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Nơi chia sẻ tất cả những kiến thức Crypto từ cơ bản đến nâng cao, kinh nghiệm đầu tư Bitcoin và các hình thức đầu tư tiền điện tử khác.

What is Crypto Lending? How does Lending work? (2022)

Crypto Lending has been growing in popularity in recent years as a way to earn interest on your digital assets. However, what exactly is crypto lending? How does it work? And what are the benefits and risks associated with it?
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lochoang
10 min read
Published Nov 03 2019
Updated Mar 22 2024
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What is Crypto Lending?

Crypto lending is a process whereby you loan out your digital assets (cryptocurrencies) in exchange for an interest rate. This can be seen as similar to traditional lending, where individuals or businesses loan out the money in exchange for an agreed-upon interest rate.

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The key difference with crypto lending is that the assets are digital, and the loans are often made on decentralized platforms. This means that there is no central authority overseeing the loan process, and the terms of the loan are set by the parties involved.

How does Crypto Lending work?

Crypto lending typically involves borrowing and lending cryptocurrency tokens.

There are three parties involved in a typical crypto lending transaction: the borrower, the lender, and the platform. The platform is an intermediary that matches borrowers and lenders and facilitates the loan transaction.

Crypto lending platforms usually require that borrowers post collateral in the form of cryptocurrency tokens. This serves as security for the loan in case the borrower is unable to repay it.

The terms of the loan, including the interest rate and the length of the loan period, are agreed upon by the borrower and lender. The platform then creates a smart contract that encodes these terms and facilitates the transfer of funds between the parties.

When the loan is repaid, the borrower receives their collateral back minus any fees charged by the platform.

Crypto lending is a relatively new phenomenon and it is still evolving. Some platforms offer flash loans, which are loans that must be repaid within a single transaction on blockchain networks. This allows borrowers to access liquidity quickly in times of need.

Other platforms offer collateralized loans, which are loans backed by collateral. These loans are typically more expensive but they offer more protection for the lender in case the borrower is unable to repay the loan.

Pros and cons of Crypto Lending

Crypto lending is relatively new, and as such, there are still a few kinks that need to be worked out. However, it does have a few advantages over traditional lending methods.

For one, crypto lending is done completely online, which makes it more convenient for borrowers.
Additionally, since crypto lending is still new, the interest rates are often lower than traditional loans.
For long-term holders, it is a great option to increase your return on investment or the number of their tokens without selling them.
Short-term holders can also benefit from taking out a loan and using the cryptocurrency as collateral to buy more when the price is low, then selling when the price rises and paying back the loan with interest.

There are a few disadvantages to crypto lending that should be taken into consideration as well.

Since the industry is still new, there is a lack of regulation, which can lead to scams or fraud.

Additionally, the volatility of cryptocurrency prices can lead to big losses for lenders if the value of the collateral drops significantly.

Overall, crypto lending is a great way to increase your returns on investment or get a loan without having to sell your digital assets. However, it is important to be aware of the risks before making any investment decisions.

Types of Crypto Lending

P2P Lending

P2P lending in cryptocurrency is a type of lending that allows you to borrow or lend directly to another person or entity using cryptocurrency as collateral.

This can be done through a variety of platforms and exchanges that offer this service. P2P lending is often used in cryptocurrency because it can be done without the need for a third party. This means that there are no fees associated with the loan so users can take advantage of the low-interest rates.

By minimizing the role of the third party, P2P lending also allows for more transparency and trust between the borrower and the lender. Rather than funding the loan itself, P2P platforms can set the rates, terms, and conditions of the loan.

The disadvantage of P2P lending in cryptocurrency is that it can be risky. Since there is no third party to protect the lender, if the borrower defaults on the loan, the lender may not be able to get their money back.

P2P lending can also be volatile. The value of cryptocurrency can fluctuate greatly, which can make it difficult to repay a loan if the value of the collateral decreases.

