“Hey there, crypto enthusiasts! Are you looking for a way to earn passive income from your Crypto Lending?
If yes, then crypto lending might be the perfect solution for you.
It is a decentralized finance(DeF) service that allows you to lend out your crypto assets to borrowers in exchange for interest.
This can be a great way to earn extra money on your crypto. While also helping to grow the DeFi ecosystem.
Table of contents
- What is Crypto Lending?
- How does Crypto Lending Work?
- Bitcoin DeFi Lending
- How You Can Earn Money in Crypto Lending?
- Table showing the Latest Crypto Lending Rates
- What are the Benefits of Crypto Lending?
- What are the Risks of Crypto Lending?
- Pros of DeFi Lending Platforms
- Current Crypto Lending Platforms
- Bitget Enters the Market
- Coinbase Launches Crypto Lending Service for Institutional Investors
- Helix to Expand Crypto Lending Platform with $2m rise.
- Is Crypto Lending Safe?
What is Crypto Lending?
Crypto lending is a process where lenders deposit their cryptocurrency into a lending platform in exchange for regular interest payments.
Borrowers can then use the platform to secure loans using cryptocurrency holdings as collateral.
How does Crypto Lending Work?
There are two main types of crypto lending platforms: decentralized crypto lenders and centralized crypto lenders.
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1. Centralized Crypto Lending Platform (CeFi)
These platforms act as an intermediary between lenders and borrowers. They typically have more significant KYC/AMLA requirements and offer a wider range of products and services, such as margin trading and staking.
You must be aware that these measures aim to confirm an individual’s identity and prevent unlawful conduct, such as money laundering and tax evasion.
In 2022, several major CeFi crypto firms like BlockFi, Celsius, and Voyager fell into bankruptcy due to the Luna token crash.
And overall, market events. Above all, these events highlighted some of the flaws with CeFi, the importance of self-custody, and responsible crypto lending strategies.
While the industry was significantly impacted by the fall of many leading players, CeFi crypto lending platforms are still in business today. Some examples of existing CeFi lending platforms include Nexo and Ledn.
Pros of CeFi Lending Platforms
For you, the greatest benefit of CeFi lending is its ease of use. With the recent emergence of DeFi, you can get intimidated by crypto assets, and lack the knowledge of digital wallets and lending protocols.
Overall, a CeFi crypto lending platform mimics much of the experience traditional lending you are already accustomed to.
CeFi lets you connect various types of payment methods, including bank accounts, debit cards, and wire transfers to buy Bitcoin.
These CeFi platforms which provide crypto lending services help you with taxation and other legal documentation necessary.
This is something that is not provided in DeFi, which can be complex and time-consuming for you to figure out for yourself.
Cons of CeFi Crypto Lending Platforms
The most prominent risk CeFi poses is the looming potential for the counterparty to not fulfill its part of its contractual obligations.
In using CeFi lending platforms, you must give up custody of your funds, relinquishing them to be managed by the central institution.
You will lack insight into transactions within CeFi and the management of funds behind closed doors.
Human error and bad judgment can have detrimental effects on how CeFi organizations operate.
Some lending platforms may employ policies and strategies that may put your funds at risk.
Leaked data and hacks to CeFi organizations can lead to a number of crimes, such as stolen funds, fraud, and identity theft.
2. Decentralized Crypto Lending Platform (DeFi)
This type of platform is a peer-to-peer platform that uses smart contracts to automate the lending process.
They typically have fewer KYC/AML requirements and offer more competitive interest rates.
In simple words, Lender deposits crypto into a lending platform. The platform lends out the cryptocurrency to borrowers.
The borrower pays back the loan plus interest to the platform. The platform pays the interest to the lender.
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First, borrowers typically need to deposit collateral to secure a crypto loan. The amount of collateral required will vary depending on the platform and the type of loan.
If the borrower fails to repay the loan, the platform can sell the collateral to cover their losses.
One of the uses of crypto lending is flash loans, which let you borrow massive liquidity without putting up any collateral and buy only within a single block.
By far the most common use for flash loans is to take advantage of arbitrage opportunities. Finding where different exchanges offer varying interest rates.
If you take out a flash loan but can not repay it before the block is validated, the transaction will be canceled.
Therefore the block is validated, the transaction will be cancelled, rendering it non-existent and as if it never happened.
Given that executing flash loans requires a fair bit of technical knowledge, and arbitrage opportunities arise somewhat infrequently, it is unlikely that most people will use flash loans.
There are a number of unique and useful use cases for crypto lending, despite the over-collateralization requirements for the borrowing side of the equation.
But regardless of whether you want to lend, or borrow, it’s important to understand how CeFi and DeFi differ. Even though both platforms aim to achieve the same goal, they offer services in different ways.
