Crypto Lending: A Beginner's Guide

The crypto lending sector has seen so much growth over the last few years. Why has it experienced this rise? What guardrails protect adopters of this emerging sector?

These questions weigh on the minds of those who want to venture into the world of crypto lending. This article provides answers.

First, let's go over the basics of crypto lending.

What is Crypto Lending

Crypto lending is the process of putting down crypto for borrowers to access as loans. Borrowers pay interest on these crypto loans. Lenders then earn passive income from interest payments generated from deposited crypto assets.

Crypto Lending Platforms

A crypto lending platform completes the lending process. It serves as the intermediary between the lender and the borrower.

The platform lets users find out how much their crypto is worth by letting them earn interest on it. These interest rates are usually better than those traditional institutions offer.

Crypto lending platforms make money for themselves through interest on loans and fees.

How does Crypto Lending work?

Crypto lending shares similarities with traditional lending. A lending platform offers investors the means to earn interest on crypto deposits. The investor then opens a savings account with the platform to make such deposits.

The lending platform offers these deposited assets to other investors seeking crypto loans. The borrower secures this loan by providing collateral exceeding the loan amount.

The borrower also pays interest on the secured crypto loan. LTV, collateral, and interest rates are the three most important tenets of crypto lending.

Crypto Lending Safety

Despite its popularity and high-interest rewards, safety is a real cause for concern.

Estranged crypto lending platforms like Celsius and Hodlnaut highlight these safety concerns. These lending platforms have paused operations, citing market conditions as the cause. They have also held onto the assets of their users.

This begs the question: Is crypto lending safe?

Safety in crypto lending has a lot of catching up to do when compared to the world of traditional finance. Volatility, security threats, and the lack of adequate regulations render it unsafe. 

It's important to note that several crypto lending platforms are reputable and reliable. Their mode of operation offers a way around these concerns.

Investors interested in crypto lending should learn about the risks involved. They should also seek reputable platforms that mitigate these risks.

Crypto Lending Regulation

Regulatory clarity is critical for any financial services industry. This is also the case for crypto lending. While certain jurisdictions are becoming more clear on their crypto lending stance, others are more opaque than ever. The United States recently made it very clear that they consider crypto lending to fall under SEC regulation. Firms that intend to offer lending services in the US can do so, if they register with the SEC.

Crypto Lending vs. Crypto Staking

Crypto staking is the act of putting up your crypto assets to help a blockchain network verify transactions and keep it running. This pledge earns you interest or staking rewards.

Although crypto staking and crypto lending share similarities, there is a difference between them. The major difference is what your asset is used for during lock-up.

Curious about the difference? Lending or staking crypto—which is best for you? Find out more by reading this guide.

Staking vs. Crypto Lending →

Bottom Line

Crypto lending and lending platforms are here to stay. They have experienced rapid growth over the last 3 years, and the future remains very bright for them.

It's up to you to join the bandwagon and use them to reach your financial goals. If you choose to join, consider its safety, the platforms you want to use, and how you want to earn from it.