If you're considering P2P lending your cryptocurrency, it's important to understand the risks and advantages before getting started.

There are a few platforms that offer P2P lending such as Aave, Compound...

Over-Collateralized Lending

Over-collateralized lending is the most popular lending type

Over-collateralized lending is a type of lending that allows borrowers to put up more collateral than the value of the loan. This provides additional security for the lender in case the borrower defaults on the loan.

This type of lending can be beneficial for both borrowers and lenders. Borrowers may be able to get better terms on their loans, and lenders can feel more confident that they will get their money back.

However, over-collateralized lending can also create risks. If the value of the collateral falls, the borrower may be unable to repay the loan. This can lead to losses for the lender.

Over-collateralized lending is a common practice in the cryptocurrency world. Many exchanges allow users to borrow against their cryptocurrency holdings. This can be a useful way to get access to cash without selling your assets.

However, it is important to understand the risks before entering into any over-collateralized loan. Make sure you know the value of the collateral and the terms of the loan.

Under-Collateralized Lending

The term "under-collateralized lending" refers to a type of loan where the borrower provides collateral that is worth less than the value of the loan.

This can be a risky proposition for both the borrower and the lender, as it leaves the lender open to a loss if the value of the collateral decreases. However, it can also be a way to get access to capital that would otherwise be difficult to obtain.

Under-collateralized lending is often used by borrowers who are looking to get a loan without having to put up a lot of collateral. This can be helpful for borrowers who don't have a lot of assets or who are trying to avoid tying up their assets in a loan.

Flash loans can be considered a type of under-collateralized lending in the cryptocurrency world. It is a loan that is taken out and repaid in a very short period of time, usually within minutes. This type of loan can be helpful for borrowers who need access to capital but don't want to take on the risk of a long-term loan.

There are a few more types of undercollateralized loans such as Credit Scores, Real-world asset loans, and NFTs as collateral…

It's important to remember that under-collateralized loans are risky for both the borrower and the lender. If you're considering this type of loan, be sure to carefully consider the risks and benefits before proceeding.

Is Crypto Lending safe and legal?

Crypto lending is legal in most jurisdictions. However, there are a few countries where it is not allowed. Be sure to check the laws in your country before participating in crypto lending.

Since everything is coded, it is tricky for authority departments to understand what is going on. That being said, it is still legal in most places.

However, is it safe?

Crypto lending is a relatively new phenomenon and as such, there is no extensive track record to assess its safety. That being said, there are a few risks to be aware of before participating in crypto lending such as regulations, frauds, scams or price volatility.

The recent event with the lending platform - Celcius - raised a few concerns in the community.

The event happened with Celsius Network has raised many concerns in the crypto community

Important factors of Lending

Lending Interest Rate

The lending interest rate in cryptocurrency is the rate at which people are willing to lend their cryptocurrencies to others. The rate is determined by the demand and supply of people wanting to lend and borrow cryptocurrencies.

The higher the demand for lending, the higher the interest rate will be. The lower the demand for borrowing, the lower the interest rate will be. The lending interest rate is an important factor in determining the price of cryptocurrencies.

Therefore, as a lender, you should know what the average lending interest rate is in order to price your cryptocurrency assets properly. As a borrower, you should also be aware of the lending interest rate in order to budget for your borrowing needs.

Lending Time

The lending time can be varied from 7 days to 180 days

Lending time in cryptocurrency is the time during which a borrower has the right to use a certain amount of cryptocurrency. This time period can be set by the lender or by the protocol governing the cryptocurrency.

The lending period can vary from a days minutes to several weeks. During this time, the lender is not able to trade, use or access their cryptocurrency.

Lending Assets

Lending Assets may be different from a platform to another

Lending assets in cryptocurrency are digital assets that can be used to collateralize loans. There are a variety of lending platforms that allow users to borrow and lend digital assets, including Bitcoin, Ethereum, Litecoin, and others.

