Earn Money From Your Crypto Holdings – Forbes Advisor INDIA

Decentralization is the main characteristic of cryptocurrencies. In the crypto community, decentralized finance (DeFi) describes the growing market of financial products and services being built on blockchains.

Crypto lending has become one of the most successful and widely used DeFi services, and many crypto exchanges and other crypto platforms offer lending and borrowing services. Investors deposit cryptocurrency, which the platform lends to borrowers in exchange for interest payments.

What is crypto lending?

Crypto lending is a decentralized finance service that allows investors to lend their crypto holdings to borrowers. Lenders receive regular crypto interest similar to interest payments earned in a traditional savings account.

Crypto lending platforms can be either centralized or decentralized, and the lender may be able to achieve extremely high-interest rates – annual percentage yields (APY) of 15% or more, depending on the platform and other factors.

Borrowers can use cryptocurrency lending platforms to secure cash loans using their crypto holdings as collateral.

Crypto lending can be an attractive opportunity for both lenders and borrowers, but the recent turmoil in the crypto lending market underscores the tremendous risks involved in the industry.

How does crypto lending work?

Cryptocurrency lending platforms are like intermediaries that connect lenders with borrowers. Lenders deposit their crypto into high-interest loan accounts, and borrowers secure loans through the lending platform. These platforms then finance the loans using the crypto deposited by the lenders.

The platform sets interest rates for both lending and borrowing, allowing it to control its net interest margin.

Interest rates vary from platform to platform and cryptocurrency to cryptocurrency. Platforms may also charge fees for their services or offer higher rates for lenders willing to lock their crypto for a specified period of time.

Centralized crypto lending involves relying on a company or other entity to oversee and facilitate the lending and borrowing process. Borrowers and lenders register accounts, and borrowers can apply for loans.

Lenders and borrowers can connect their crypto wallets to decentralized crypto lending protocols, which automatically facilitate lending and borrowing processes using smart contracts.

A smart contract is a block of code that automatically runs on the blockchain network when certain conditions are met.

crypto lending platform

Current rates on popular crypto lending platforms show that lenders can pay far higher annual percentage rates (APY) than most high-interest savings accounts. For example, Gemini advertises that with Gemini Earn, users can get up to 8.05% on over 40 cryptos.

Centralized platforms like BlockFi and Nexo integrate Know Your Customer (KYC) and anti-money laundering regulatory protocols to limit risk.

But not all crypto exchanges offer crypto loans.

Popular decentralized crypto lending platforms include Aave, Compound, DYDX, and Balancer. These platforms use smart contracts to automate loan payments and yields, and users can automatically deposit collateral to obtain a loan if they meet the appropriate requirements.

Advantages and Disadvantages of Crypto Lending

Crypto loans have several advantages over traditional bank loans. First, crypto borrowers can secure loans without a credit check, making loans available to borrowers who may not qualify for bank loans.

Borrowers can often secure crypto-backed loans at lower interest rates than bank loans, which is another benefit of crypto lending.

Crypto lenders can generate passive income on their crypto holdings at rates that are typically much higher than the rates on savings accounts. It can also be a more flexible alternative to crypto staking, which involves locking up crypto and staking it to a blockchain security protocol.

Unfortunately, Glenn Huybrecht, Cake DeFi's vice president of operations and chief operating officer, says crypto lenders must also understand the risks they are taking.

Institutional borrowers usually deal with crypto lending firms on individual terms. This is how things went bad for Voyager Digital and BlockFi. These crypto lenders loaned hedge fund Three Arrows Capital (3AC) millions of dollars in cash and Bitcoin (BTC), and they were exposed when 3AC defaulted. 3AC filed for Chapter 15 bankruptcy on July 1.

Voyager Digital, BlockFi, and Celsius are just three examples of cryptocurrency lenders that are struggling with severe liquidity crunch. Voyager Digital recently filed for Chapter 11 bankruptcy protection. Celsius is facing bankruptcy. Vermont's Department of Financial Regulation said on July 12 that it believes Celsius is “deeply insolvent” and does not have the liquidity to meet its obligations.

“Some loan providers have been very lenient with low collateral requirements, which leaves them in trouble when one of their customers defaults,” says Huybrecht.

“Since crypto deposits are not insured by any federal insurance, loan holders are at risk of losing their money if the platform provider goes bankrupt,” says Jay Yang, founder of crypto exchange Taisen. In recent weeks, we have seen this risk play out in real time, with DeFi lending platforms like Celsius, Babbel and Wold halting withdrawals due to 'extreme market conditions' and causing a host of downstream issues in the process. Is.'

Dikemba Balogu, chartered financial analyst and financial advisor at Genius Yield and Genius X, says crypto borrowers should also be prepared for a unique set of risks, including higher liquidation risk.

“Decentralized lending with cryptocurrency typically requires the borrower to put down a deposit of up to twice the value of their requested loan or have a loan-to-value (LTV) ratio of 50%,” says Balogu.

“Liquidation triggers are built into the contract, such as LTV exceeding 75%, (which) will ensure automatic liquidation of the borrower's collateral so that the lender gets the principal amount back.”

Things can get even messier when a sudden drop in prices and market liquidity prevents the lending platform from selling the borrower's collateral fast and high enough to cover the lender's principal, potentially causing the borrower to default. And both the lender may suffer a loss.

Bottom-line

If you are considering crypto lending or borrowing, you should fully understand the vulnerabilities associated with their preferred crypto lending platform.

You should also understand the specifics of your loan account or loan terms and the general risks associated with the volatile and loosely regulated cryptocurrency market.