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The crypto industry has really evolved. If you've been keen, you’ve certainly noticed the brilliant changes. Stablecoin lending is one of the newest ways to make passive crypto 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 everything 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 BTC, stablecoins are not volatile. Most stablecoins are pegged to fiat currencies to prevent price fluctuations. However, they can also be pinned to other assets.
There are three different types of stablecoins. They include:
- Fiat-backed stablecoins. Fiat currencies, such as the US dollar, back these.
- Crypto-backed stablecoins. These are backed by other cryptocurrencies, such as Ethereum.
- Algorithmic stablecoins. There is no underlying asset backing these stablecoins. 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. For the loan to be approved, the borrower must put up collateral. This makes it less likely that you will 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 the lending platforms.
How Does Stablecoin Lending Work?
The lending process involves three parties. The first are 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 figures out if they are a good credit risk, holds their digital assets, and sets the interest rates on their 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 collateral held 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.
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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 primarily use stablecoin loans as capital to purchase more of particular 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. Also, crypto exchanges have to borrow more stablecoins so that investors can easily change their assets.
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. Even though stablecoin issuers still make a lot of coins during this time of high demand, it's not enough to feed the market. 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 the safety of lending are insurance, regulation, and security. Let’s discuss them in detail below.
Insurance
Even though most lending platforms have good security systems, they still need to take the right steps to deal with losses caused by hacking 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. Most lending platforms these days are insured against loss, so you don't have to worry about losing your digital assets if you invest with them.
Regulation
Most stablecoin lending platforms are usually regulated, meaning everything goes through a central exchange. As a result, established rules govern borrowers, lenders, and interest rates. The laws help make sure that lending platforms are open and don't put their customers' digital assets at risk. This protects customers from being taken advantage of by rogue crypto lending platforms.
Security
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 hacking. For instance, Crypto.com was recently hacked, and about $15 million of Ether was stolen. This happened because some clients reported strange activity on their accounts, which made the platform stop transactions and look into what was going on. So, your money could be at risk if a lending platform doesn't have good security systems.
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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 platform that is both regulated and insured is more likely to follow all the rules and keep your crypto assets safe. Do your own research to find out if the company is regulated and has insurance. You could also read its fine print to see how it protects clients from theft and other issues. This will also help you find out exactly what their insurance covers, since some policies don't cover things like having your wallet 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
On a lending platform, you can use fiat money, stablecoins, or other cryptocurrencies to lend money or earn interest. 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 involved in crypto trading.
Look Out for Exaggerated Interest Rates
Most stablecoins offer alluring interest rates. So, fake crypto lending platforms take advantage of this by offering rates that are too good to be true to attract crypto investors who don't know what's going on. So, always look at the stablecoin interest rates that other well-known lending platforms offer. This will help you spot the ones that aren't realistic. That will save you from investing on 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? Whether demand continues to outpace supply will be the main determining factor in this.
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 more affordable. However, many people must learn about cryptocurrency lending and invest in it for this to happen. This is probably possible because lending stablecoins comes with interest rates that could encourage more people to lend their stablecoins, which would increase the 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 is needed 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:
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:
Pros and Cons of Stablecoin Lending
If you know the pros and cons of stablecoin lending, you'll be able to make investments with a clear head.
Pros
- 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.
Cons
- 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 great investment that you should think about, especially because the interest rate is so appealing. 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. This article should have helped you do the same thing, so you can now invest in it with confidence.
