Crypto lending service has been available for years, but it’s only in 2020 that it’s finally taking off.
In this post, we will look at how crypto lending operates, the best crypto lending services, and what the dangers of crypto borrowing are.
What is Crypto Lending
There are two kinds of crypto lending sites available.
Centralized networks such as BlockFi decide who will take out the loan and what the interest rate will be. This centralized systems also need KYC which can prohibit those users from accessing their services.
Decentralized networks such as MakerDAO are regulated by smart contracts. Anyone in the world can gain interest or borrow as long as they have crypto. There is no KYC, and no one can obstruct the root of a loan.
Is There Any Risk of Crypto Lending?
Of course, there is!
Each type of network has its own advantages and drawbacks.
Decentralized systems are awesome because anybody can use them, but they can be buggy, are not always easy to use and some people have lost money.
Centralized systems tend to be more stable and provide loss protection, but they limit who can borrow and charge a higher lending fee than a decentralized platform.
How Does Crypto Lending Work?
Standard bank accounts deliver a low interest rate. $10,000 in a bank account for a year could produce enough interest to buy two cappuccinos and a bagel of cream cheese. It’s no wonder buyers are scrambling for an option.
The alternative is going on in crypto, and the returns can be very high. The prices are changing all the time, but it is likely to receive 6 to 8% interest a year on average. The same $10,000 deposited with a crypto lending platform? After a year, you may be able to afford a mobile phone instead of an insubstantial meal.
Crypto lending platforms operate both ways, as they also allow borrowers to deposit crypto and then borrow. This is considered a collateralized or guaranteed loan, since it is secured by an asset. These concepts are not unique to the crypt.
Hypothecary is indeed a guaranteed loan, since the valuation of the house secures the loan. A credit card is an unsecured debt since the credit is not backed with any asset.
While different crypto lending platforms use different templates, the basic principle is that a platform makes a profit by charging a middleman’s fee.
Investor A deposits crypto with a lending network and gets an 8 percent annual return.
Investor B borrows from the Crypto Lending Network and pays an average interest rate of 10% for the loan.
Crypto Loan Companies usually take a 2% gap between the borrower’s price and the interest received by the saver.
Best Crypto Lending Platforms in 2020
MakerDAO is the first DeFi (Decentralized Finance) site to collect $1 billion worth of funds. While the math that MakerDAO supports is complicated, the concept behind the platform is amazingly basic.
Traders deposit crypto, mainly Ethereum (ETH), and in exchange, they will mint the stablecoin DAI, which represents the value of 1 US dollar (1 DAI = 1 dollar). The minimum collateralization rate is 150 percent so that any $1.50 worth of crypto deposits can be minted to $1 worth of DAI.
It is advised, however that a collateralization limit of 300 percent or more be retained. Recently, a number of traders had their loans closed when the price of Ethereum plummeted on a black Thursday.
Actually, the funding cost on the Creator Site is 0 percent, which is perfect for borrowers. However, this figure fluctuates wildly and has been as high as 20%.
MakerDAO also helps investors to deposit DAI in order to gain money. The current interest rate on savings is 0 per cent, although this will grow as the loan rate increases.
Next up in the top crypto lending platform is BlockFi, a crypto lending platform for a person with a lot of crypto. For eg, an investor who has 10 Bitcoin who needs to use his BTC to secure a car loan.
Like other cryptocurrency financing sites, BlockFi demands that the loan be overcollateralized. For eg, a $50,000 BlockFi loan will require at least $100,000 worth of ETH or BTC. The minimum loan sum for BlockFi is $5,000.
BlockFi pays interest on crypto deposits as well. They actually pay 8.6 per cent of deposits.
Nexo is another crypto lending and borrowing platform that is very common, particularly in Europe. Currently, Nexo’s loan rate is 5.9 percent, while the deposit rate is an incredible 10 percent.
Savers will gain a very competitive interest rate on their Nexo deposits. Unlike other networks, Nexo is completely insured from risks that are very attractive. Nexo also sells a crypto bank card. This makes their website perfect for investors who want to spend their crypto quickly.
4. Aave (Previously called ETHlend)
ETHLend (LEND) was set up as a shared peer-to-peer investing and lending network for cryptocurrencies. It is seeking to address the problem of defaults on loans, protecting lenders from damages suffered as borrowers are unable to repay their loans. It also helps cryptocurrency investors to access the ownership of their digital assets without forcing them to sell those assets.
ETHLend uses the Ethereum blockchain to allow safe lending using a simple peer-to-peer lending platform. In reality, borrowers make a loan request that generates a Smart Contract built on Ethereum. The whole process provides a superior loan service that no middlemen require, making it a fairer and cheaper system for borrowers, and a less costly system for lenders. Owing to blockchain technology, all profits from it.
5. Celsius Network
Celsius Network offers some of the lowest borrowing costs on any crypto network. Currently, it’s just 1% interest to take out a crypto loan on their site. Lenders still have it as well as it’s easy to receive up to 10% of Crypto deposits with Celsius. As for any network, these prices will adjust easily on the basis of supply and demand.
Crypto lending platforms are awesome because they are changing the rule of game in the banking industry. Because they are mostly having a decentralized nature (without no middleman) and it enables people, those who have no access to traditional lending service, can get benefit from it.
They can borrow out loans and pay interest using cryptocurrency — no boundary whatsoever.
Looking at how big the return and gap betweenmost traditional bank accounts and currency crypto lending market, it’s likely that more money will continue to flow into crypto lending platforms in the coming months and years.