How to Get Started With Crypto Lending Platforms
The sad news is that bank closures aren't a new trend. There are only 4,194 commercial banks still standing in 2022—in 2000 there were 8,000.
This is happening not only in low-income and minority communities but in highly populated areas, too. This creates an unfortunate financial situation for these people.
This puts stress on the surrounding neighborhoods economically.
More people are opting into online banking, but even that creates hurdles for people. Many people don't have enough money to meet the minimum banking requirements.
These people quickly become unbanked or underbanked. One solution is crypto lending platforms.
If the word crypto intimidates you, we are here to change your mind. Cryptocurrencies create an alternative solution to the traditional financial system with many benefits.
Read our guide to learn more about these crypto lending platforms and what they can do for you.
Fiat money lending is a core aspect of the legacy financial system. Lending and borrowing are used for many things such as mortgages, loans, and lines of credit.
The process is a lot simpler and more straightforward than you might imagine. Lenders loan their money to borrowers in exchange for a regular interest rate, allowing them to earn money passively.
This is facilitated through a financial institution (i.e. a bank), or peer-to-peer independently.
When it comes to crypto lending, there is centralized or decentralized. A centralized finance (CeFi) platform works in a similar fashion as a bank would. They are decentralized to some degree, but not 100%.
Centralized crypto lending platforms (BlockFi, Celsius, etc.) acts as a custodian for your deposited funds. They then will loan your money out to market makers, hedge funds, and other users on the platform.
This model works well on the surface but is vulnerable to a slew of possible negative outcomes. such as hacks, thefts, etc.
This is largely due to the fact that you need to provide sensitive information when signing up due to KYC/AML (Know Your Customer/Anti-Money Laundering) regulations.
Decentralized crypto lending platforms (Aave, Maker, etc.) are where the users have complete control over their money always. Popular blockchains such as Ethereum make this possible with their smart contracts.
How Does It Work?
Lenders on DeFi platforms will supply their crypto to a money market. This is facilitated via a smart contract and allows users to come in and borrow the crypto.
The lender will receive the lending platform's native token (Aave-aTokens, Maker-Dai, etc.), at a later point.
Approximately all cryptocurrency loans on these crypto lending platforms are over-collateralized. This means that borrowers need to prove a guarantee (in crypto) that is more than the loan is worth.
Why would someone want to borrow with DeFi when they could just sell their crypto assets from the get-go?
Some users don't want to sell their crypto assets in the hopes that the value will increase in the future. They may also need to cover expenses.
Taxes are another reason why someone would find a DeFi protocol attractive. They could potentially avoid or delay paying capital gains taxes.
Digital asset investors may want to use DeFi as a way to leverage their trading positions too.
Getting Started With Crypto Lending Platforms
How do you get started with crypto lending platforms? Do your research, compare and contrast, and talk to the crypto community.
A CeFi platform will require you to sign up with an e-mail and password. You will also need to identify yourself with an ID, name, phone number, and address.
With a DeFi platform, you'll need to connect your wallet. There are many popular options to choose from. Hot wallets like MetaMask are easy to set up just as long as you store your seed phrase (12-24 words) in a safe place.
While hot wallets are more convenient since you only need to download them to your mobile device or computer, they do come with a greater risk since they're connected to the internet.
Cold wallets like the Ledger or Trezor are a great choice if you want to take your privacy and security more seriously. They are safer since they're completely offline. Your crypto never leaves your hand.
Once you've hopped on either a CeFi or DeFi platform, decide on how much collateral you'd like to deposit and which crypto. Deposit the collateral and watch the funds show up in your wallet and on the corresponding blockchain.
There are certain key factors you need to pay attention to as well, such as interest rate, cost, risks, loan duration, collateral amount, and minimum deposit limit.
Find a CeFi or DeFi platform you feel comfortable with lending your money to the crypto community. Pay attention to the interest rates and loan agreements.
Choose the crypto and how much you'd like to deposit. From your wallet, send the crypto to the platform. You will now receive interest on the platform's native token.
Do your research to find crypto lending platforms with low interest rates on their cryptocurrency loans.
While they may not be as inexpensive as a mortgage or car loan, you will be able to find an interest rate of 0-10% easily.
Be sure to compare the costs including any hidden fees. With DeFi crypto lending platforms, you'll find the fees to be much lower since there are no middlemen involved.
Popular CeFi platforms like Celsius have been heavily criticized due to customers being locked out of their funds and accounts being frozen.
While CeFi platforms present many advantages to the traditional financial system such as high APY percentages, they are not without their set of risks.
DeFi platforms are much safer since the customer holds their private keys. This of course comes back to the very ethos that defines cryptocurrency. Remember the mantra—not your keys, not your crypto.
