Crypto borrowing and lending have become increasingly popular over the last years. Just like traditional lending, you have the ability to loan out your digital assets in order to receive high interest from whoever is borrowing from you. There are many solutions and platforms that let you give out or take a loan with your crypto, however, it does work slightly differently than these traditional loans.

How does crypto lending work?

Investors lend fiats or cryptocurrencies to other borrowers in exchange for interest payments on those assets. The two main parties involved are the lender, who will receive interest from the borrower in exchange for the loan, and the borrower, who will deposit crypto-assets as collateral to secure the investor’s investment.

Step-by-step Guide to Lending/Borrowing

The lending process can vary across different platforms, but getting a crypto-backed loan will typically involve the following steps for each party:

Lenders:

1. Choose an Interest rate

2. Give the borrower crypto assets in exchange for bonds that prove you gave them crypto

3. Receive more bonds as interest

4. When you want your money back, send over the bonds you received through the smart contract

5. Make a profit on your crypto!

Borrowers:

1. Register on a platform that indicates the desired sum

2. The platform automatically calculates how much crypto is needed for collateral

3. The borrow deposits the collateral on the platform

4. The borrower applies for the loan and waits on approval

5. The platform deposits funds into the borrows account

So why lend your crypto to someone else?

1. Attractive interest rate

The main benefit for lenders is the high interest. You will likely get back more crypto than the amount that you’ve lent out, therefore you’ll be making a profit without needing to do hardly anything for it. Additionally, the interest rate is much likely higher than that of your savings account.

2. Avoiding Crypto Volatility

In general, you are able to lend almost whatever crypto you want. However, lending stablecoins may appear as a newer solution for crypto owners. By lending stablecoins, a digital asset pegged to a local currency, you are able to grow your assets without the risk that you typically have with crypto. In short, you’ll likely be able to predict how much you’ll be getting back before even lending out your crypto assets.

Summary

As with all things in crypto, be sure to do your own research before choosing a platform or a currency to lend. You want to avoid shady players in the game and always be prepared when starting your lending journey. Take your time to understand the terms of the loan, and it never hurts to have a backup plan in case the borrower isn’t able to pay you back.

Start exploring exchanges, platforms, and DeFi protocols to see which might be the best fit for you.

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