All you need to know about stablecoin lending.
The crypto industry has really evolved. If you've been keen, you’ve certainly noticed the brilliant changes. Stablecoin lending is among the latest inventions in the industry that has made it easier to earn crypto passive income. However, it is still a mystery since many people don’t know how it works. If that sounds like you, then this article is for you. Today’s post will explain all you need to know about stablecoin lending.
Let’s jump right in, shall we?
What Is a Stablecoin?
A stablecoin is a cryptocurrency that offers stable value in the crypto market. So, unlike bitcoin, stablecoins are not volatile. Most stablecoins are pegged to fiat currencies to prevent price fluctuations. However, they can also be pegged to other assets.
There are three different types of stablecoins. They include:
Fiat-backed stablecoins. These are backed by fiat currencies such as the US dollar.
Crypto-backed stablecoins. These are backed by other cryptocurrencies such as Ethereum.
Algorithmic stablecoins. These stablecoins are not backed by any underlying asset. But they use a similar mechanism to that of a central bank to control their supply and demand.
What is Stablecoin Lending?
This involves lending stablecoins to crypto borrowers to earn interest. The borrower must provide collateral for the loan, making it less likely to lose your digital assets. Therefore, stablecoin lending can be a great way to earn passive income.
You receive interest payments daily, weekly, or monthly, depending on your lending platform. The interest rates vary with lending platforms.
How Does Stablecoin Lending Work?
The lending process involves three parties. The first is usually the stablecoin lenders. This could be anyone, from crypto hodlers to investors looking to make money from their crypto assets.
Borrowers are the second party and are mostly individuals or entrepreneurs looking for funds to start or expand their businesses.
The crypto exchange represents the third party responsible for connecting lenders and borrowers. It uses in-house risk management methods to do so. So, it assesses their creditworthiness, holds digital assets, and sets interest rates for the loans.
Here is what the lending process looks like:
The borrower approaches the lending platform to apply for a stablecoin loan.
The platform verifies if the borrower meets the requirements for the loan.
The crypto lending platform then asks for collateral.
Once all the conditions are met, the lender releases digital assets to the borrower.
The lender receives interest payments for the loan.
The lending platform returns the held collateral to the borrower after they pay the loan.
Most lending platforms follow this process when giving loans. However, confirm with yours to ensure you understand the exact steps involved before engaging.
Click here to dive into how stablecoin lending works.
Why Are Stablecoin Lending Rates High?
Stablecoin lending has huge demand, especially from crypto payment processors and huge institutional traders. Institutional traders mostly use stablecoin loans as capital to increase their leverage on certain cryptocurrencies. Crypto payment processors take stablecoin loans to help them quickly reimburse lenders.
Stablecoins are also a safe haven for crypto traders. Many traders switch to stablecoins when volatile cryptocurrencies are in a bear market. This enables them to avoid the volatility that could easily cause losses. By frequently switching to stablecoins, they contribute to the high demand. Crypto exchanges are also forced to borrow more stablecoins to enable investors to convert assets easily.
As you can see, the demand for stablecoins is always pretty high due to a variety of factors. However, their supply is still quite low. Although stablecoin issuers still produce many coins during this demand period, it still doesn’t satisfy the market’s hunger. Therefore, the increased supply does not help lower interest rates. Plus, stablecoin lenders charge premium rates since they know there is ready demand in the market. This means that lending stablecoins earns you great returns while borrowing forces you to pay expensive rates.
Is Stablecoin Lending Safe?
Although stablecoin lending involves some risks, it is a safe investment. The main factors that determine lending safety are insurance, regulation, and security. Let’s discuss them in detail below.
Although most lending platforms have reliable security systems, they still need proper measures to handle losses from hacks or other security breaches. For instance, Coincheck was hacked in 2018 and lost over $500 million worth of crypto. This forced the platform to compensate clients, which would have been easier with insurance. Fortunately, most lending platforms nowadays are insured against loss, meaning you can invest with them without worrying about losing your digital assets.
Most stablecoin lending platforms are usually regulated, meaning everything goes through a central exchange. Therefore, set rules govern the borrowers, lenders, and interest rates. The laws help ensure lending platforms remain transparent and don’t jeopardize their clients’ digital assets. This protects customers from being taken advantage of by rogue crypto lending platforms.
A lending platform must guarantee top-notch protection for the customer’s digital assets. Fortunately, most platforms nowadays have excellent security systems. However, there is still some risk of hacks. For instance, Crypto.com was recently hacked, and about $15 million of Ether was stolen. This happened after some clients complained about fishy activities on their accounts, forcing the platform to pause transactions and investigate. Therefore, if a lending platform does not have reliable security systems, your money may be at risk.
