Blockchain technology is certainly one of the most exciting innovations in the modern era, with immense possibilities for revolutionizing a wide array of products and services. This technology is what powers cryptocurrencies, the digital alternative to fiat money (US dollars, euros, etc.). As the appeal of this new technology becomes more apparent, it is no wonder that traditional finance is slowly but surely making its way into the crypto sphere. Naturally, this refers to the lending industry as well. Simply put, crypto lending is the practice of lending digital assets via crypto exchanges or various lending platforms with an interest rate.
How does crypto lending work?
Cryptocurrency lending services connect borrowers to lenders on their platforms. Lenders receive their cryptocurrencies back once the borrower pays back the loan. Loans on most platforms are backed by tangible assets, such as real-estate. Other platforms allow users to take loans backed by cryptocurrencies.
Although crypto lending differs slightly depending on the platform you are using, the general idea is the same. A lender makes his or her holdings available to loan at a set rate. This could be on an exchange or a lending platform. People usually lend crypto assets for two reasons: personal use and margin lending. In margin lending, once the lender’s funds become available, a borrower who thinks a particular coin will face a price increase will request to lend some of the lender’s funds from the exchange. A couple (or more) days later, the borrower will pay back the borrowed crypto assets, with the interest rate.
Projects offering cryptocurrency lending services
The list of platforms offering crypto lending services is quite long and continues to grow. Although they have differences in their modus operandi and services provided, here are some of the best platforms you should consider if you are interested in crypto lending:
1) Vleppo - Vleppo is a European FinTech company developing a unique P2P cryptocurrency market on the Komodo Platform, with financial services that include crypto lending administration. In addition to the Vleppo Platform for transactions, its products include Vleppo Value Matrix, a valuation database for determining a potential market value for unlisted digital assets; Vleppo Research, which offers insight on different crypto coins and other digital assets offered as collateral to determine a maximum lending value to suit the asset’s perceived risk; and a VLX token empowering stakeholders to generate revenue through the platform without having to liquidize their asset.
2) Nexo - Powered by Credissimo, Nexo is a blockchain company that gives its users a possibility to make instant crypto loans, allowing crypto owners to use their holdings as collateral, then withdraw cash in over 40 fiat currencies. This gives the crypto asset holder instant access to cash while retaining ownership of their assets.
3) SALT Lending - A platform providing blockchain-backed loans, SALT (short for “Secured Automated Lending Platform”) allows using cryptocurrencies (currently bitcoin, ethereum, litecoin, and dogecoin) as collateral in exchange for a cash loan.
4) ETHLend - Running on the Ethereum Network, ETHLend is a decentralized lending application offering zero-fee P2P lending via smart contracts, allowing a borrower and a lender to decide on the essential loan details without a third-party intervention.
5) Crypto Lend - Primarily focused on margin lending, Crypto Lend is a platform that offers assistance on margin lending at Bitfinex, Poloniex, and Quione, as well as on funding at Bitmex. Utilizing a technology known as a lending bot, the platform helps lenders earn an interest on their digital assets.
Why should people venture into crypto lending?
Cryptocurrency lending comes with numerous advantages. First of all, it gives lenders a chance to generate income by lending crypto to other users, offering the digital assets that they have at their disposal but are not currently using or planning to sell in the near future. This is a lucrative opportunity as this type of lending can generate a much higher interest rate in comparison to traditional savings accounts.
Utilizing blockchain technology also means that issuing loans could be cheaper and accompanied by more transparency. At the same time, the technology’s immutable nature could reduce risks of fraudulent activities.
Lending crypto is also a faster process than traditional lending as creating a lender account on an exchange or cryptocurrency lending platform takes only a few minutes at the most, while setting up a bank account takes substantially longer (a matter of weeks sometimes).
Additionally, most cryptocurrency lending platforms also have tools in place that make sure that the funds and interest rates are automatically paid back to the lender.
Things you should watch out for
No part of the financial industry (crypto finances included) is ever entirely risk-free. Although risks are generally low in the crypto lending sphere, there are nevertheless some things you should be careful about when you decide to venture into the field yourself.
First, the cryptocurrency market is notorious for the non-existence or inconsistency in the regulatory framework across the world. While some governments are banning the use of cryptocurrencies altogether, others are slowly approaching the subject, more or less successfully. Regardless, there is still no global regulatory consensus on the market level. Due to this problem, legal issues are treated differently depending on the country of your current residence or the jurisdiction the lending platform adheres to, which could lead to other bureaucratic problems.
Secondly, some lending platforms charge high commission rates from the interest rates the borrowers pay. Interest rates are also set on a daily basis, instead of covering the full loan period, so there is no way of guaranteeing your daily profit.
There is also the fact that exchanges have been exposed to hacking attacks in the past, so you should take extra effort to find a platform you can trust, and a useful rule of thumb in the investment business is that you should never lend more than you can afford to lose, regardless of the currency (digital or fiat) or the method of investing.
In summation, lending of cryptocurrencies offers an easy opportunity for earning passive income if you have digital assets that you do not need at the moment or are not planning to use any time soon. It is also an excellent option for all who are interested in cryptocurrencies and trading but do not have extra time on their hands for dealing with the challenges of day trading. Despite all the perks, some caution is nonetheless advisable. If you are unsure which companies are worth your trust, there are platforms out there to help you out. As with all financial decisions, do your due diligence before you lend crypto or take out a crypto loan.