With that said, decentralized crypto lending platforms aren't without their risks too. For example, APYs could change drastically, causing customers to repay a lot more than anticipated.
Once you understand the potential risks involved and learn from the crypto community what to do and what not to do, it's easy to get started.
Pay specific attention to how protocols function, supported wallets, and any fees attached. You'll also want to check and double-check that you're sending to right public address.
"Liquidity" and "collateral factor" both come into play when determining how much crypto someone can borrow on crypto lending platforms. This will largely depend on the total pool fund from a particular market.
The collateral factor is a term used to describe the total amount of crypto that can be borrowed. The collateral factor is based on the quality of the collateral.
Without getting too technical, what borrowers have to pay and the interest lenders receive are determined by the supply and borrowed tokens ratio in a specific crypto market. The borrow APY is higher than the supply APY.
When it comes to APY % rates it'll largely depend on the platform and the crypto asset. Centralized crypto lending platforms will tend to have higher rates.
As far as the crypto assets themselves, stablecoins have some of the highest APYs (10-12% on CeFi) we've seen thus far. Major cryptocurrencies like bitcoin and ether will tend to have APYs of ~2%-6% for CeFi and 0%-1% for DeFi.
Be sure to check the loan duration too. Cryptocurrency loans much like traditional loans will be either fixed or flexible. Do your own research and make a wise decision.
Minimum Deposit Limit
Similar to traditional financial systems, some crypto lending platforms have a minimum deposit limit. If this is of concern to you, be sure to do your research to find one that meets your current financial needs or limitations.
You don't need to concern yourself if you have a poor to zero credit history. When you apply for cryptocurrency loans on these crypto lending platforms, they typically won't run a credit check.
This is such a strong advantage when compared with the legacy financial system. Crypto doesn't care what economic status you're currently in. It levels the playing field for all to take advantage of.
The beautiful thing about these crypto lending platforms is that you can choose what currency you'd like your loan in. You can choose between fiat or a number of different crypto assets.
Best Crypto Lending Platforms
Whether we're in a bull or bear market, how do you find the best crypto lending platforms available? Depending on your familiarity and comfort level, you may favor either CeFi or DeFi.
We encourage you to try both to see what you like most of all.
Aave is a DeFi lending platform. On Aave, there is a system of lending pools. Lenders deposit their crypto into these pools without any third party involvement.
Users can borrow crypto but it depends on the posted collateral and current liquidity. If you hold their native token AAVE you can vote on decisions for AAVE (since it's a governance token).
You can choose between fixed and floating interest rates with Aave, too. Be sure to check out its flash loans as well. Aave runs on the Ethereum blockchain.
BlockFi is a great choice for beginners. This CeFi platform allows you to fund your wallet with bitcoin, ether, stablecoins, etc.
While it is centralized, you are still free to withdraw your crypto at any point. The first one will be free and for any extra withdrawals, you'll be charged a small fee.
If you'd like to receive a fiat (USD) loan, you can do so—you'll just need to use crypto as collateral.
Crypto.com is one of the best crypto lending platforms on the market. Its app is a breeze to use with many perks and benefits (Netflix, Spotify, Airbnb discounts).
On top of this, their credit and debit cards are top-notch.
You can expect to earn ~6% APY on stablecoins like Tether, TrueUSD, and USD Coin. You won't have to lock up your stablecoins for a minimum amount of time to take advantage of this APY either.
Compound is a DeFi lending platform running on the Ethereum blockchain. If you'd like to earn interest on your crypto, you can deposit them into the lending pools. You can also take out cryptocurrency loans from these pools.
You'll find two native tokens on the Compound platform—cTokens (pegged to a crypto asset) and COMP. Lenders who deposit into liquidity pools can obtain cTokens but only for the specific crypto asset that is locked.
MakerDAO also runs on the Ethereum blockchain. You'll find two native tokens: DAI and MKR. DAI is a stablecoin that borrowers are issued once they've deposited crypto collateral.
MKR is the governance token. Take a look at the Maker vault too.
Nexo is one of the leading crypto lending platforms out there. It is similar to Crypto.com with high APYs. By staking their native token, you will earn a higher APY.
You won't have to stake cryptocurrencies like bitcoin in order to earn money with the yield, either.
Capitalize on Crypto
These crypto lending platforms offer many attractive features. Now people who are shut out of the traditional financial world can opt-in with crypto.
Take your time to understand how these platforms work. When you do your own research, you'll be earning money passively in no time.
The crypto market moves fast. The good news is you don't have to go at it alone. Our crypto hedge fund Truecode Capital Crypto Momentum Fund can be a great option. Be sure to contact us right away.
Last updated June 1, 2022
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