Click here to dive into stablecoin lending safety.
How to Stay Safe When Lending Stablecoins
Here are a few ways to stay safe from the risks involved with stablecoin lending:
Invest with Insured and Regulated Lending Platforms
A regulated and insured platform will likely follow all the rules and faithfully protect your crypto assets. Therefore, always do your own research to see whether the company is regulated and insured. You could also read its fine print to see how it protects clients from theft and other issues. Additionally, this will enable you to determine exactly what their insurance covers because some don’t cover things like your wallet getting hacked.
Nexo is an excellent example of a regulated and insured lending platform. Its insurance is worth over $775 million, and Nexo plans to increase it to $1 billion.
Lend and Receive Interest in Stablecoins
You can lend or earn interest on a lending platform in fiat currencies, stablecoins, or other cryptocurrencies. Stablecoins serve this purpose best as they aren’t volatile. Therefore, your earned interest will maintain its value until you lend it again. So, using stablecoins allows you to protect your money, especially if you aren’t crypto trading.
Look Out for Exaggerated Interest Rates
Most stablecoins offer alluring interest rates. Therefore, fraudulent crypto lending platforms take advantage of this to offer unrealistic rates to attract unsuspecting crypto investors. So, always check the stablecoin interest rates other established lending platforms offer to help differentiate unrealistic ones. That will save you from investing with crooked platforms.
The Future of Stablecoin Lending
Stablecoin lending offers higher interest rates than a traditional savings account. However, will these rates remain high even in the future? This will mostly be determined by whether demand will continue overpowering supply.
An increase in supply in the future is probably the only thing that might help lower the current rates. If that happens, stablecoins will be more available for lending, making them affordable. However, many people must learn about cryptocurrency lending and invest in it for this to happen. This is likely possible since stablecoin lending offers interest rates that may attract more people to lend their stablecoins, hence boosting supply.
How to Lend Stablecoins
Lending stablecoins is usually a walk in the park. This simple guide explains the exact steps to follow to lend stablecoins:
Choose a reliable and trustworthy crypto lending platform. Therefore, research to see the platform’s reputation. Online reviews are a great place to see what other crypto investors say about the lending platform.
Sign up to the platform and complete any needed verification. Also, platforms have varying terms and conditions. So, carefully read all of them to help understand what you are getting into from the outset.
Decide on the specific stablecoins you want to lend.
Start investing in your digital assets to start earning interest.
Which Stablecoins Should You Lend?
There are many stablecoins in the market with varying interest rates. Therefore, check out different options and pick the most rewarding and friendly one. These stablecoins are available on different platforms, thus making them easier to invest in. Below are the most popular options to consider:
|Popular Stablecoins to Lend||Interest Rate (APY)||Advertising Policy|
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USD Coin (USDC)
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Where to Lend Stablecoins
Most crypto lending platforms offer different types of stablecoins, from fiat-backed to crypto-backed. However, some platforms don’t offer a wide variety to choose from. The platforms that offer great stablecoins with high returns are:
Invite friends and earn up to $1,000, paid out in Bitcoin
775,000,000 USD for theft, hacking, loss of keys and more
Earn 2% more when opting to earn interest in NEXO tokens
No current offers
$100M insurance included
Earn higher interest and pay lower fees when staking their CLT token
USD Coin (USDC)
Pros and Cons of Stablecoin Lending
Understanding the advantages and disadvantages of stablecoin lending will enable you to invest with an unbiased mind.
Unlike other crypto investments such as mining, stablecoin lending offers an easy way to invest in digital assets and earn passive income.
It offers high interest rates.
Crypto lending platforms are regulated and insured, lowering the chances of losing your assets.
It also offers an easy way for borrowers to access loans, provided they have the needed collateral.
There is still some risk of losing your digital assets to online hacks.
Some lending platforms have limited terms and conditions that dictate how you earn interest. For instance, some platforms only allow you to lend a few coins, which may not even include the stablecoin you wanted to invest in.
Stablecoins are still under scrutiny of being regulated, and it’s unclear what their future looks like.
Who Is Stablecoin Lending for, and Should You Invest in It?
Stablecoin lending is a fantastic investment that you should definitely consider, especially due to its enticing interest rate. However, you shouldn’t just blindly jump into it as there are some risks to be aware of. Therefore, stablecoin lending is for people who have taken the time to research and fully understand it. Hopefully, this article has helped you achieve the same, and you can now comfortably invest in it.