Basically, when you plan to HODL your crypto assets and have no plan to sell soon, you can lend the crypto assets and earn interest for that period. The interest earned is also called ‘crypto dividends’.
Bitcoin DeFi Lending
Essentially, Bitcoin DeFi has rapidly grown in the last couple of years, thanks to the amount of developers building on top of Bitcoin.
With the emergence of Bitcoin DeFi, many of you are starting to bring your BTC out of storage to earn interest payments, all while directly interacting on the blockchain.
If you are new to DeFi, this type of DeFi lending is conducted through a decentralized application(dApp) and governed by automated smart contracts rather than a centralized authority.
These smart contracts are often open-source, allowing anyone to view and audit the lending protocol’s coding for themselves.
Through a decentralized lending platform, you have significantly more transparency and control over your funds.
All transactions are publicly through a distributed ledger, meaning anyone can verify activities on the blockchain.
Chiefly, DeFi is a fundamental pillar of cryptocurrency, blockchain, and Web3 entirely.
With these technologies, the world is trending towards systems that empower the end user and remove reliance on central entities.
This way, you can carry out peer-to-peer transactions that optimize the efficiency of crypto lending and borrowing.
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How You Can Earn Money in Crypto Lending?
Chiefly, Crypto Lending can be a good way to earn passive income and access liquidity without having to sell your cryptocurrencies.
You as a lender can earn interest on your cryptocurrency holdings by depositing them into a lending platform.
And then, you can access cash or other cryptos without having to sell your existing holdings.
Typically, you will see that crypto platforms offer competitive interest rates than traditional banks.
Essentially, decentralized crypto lending platforms off more privacy and security than centralized platforms.
Steps to follow to start earning money from Crypto lending platforms
a. Choose a Reputable Lending Platform
There are many different crypto lending platforms available. So, it’s important to do your research and choose one that has a good reputation and track record. You can read reviews from other users and check the platform’s security features too.
b. Create an account and deposit your Cryptocurrency
Once you have chosen a lending platform, you will need to create an account and deposit your crypto. Most platforms support a variety of different cryptocurrencies, so you can choose the ones that you want to lend out.
c. Choose a Lending Term
Some lending platforms allow you to choose the length of time for which you want to lend out your crypto. This can affect the interest rate that you earn. For example, some platforms offer higher interest rates for a longer lending term.
d.Start earning Interest
Once you have deposited your crypto and chosen a lending term, you will start earning interest on your deposits. The interest rate will vary depending on the lending platform, the crypto that you are lending, and the lending term.
Table showing the Latest Crypto Lending Rates
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What are the Benefits of Crypto Lending?
1. You earn passive income. Also, you can earn interest on your crypto assets by lending them out.
2. Basically, crypto lending is a key part of the DeFi ecosystem which is a new and innovative way to use blockchain technology.
3. These crypto-lending platforms often offer higher rates than traditional ones.
4. You can choose to lend your crypto for a short or long term, depending on your needs.
What are the Risks of Crypto Lending?
Crypto lending is a relatively new and risky investment, so it’s important to understand the risks involved in it.
a. The value of Cryptocurrencies can fluctuate widely, which can impact the value of collateral and the borrower’s ability to repay the loan.
The value of your crypto assets could go down, which could mean you lose money on your loan.
b. If a borrower defaults on the loan, you lose your crypto assets.
c. The crypto lending platform could be hacked, so it’s important to choose a reputable platform with strong security measures in place.
Which is better Staking or Liquidity?
Generally, staking offers lower returns compared to yield farming and liquidity mining.
Yield farming offers higher returns than staking, as it involves moving your cryptos between different liquidity pools to find the best ROI.
Is Crypto Interest an Income?
Yes, crypto interest is considered ordinary income subject to income tax. Stablecoins are taxed similarly to other cryptocurrencies. It is subject to ordinary income tax.
What is DeFi staking Income?
In staking, you can earn rewards by locking up your tokens for a fixed amount of time, depending on the plans offered by the operator.
Every blockchain will require a minimum amount of tokens before it can add the user as a validator., which in the case of the Ethereum blockchain is 32ETH.
What is Bitcoin Lending?
No doubt, as a digital asset, Bitcoin has proven itself to be the most secure, decentralized, and trustworthy cryptocurrency in the world.
Individuals and Businesses alike have adopted buy-and-hold strategies for investing in Bitcoin for the long term.
The most well-known form of Bitcoin DeFi lending is one with Wrapped Bitcoin on Ethereum.
While keeping Bitcoin locked away in cold storage is the safest option, you might be willing to take on the risk to passively earn a yield on your funds.
