Bitcoin Lending Safe?
Yes and no.
The problem with Bitcoin lending is that it will always be controlled by a centralized company like BlockFi. That means KYC and the collection of user data. This data is vulnerable to theft as BlockFi learned when they were hacked in May of 2020. While the hacker didn’t steal any BTC, they did steal personal information like the names and addresses of account holders.
This is a very bad situation. The hacker can sell that information on the dark web and criminals have been known to go to great lengths to try and steal crypto from investors they believe to be large holders of crypto, commonly known in the crypto space as whales.
Data storage aside, Bitcoin lending can be safe because centralized companies tend to store Bitcoin securely. They also keep insurance against losses, similar to a regular bank account.
Crypto Loans without Collateral
Platforms like Aave have begun to offer “undercollateralized” crypto loans, which is the first step toward non-collateralized loans. However, as of yet crypto credit lines without collateral do not exist.
The work is being done though, and the first platform to figure out non-collateralized crypto loans is going to make a lot of money and perhaps become the best crypto lending platform!
Until then, all crypto lending will require some form of collateral to be deposited in order to guarantee the loan.
Out of the Banks, into Crypto Lending
Crypto lending platforms are awesome because they serve two roles: they allow borrowers to take out loans and they also pay interest on crypto assets.
Given the paltry interest rates that most traditional bank accounts yield, it’s likely that more money will continue to flow into crypto lending platforms in the coming months and years.
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This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.