Written by: Matt Johnes, a crypto trading bots enthusiast and a content writer at TradeSanta. (My final goal is to help readers find what they need, understand what they find, and use what they understand appropriately).
Summer 2020 saw a DeFi boom, the platforms that enabled their clients to lend and borrow a diverse range of cryptocurrencies, such as MakerDAO, Compound and Aave, experienced an influx of daily active users and accounted for a significant part of the interest in DeFi.
In today’s article let’s dive into what is crypto lending and explain why it is such a big deal.
As countless other examples of cryptocurrency markets, the lending stems from traditional financial markets. The term originated many years ago and is tightly tied to the definition of debt.
What Is Lending?
In the traditional market, a lender is a financial institution that makes funds available to you, a borrower, with the expectation that you will repay the funds with an interest or fees after some time. While borrowing from a bank, you will be assessed based on your credit history and a pledged collateral.
Collateral may take the form of real estate or other kinds of assets that the lender will accept as security for a loan. Collateral makes sure that the interests of the bank are protected if the lender is unable to fulfill its obligations. Once you default on your loan payments, the lender can seize your collateral to recoup some or all of the losses.
What Is Crypto Lending?
Why was the concept of traditional lending important to explain? Because it’s almost the same with the crypto markets, except… it’s not quite the same!
First of all, all of crypto lending services are based on blockchain, mostly on the Ethereum blockchain, although not necessary, which means no traditional banks or custodians.
In addition to that, market players manipulate with quite different assets and have to know where and how to purchase them.
And last but not least, the volatility in the crypto market is huge, so be prepared for your loans to be generally more than 100% collateralized.
Why Are Crypto Lending Rates so Attractive?
Traditional banking fails to provide attractive interest rates. Some of them go as far as having negative deposit interest. No wonder, many people are looking towards more lucrative opportunities in search of passive income.
Money deposits have been known as the simplest way to make money work for you and generate passive income to live from. Cryptocurrency lending still is a topic of debates, but more and more people are leaning towards crypto lending as an alternative source of income. The interest rates may reach as high as 15% due to the fact that crypto is a young evolving market and demand for it is constantly increasing. Investors can take out crypto-backed loans to ensure they have available funds while avoiding losing exposure to specific cryptoassets.
Lenders are the ones providing investors with these loans through DeFi and often through centralized finance platforms. Often, the loans are taken out so investors can enter leveraged positions.
It’s no secret that DeFi gave the crypto lending industry a significant push forward. This can be explained by the following benefits:
- All loans are issued via smart contracts. Every detail of the loan is automated and verified.
- DeFi lending doesn’t require a custodial to perform any operation
- Earning interests are adjusted according to the market automatically
- The interest or collateral is collected automatically, no need to worry if the deal goes wrong
In short, DeFi lending has proved to be a secure and easy way to make one’s money work for them without breaking a sweat.
The Crypto Lending Ecosystem
Although crypto lenders are not banks, they might be centralized entities, such as Genesis Capital, Unchained Capital, BlockFi, OTC desks or exchanges that use margin lending and trading, or decentralized ones.
The latter are protocols that rely on smart contracts to automate the distribution of loans and interest payments. These are the ones we will be talking about in this article: Maker, Compound and ETHLend.
Crypto borrowers normally wish to trade and can pledge collateral in the form of cash or crypto. Crypto lending platforms, interestingly, play the role of a middleman or a matchmaker in this game.
Top Crypto Lending Platforms in DeFi
In this article we are going to discuss some of the top DeFi crypto-lending platforms.
It’s important to consider we’re discussing cryptocurrency lending in this article, and as such platforms that allow users to earn interest on their holdings in other ways, including liquidity mining, are not being considered.
The name Aave stems from the Finnish word for “ghost”.
The main characteristic of Aave is it’s open-source nature. It is a non-custodial protocol enabling decentralized lending and borrowing. Lenders provide liquidity to the market, to earn a passive income, while borrowers are able to borrow in an overcollateralized or undercollateralized fashion.
Lenders earn on ERC20-compliant aTokens at a 1:1 ratio to supplied assets. Meaning, while lending 36 Dai, they receive 36 aTokens (36 aDai).
Interest rates adjust algorithmically based on supply and demand, but Aave lets borrowers opt in to and out of (at any time) a stable rate that changes less often. From borrowers, a 0.00001% of the loan amount is collected on loan origination and 0.09% from Flash Loans, a developers oriented feature that allows to borrow any available amount of assets without collateral.
Compound is an algorithmic money-market protocol on Ethereum that allows you to borrow or lend funds and earn interest for providing liquidity. Rates adjust automatically based on supply and demand.
Just like in the Aave case, supplied asset balances are represented by ERC20-minted tokens, but on top of Compound, they’re called cTokens. Now, imagine you’ve accelerated a certain amount of cTokens on your account after lending funds, now you can borrow up to 50-75% of their cTokens’ value, depending on the quality of the underlying asset
The Compound protocol sets aside 10% of interest paid as reserves; the rest goes to suppliers.
C.R.E.A.M. Finance stands for Crypto Rules Everything Around Me. It is a peer-to-peer lending platform focused on providing lending, exchange, payment, and asset tokenization services.
The main feature of this platform is bringing liquidity to the underserved assets, such as stablecoins (USDT, USDC, BUSD, yCRV, etc), governance tokens (COMP, BAL, YFI, LEND, CRV, CREAM, MTA, SUSHI) and others such as ETH, LINK, and renBTC.
Since 1st September 2020, CREAM has made the switch from Ethereum to Binance Smart Chain (BSC).
Yield farmers who create and deposit assets into liquidity pools on Cream Swap’s platform receive Cream Pool Tokens (CRPT).
DeFi crypto lending platforms have experienced a hype summer attracting more than $10 billion into their smart contracts. Based on these numbers we might conclude that migration of banking to blockchain seems like a natural next step for the whole crypto niche and will only evolve.
Material prepared by TradeSanta – automated trading platform. Automate your trading strategy on major exchanges
Featured image via Pixabay.