With Bitcoin, there are a number of ways to lend. Each with its own terms, degrees of risk, interest rates, and other important factors that you must consider.
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What is the Process of Bitcoin Lending?
It is the process of depositing Bitcoin(BTC) to a platform for a predetermined duration in return for periodic interest rewards, usually on a daily, weekly, or maybe monthly basis.
This process of Bitcoin lending is managed by a platform that connects lenders and borrowers.
Lenders supply Bitcoin to a “pool” of funds, while borrowers request a loan for v these funds and pay off the loan plus interest over a set timeframe.
The interest that the borrowers charged for taking out the crypto loan is paid back to lenders as a reward for supplying their Bitcoin in the first place.
You can turn your Bitcoin into a productive asset that pays you dividends over time. It can be a lucrative way for you to acquire more bitcoin, all while not selling, trading, or buying any funds.
With wrapped Bitcoin, you can interact with the vast Ethereum ecosystem, including top crypto lending platforms like Aave and Compound.
Obviously, this presents an inconvenience for you if you wish to stay on the Bitcoin network.
However, native Bitcoin DeFi lending has grown in popularity with the growth of Bitcoin layers like Stacks, RSK(Rootstock), and Liquid Network.
Layers utilize smart contracts to carry out decentralized lending transactions. And, transactions occur within each layer but are later bundled and sent to Bitcoin’s base for final settlement.
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Pros of DeFi Lending Platforms
Only you can control your crypto assets with a pair of private/public keys. Defi lending eliminates the need to trust that an institution will uphold its commitments and responsibility to manage the funds.
This aspect has become extremely valuable with the collapse of large CeFi crypto lending platforms in 2022.
These types of platforms are accessible without traditional banks. Now, millions of unbanked people across the world have the opportunity to participate in crypto lending activities.
With just a crypto wallet and Wi-Fi connection, anyone can access DeFi lending.
Cons of DeFi Lending Platforms
If you are a novice user, interacting with blockchain-based lending applications can be a daunting experience.
If any mistakes or errors are made, there is very limited customer support in DeFi. Similarly, it is almost impossible to undo transactions because of the immutability of blockchain.
By self-custodying funds, you must undertake full accountability for how you fund your digital wallet and what lending protocols you use.
Counterparty risk still exists in DeFi but in the form of smart contracts. You must trust that a crypto lending protocol’s smart contracts are free of coding errors.
These bugs usually only become evident once they are already exploited. Thereby, making them so difficult to mitigate.
In the worst-case scenario, smart contracts risk causing the collapse of a lending protocol and subsequent loss of your funds.
Therefore, they have yet to be truly battle-tested to perform as anticipated for a long period of time.
This type of DeFi platform is more complicated than with other lending blockchains, like Ethereum.
This is due to the fact that most Bitcoin lending transactions require the use of layers to execute complex smart contracts and achieve practical speeds and costs.
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Why You Should/ Can Lend Bitcoin?
First, utilizing lending platforms yields opportunities to effortlessly earn passive income on your BTC.
You can choose which method works for you best out of CeFi and DeFi.
Some platforms offer annual percentage yields(APYs) of 5% or more on Bitcoin deposits. This means that you can generate significant passive income simply by lending out your Bitcoin.
Additionally, if you need cash but don’t want to sell your Bitcoin, you can use a Bitcoin lending platform to secure a loan against your Bitcoin holdings.
This can be a good way to avoid capital gains taxes and still have access to the cash you need.
If you have poor credit or no credit history, Bitcoin lending is a good option because these lending platforms do not perform credit checks on borrowers.
Once you are approved for a loan, you can typically receive funds in your account within hours.
How You Could Use Bitcoin Lending Properly?
a. You could use it to cover unexpected expenses, such as a medical bill or car repair.
b. Secondly, you could use it to fund a business venture or investment.
c. Third, you could use it to finance a major purchase, such as a house or a car.
d.Or you could generate additional Income.
Of course, there are some risks associated with Bitcoin lending. For example, if the value of your Bitcoin collateral falls below a certain threshold, the lending platform may liquidate your collateral to cover the loan.
So, you need to monitor the value of your collateral and make sure it remains above the liquidation threshold.
Additionally, some Bitcoin lending platforms have been hacked in the past, which has resulted in people losing cash.
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Current Crypto Lending Platforms
Current rates on popular crypto lending platforms suggest lenders can get paid much higher annual percentage rates (APY) than they can expect in most high-interest savings accounts.
For example, Gemini advertises that with Gemini Earn, you can receive up to 8.05% on more than 40 cryptos.
Popular decentralized crypto lending platforms include Aave, Compound,dydX, and Balancer.