When you collateralize a loan with lending assets, the platform will hold onto your digital assets as collateral and release them back to you when you repay the loan. In the event that you default on the loan, the platform may sell your collateral to cover the outstanding balance.

Lending Total Value Locked

Total Value Locked in lending refers to the total funds that are locked in the lending section. The total value locked in cryptocurrency is important because it gives insight into how interests investors have in this category.

If the total value locked in cryptocurrency is high, it means that investors believe that digital assets will continue to grow in value. Conversely, if the total value locked in cryptocurrency is low, it means that investors are pessimistic about the future of digital assets or not interested.

Best Crypto Lending platforms

Top 3 lending projects according to Defilama 25th June 2022

Aave Protocol

Aave is a decentralized protocol that allows users to deposit and borrow cryptocurrencies. Aave Protocol is an open-source project that was created to address the needs of the DeFi community. The protocol enables users to collateralize their digital assets and borrow against them.

The protocol is powered by the Ethereum blockchain and uses the ERC20 token standard. Aave Protocol is compatible with all major wallets including MetaMask, Trust Wallet, Ledger, and Trezor. The protocol is currently in beta and is available for use on the Ethereum mainnet and other chains such as Avalanche, Polygon...

Aave is the largest lending platform in the DeFi space with over $5 billion in total value locked as of today. The protocol has seen rapid growth since its launch in January 2020 and is now one of the most popular protocols in the DeFi space.

Learn more: How to use Aave

Compound Finance

Compound Finance is a decentralized finance (DeFi) protocol built on the Ethereum blockchain that allows users to earn interest on their cryptocurrency holdings, or borrow against them. The protocol is open-source and permissionless, meaning anyone can use it.

The Compound protocol currently supports 17 assets. Users can deposit any of these assets into Compound and earn interest on them at rates that are set by the protocol based on supply and demand. For example, if there is high demand for USDC from borrowers, the interest rate paid to USDC depositors will increase.

The project is the second-largest lending platform in terms of  USD value locked, behind Maker. As of June 2022, the protocol had over $2.95 billion worth of cryptocurrency deposited by users.

Justlend

JustLend is a TRON-powered money market protocol. It is an open-source project that allows users to deposit and borrow TRX and other TRC-20 tokens. The protocol uses a smart contract to manage the funds, which are then stored on the blockchain.

The interest rates for both depositing and borrowing are set by the market, and the platform does not charge any fees. JustLend is designed to be a decentralized, trustless system that offers a safe and easy way to earn interest on your digital assets.

Justlend stays in the top 3 lending projects with over $1.56B in locked.

How to start Lending in Crypto

Are you looking to get started in the world of cryptocurrency lending? If so, there are a few things you need to know before getting started. Here's a quick guide on how to start lending in cryptocurrency.

find a reputable exchange
connect your wallet and deposit some funds
browsing the different lending options available
enter the amount you want to lend and click "submit".

Be sure to repay your loan on time to avoid any penalties or fees. And that's it! You're now ready to start lending in cryptocurrency.

Lend assets

Lending assets can be varied from one platform to another. There are many ways to go about this, but in general, you'll want to consider a few key factors:

The stability of the asset. You'll want to choose an asset that is relatively stable in price, as this will help minimize the risk of your investment.
The interest rate offered on the asset. This will vary from one asset to another, so be sure to compare rates before investing.
The term of the loan. This will also vary from one asset to another, so be sure to compare terms before investing.
The reputation of the lender. Be sure to research the lender before investing, as you want to be sure that they are reputable and that your investment is safe.

By considering these factors, you can be sure to choose the best lending asset for your needs. With a little research, you can minimize the risk of your investment and maximize the return.

Borrow assets to receive incentives and leverage income

Conclusion

Crypto lending can be a profitable way to invest in digital assets if it is done carefully and with an eye towards mitigating risk.

If you're thinking about starting a crypto lending platform, be sure to do your research and do your own research carefully to ensure that it's the right decision for you. Thank you for reading and don't forget to join Coin98 Community for the latest updates.