Crypto Lending Safety: What You Need to Know

Like some other sectors within the crypto industry, in some countries, the crypto lending space lacks enough regulation. As a result, several products and services like crypto loans, crypto savings accounts, and interest accounts do not comply with existing financial laws.

Despite its phenomenal growth over a short period, the lack of regulation for this industry raises concerns about the safety of investors. Beyond a lack of regulation, many other factors make investors wary of investing in this market.

For example, some crypto lending companies are uninsured. Also, the crypto markets are prone to experiencing considerable swings in price value due to market volatility. These concerns have led many to wonder: Is crypto lending safe? What are the safest crypto lending platforms? How can I select a safe crypto loan platform?

This article will focus on crypto lending safety. Among other topics, we will discuss some of the safety issues currently plaguing crypto lending platforms. Additionally, we will review some of the safest crypto lenders available today. Finally, this article will offer safety tips for potential investors who wish to join the crypto lending industry.

What are the Safety Issues With Crypto Lending?

1. Some Crypto Deposits Lack Insurance

Since the crypto lending industry is in its early days, some platforms operating within this sector are uninsured. Crypto platforms without insurance will be unable to compensate the users if there are hacks or thefts.

Due to this factor, users who make crypto deposits on these platforms risk losing all of their assets. Investors can also lose their crypto assets if their preferred crypto lending platform goes bankrupt.

Despite a small number of crypto lending platforms being uninsured, the crypto lending industry has continued to experience immense growth. A major reason for its growth is closely attached to the interest rates offered by crypto lenders. For example, lending Bitcoin can generate up to 9.42% annual yield, and some tokens can give yields higher than 100%.

2. Cyber-attacks on Your Stored Crypto Assets

The amount of crypto assets held by crypto lending platforms makes them a potential target for cyber attacks. Currently, several top-rated platforms in this space rely on custodial assets managers like Bitgo and Ledger Vault for storing their digital assets.

However, these platforms can not provide a 100% guarantee of the safety of digital assets stored in their cold wallets. Additionally, some crypto lending platforms do not use custodial asset managers. This increases the risks attached to the safety of crypto deposits from investors.

3. Smart Contracts can be Faulty

Smart contracts form the building blocks of any decentralized finance platform. These contracts are made up of lines of code that govern the operations of all DeFi protocols. Since human developers usually write smart contracts, there is always a possibility of mistakes embedded into the lines of code.

Such mistakes can lead to operational and security risks. These mistakes can seriously affect the performance of critical features like interest payments and collateral liquidation on a DeFi lending protocol.

Smart contracts operate without input from an intermediary in the background. In case of errors in the smart contract, investors can not hold anyone responsible if the smart contract fails and you lose all your cryptocurrencies.

4. Lack of Proper Crypto Regulations

Unlike most mainstream asset classes, in some countries, there is a lack of regulation. This is particularly true for DeFi platforms. While a lack of rules is suitable for decentralized systems, investors lack legal certainty. In DeFi platforms, these legal challenges are more evident as there are no legal contracts to bind them in today's legal framework.

So if you lose your assets on a DeFi platform, who can you sue? You won't be able to take any legal action in most cases. However, the situation is slightly different regarding CeFi, as you can hold the platform provider legally responsible if it doesn't fulfill its contractual obligations.

5. Crypto is Volatile

The volatile nature of the crypto markets is another reason for safety concerns expressed by many potential investors. The crypto market is highly volatile, and investors risk seeing their assets lose value if their digital assets experience a massive price drop.

Although crypto lending platforms like Nexo are built to withstand the volatility associated with cryptocurrencies, these platforms can become riskier when prices fluctuate too much.

The Safest Crypto Lending Platforms

Although relatively young, the crypto lending sector has seen an increase in patronage over the past few years. This section of our guide will reveal some of the safest crypto lending platforms.

Nexo

This crypto lending platform provides access to crypto-backed loans. In terms of investment opportunities, Nexo offers up to 12% APY on stablecoins like USDT, DAI, and USDC. Additionally, investors can earn up to 17% APY on the TerraUSD (UST) stablecoin.

You will find Nexo's certifications on its licenses and registrations page. Additionally, Nexo is covered by a $375 million insurance policy due to its affiliation with BitGo and Ledger Vault.

CoinLoan

CoinLoan is another loan platform that provides institutional borrowers access to fiat currency and crypto loans. The CoinLoan interest accounts allow investors earn up to 12.3% APY for staking the CoinLoan token (CLT). Users can also earn up to 10.3% on stablecoins with this platform.

The platform is duly registered and regulated by several European-based regulators. A $100 million insurance policy also covers CoinLoan due to its affiliation with BitGo.

Crypto Lending Safety Tips

The crypto lending space offers investors opportunities to access several investment opportunities. However, investors need to select a safe and reliable crypto lending platform to earn interest on their crypto deposits. This section of our article provides tips on factors to consider when choosing a crypto lending platform.

Choose Established Crypto Platforms

Investors should watch top-rated crypto lending platforms available within their jurisdiction. Before settling on your preferred crypto lender and making crypto deposits, users must check the economic health of all of these platforms.

Select Platforms With Insurance Policies

Investors are encouraged to select platforms that offer adequate insurance cover to their users. You get private insurance policies covering technical risks and asset theft with some centralized traditional platforms. Many of these platforms also benefit from insurance cover provided by their custodial asset managers.

Always Check Smart Contracts

Smart contracts used on all DeFi platforms are usually available to the public. With the necessary technical knowledge, you can check the smart contracts yourself or trust the developers and the community behind the platform.

Invest In Stablecoins

Investors can easily avoid volatility associated with the crypto markets by investing in stablecoins. Specific platforms even offer a higher interest rate on stable coins, and you can also opt to receive interest payments in stablecoins.

The value of stablecoins is tied to an underlying stable value asset, like the US dollar USDT and USDC. Unlike Bitcoin, you do not have to face the same volatility risk with stablecoins, as their value fluctuates only as much as the assets they are tied to.

Conclusion

Similar to traditional financial institutions, crypto lending platforms are responsible for ensuring the safety of their investors. For this reason, many lending platforms are improving the quality of service they offer to their users.

Additionally, financial regulators like the Securities and Exchange Commission have begun to develop laws for the crypto lending industry. A combination of these factors and more innovation in this space will increase the number of reliable and safe crypto lenders in the future.

For now, investors are urged to research the safety issues highlighted in this article carefully. Additionally, investors must pay attention and use the safety tips in this article when selecting a reliable and safe crypto lending platform.

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