These platforms use smart contracts to automate loan payouts and yields, and you can deposit collateral to receive a loan if they meet the appropriate requirements automatically.
Which Platform is best for Lending Crypto?
Nexo – Overall best with the best rates.
Aqru- Top choice for daily interest with high-security features and multi-layered deposit insurance.
Aave- Top leading choice for advanced investors.
How Big is the Crypto Lending Market?
According to Global Market Insights, the market for digital lending platforms surpassed $8.5 billion USD in 2022.
Its compound annual growth (CAGR) is expected to hit 20.5% from 2023 to 2032.
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Bitget Enters the Market
The crypto exchange Bitget became the latest to enter the industry with its new Crypto Loans product.
Bitget’s new offering uses a dual-coin system where you stake one coin as collateral to borrow an equivalent amount in another coin.
The loan comes with an interest rate to repay, and the borrowed amount is based on the market value of the collateral.
You have a predetermined period to repay the loan, and they can choose to do so before or at the specified deadline.
It is a centralized exchange, hence its loans are not an example of decentralized finance.
In recent months, digital asset lending has become a lot more popular with NFTs. After finding success with its professional-level NFT trading platform, Blur released its lending platform, Blend on May 1st.
According to a report by Nansen, Blend facilitated over 15,800 loans totaling 123,500 ETH ($ 224.4 million) in under one month.
Coinbase Launches Crypto Lending Service for Institutional Investors
With this service, institutions can lend digital assets to Coinbase under the standardized terms in a product that qualifies for a Regulation D exemption. The exchange then can use borrowed funds to offer loans to other institutions.
Coinbase’s new business initiative comes in the aftermath of last year’s high-profile collapses of lenders Celsius Network, Blockfi, and Genesis Global.
The string of failures resulting from risky bets eventually limited borrowing and leverage options for investors.
Like other crypto companies, including the world’s biggest digital asset exchange Binance, Coinbase has been targeted by U.S. regulators in an ongoing crackdown on the industry that has affected crypto business in the U.S.
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Helix to Expand Crypto Lending Platform with $2m rise.
Blockchain-based lending has long been a major cog in the Web3 machine. The segment accounted for half of the total value locked, or the amount of assets currently staked, on the Ethereum.
However, as the bear crypto market continues to bring down lender interest, lending platforms continue to struggle for growth.
A trend among firms looking to real-world assets (RWAs), can curb crypto’s volatility.
In Southeast Asia, one company looking to do this is Helix, a Web3 startup incubated by Singapore’s Helicap.
It aims to create a platform that gives lenders access to stable yields tied to RWA’s through Smart contracts and tokenized collateral.
Helix plans to Ethereum in Q4 this year and target accredited and institutional investors.
It also wants to work with stablecoin providers, exchanges, and other lending protocols to grow the RWA credit ecosystem.
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Is Crypto Lending Safe?
Mostly yes, crypto lending is safe because your money is lent out through smart contracts.
These contracts are publicly auditable and verifiably secure; or at least as safe as the platform providing them. And whenever you lend out crypto, your funds are protected by the high collateral requirements.
There are, however, a few caveats we should discuss. First and foremost, crypto lending is largely unregulated.
As such, if a platform-breaking bug or a nefarious hacker group shuts down a platform through which you lend crypto, you are on your own.
There is no regulator or agency that can or will help you recoup your funds. In times of extreme market conditions, some firms will even lock your funds into their platforms to prevent their platform from going down, as seen with Celsius.
In extreme cases like these, you can find yourself far up a creek without a paddle.
If you are considering lending or borrowing crypto, you should fully understand the vulnerabilities associated with their preferred crypto lending platform.
You should also understand the specifics of your lending account or loan terms and the general risks associated with the volatile and loosely regulated cryptocurrency market.
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You can generate income from Bitcoin Lending, staking, and mining, Liquidity pools offer passive mining and you can earn dividends from your Bitcoin investment.
Interest rates on Bitcoin lending platforms can range from 0.5-0.8% PY (Annual Percentage Yield),. Depending on the protocol, loan amount deposited, and term of the loan.
In return for staking your coins, you can earn additional crypto as a reward. Staking differs from crypto lending in that the staked crypto is not lent out to borrowers. In a proof-of-stake blockchain, new blocks are not mined like in a proof-of-work(PoW) system(e.g. Bitcoin and Litecoin).
Loaning crypto on a centralized exchange is not taxable. When you lend your crypto, you do not receive any token in return, unlike what happens on decentralized exchanges.
You might wrap your Bitcoin to use it on the Ethereum network, creating Wrapped Bitcoin. Taking the wrapping method seriously is crucial regarding taxes and cryptos, as it is considered a taxable event.