What Is Crypto Lending?

Technologies in the field of investing and trading are rapidly developing along with the emergence of new cryptocurrencies and the expansion of the functionality of old ones. If earlier traders could only buy and sell cryptocurrency, now cryptocurrency exchanges offer more flexible tools for earning, to which a wider range of trading strategies can be applied.

One of these ways to earn money is crypto lending. There are many definitions of crypto lending based on the fact that this is some special form of credit, both between individuals and corporate agents (businesses). However, this is too narrow a definition that does not give an understanding of the very essence of crypto borrowing, without which it is difficult to understand what is crypto lending, how the crypto lending scheme works, especially in the cryptocurrency market.

To begin with, we should take a little retrospective look at where the lending actually came from as a phenomenon. In the late 1990s and early 2000s the development of electronic payment systems began, which allowed not only to instantly transfer money from one client to another, but also to establish connections between these clients. That is, for example, any client of the payment system could easily transfer money to his partner's electronic wallet for any services or goods.

Thus, a whole system of private transfers arose, which was called crowdfunding. Initially, the task of crowdfunding was to ensure that users of payment systems could donate to some socially significant or charitable projects. Later, this form of lending was transferred to business, and many startups appeared thanks to crowdfunding. Gradually, crowdfunding took on a different form, which was called crowdlending, when, for a certain fee, any person or business project could borrow from a network community. As a rule, such loans were issued at relatively low interest rates. Soon, crowdlending acquired a large-scale form and numerous IFIs, payment systems, exchange networks and individuals became its clients.

With the advent of crypto-financing, decentralized finance (DeFi), the entry of a huge number of cryptocurrencies into the ICO market, and the development of blockchain technologies, lending schemes have received software platforms that allow almost anyone to work in the loan market. Such technologies are called P2P crypto lending. In essence, now anyone with a cryptocurrency wallet can transfer money anywhere, as well as borrow quite large amounts of money.

For the full implementation of this scheme, a third party is needed, which would guarantee that the parties of the credit process comply with their obligations. Such a party is either a cryptocurrency exchange or a crypto-lending site, which, as it were, acts as a bank. But at the same time, the site itself does not participate in the lending process, but only provides a technological platform. Thus, a more precise definition of lending is as follows: the ability of any person to lend to another with the help of a technological platform of the cryptocurrency market, which takes on the function of guaranteeing the fulfillment of obligations.

How Does Crypto Lending Work?

How does crypto lending work? The scheme of crypto lending protocols’ work is relatively simple and does not require any special technical skills and the ability to work with computer programs. Almost all cryptocurrency lending platforms are designed for the average user, and to master the whole scheme, it is enough to know how to use a regular smartphone or laptop.

How to lend cryptocurrency? The schema itself looks like this:

An appropriate platform is selected through which the cryptocurrency lending process can be carried out. These are either cryptocurrency exchanges, or special crypto-lending services.

A standard registration form is produced, where the system requests a minimum of personal data. However, it should be noted that many cryptocurrency exchanges require full customer verification. This sometimes requires the provision of a scanned copy of the passport, confirmation of bank details, as well as the place of residence.

After registration, the client gets access to the crypto lending platform, which looks like a table, where on one half there are applications for receiving money on credit, on the other – applications of those who offer their money on credit.

The client then submits his loan application. For example, he has 2 BTC, and he wants to rent them at 10% per month, for a period of six months. The application is placed in the system, and if there is a willing person, the transaction will be automatically completed between clients.

At the end of the term, the creditor receives his interest and the entire amount of the debt. The commission of the crypto exchange or service is deducted from this amount, which usually rarely exceeds 1% of the transaction amount, since they work on the principle of a large turnover of money than on the maximum margin.

Crypto Lending vs Staking

Unlike cryptocurrency lending, where the investor's funds are used as a source of loans for other market participants, in staking, the deposit is frozen to ensure the operation of the coin's blockchain.

How to Lend Cryptocurrency Safely?

What is the crypto lending level of safety? The crypto borrowing scheme seems to be flawless, but where is the guarantee that the borrower will return the money, and even with interest? Here, a lot depends on which intermediary or cryptocurrency platform you have to work with. If we talk about exchanges, then the verification process available there allows, at a minimum, to guarantee that the client does not disappear with money, because all his passport data and address of residence are available.

In most other cases, the investor or lender can only hope that the reputation of the lending platform he has chosen is trustworthy. Actually, this part of the crypto lending scheme is the main risk when working with cryptocurrencies.

There are additional risks: 

Many cryptocurrency exchanges and services work with a small list of assets. Crypto lending platforms are not always ready to work with clients from certain countries. This is especially true for popular US-based crypto exchanges.

There is a fairly high minimum threshold for entering the crypto borrowing market. Usually, the minimum amount for many sites is 500 – 1000 USD and more, although there are also platforms that work with almost one-dollar amounts.

What Are the Benefits of Cryptocurrency Lending?

You can use temporarily free money, and give it on credit, receiving interest. This is much better than taking a loan, and then paying for it yourself.

Relative anonymity allows you to protect both your personal information and the entire process of a crypto lending transaction.

There are high percentages of earnings in the cryptocurrency market, which is not surprising, since it is still at the very initial stage of its development and the growth in the price of many cryptocurrencies by 100, 400 or 1000% per year does not surprise anyone.

You can manage your capital from anywhere in the world without tying yourself personally to any one bank.

How Much Can You Earn on Lending Crypto?

How to lend cryptocurrency with some profit? Crypto lending is a simple type of income, which, in a good case and the right approach, can bring up to 400% per year of the invested amount. Such an indicator is unattainable for banks even with the most profitable deposits.

Is Crypto Borrowing Worth It?

Despite the pleasant prospects in this type of income, you need to pay attention to the amounts of deposits and the sources of funds that will be invested in the business. It is not worth risking the last savings, as well as investing borrowed money, even with complete confidence in the successful outcome of the case. In the world of trading, there are many cases of unfortunate consequences associated with unsuccessful investments.

What Should a Crypto Lending Participant Take into Account?

Crypto lending, like other ways to make quick money, is always associated with high financial risks. When investing in a project, rely only on your own financial capabilities and never resort to loans.

Careful study of the project, collection of information and feedback, consultations with specialists will help to minimize the risks of losing cryptocurrency.

When investing cryptocurrency in a crypto lending service or exchange, you need to take care of two-factor authentication. The absence of this option in the settings indicates the unreliability of the crypto lending project.

You can save on the commission if you indicate the crypto wallet number when buying a cryptocurrency. In most cases, lending projects provide such wallets to their investors.

Withdrawal of profit in full reduces the risk of loss, but does not increase the profitability of this activity.

The attractiveness and high profitability of a cryptocurrency lending should not be the reason for rash decisions. The loss is ultimately borne by the investor. Therefore, consider your actions before you agree to invest in any project.

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