Head of Growth at Hodlnaut
Crypto lending is a growing market that started only a few years ago. Unless you're new to cryptocurrency, you probably have heard this term at some point. Crypto lending works similarly to peer-to-peer lending, where borrowers are connected with lenders via an online crypto lending platform with cryptocurrency as the currency of trade instead of fiat money. Technically, the more appropriate term is crypto-secured lending because not all loans are denominated in cryptocurrencies.
Individual investors or hodl-ers often use their crypto assets as collateral for cash loans that can be used for investment or as working capital. The mechanism may differ depending on the crypto lending platform, but to put it simply, borrowers use their crypto assets such as bitcoin, as collateral to obtain a fiat loan or stablecoin loan. Lenders then provide the assets for these loans in exchange for interest rates on the asset.
There are two types of crypto lending: centralized and decentralized. The main difference of each type of crypto lending here is who or what is handling the lending and borrowing process; a business or a protocol.
They are entities or companies that handle the user's onboarding process, such as implementing KYC (Know-Your-Customer) and exchanging cryptocurrencies and fiat money with a custodial system in place to protect the assets. They are also more flexible in forming partnerships with other businesses and negotiating customized loan agreements.
Centralized crypto lending platforms use margin lending to attract users. They offer to maximize the productivity of their crypto assets safely and easily. Furthermore, it is also common for them to offer favorable interest rates and terms to crypto lenders compared to decentralized crypto lending.
Examples of centralized finance crypto lending platforms:
Hodlnaut is a Singapore-based fintech startup that offers financial services where users can deposit crypto assets and earn favorable interest rates. The rates are 6% interest rate (effectively 6.2% APY) for Bitcoin and 8% (effectively 8.3% APY) for USDC and USDT stablecoins. There's no lock-in periods or minimum deposits, and all deposits automatically earn the best rate.
Besides interest account, Hodlnaut also offers institutional loans where corporates can obtain a credit line using their digital assets as collateral. Hodlnaut is started by two entrepreneurs and self-proclaimed bitcoin maximalist in Apil 2019 as part of Antler's portfolio company, a global VC firm backing the early-stage startups.
BlockFi is a crypto lending startup that started in 2017 from New York that offers financial services to crypto investors such as interest account, crypto loans, and trading. Their products and services aim to help crypto hodlers do more with their digital assets.
The interest account offers varying rates on different assets; 6% interest rates for BTC, 4.5% for ETH, 5% for LTH, and 7% for USDT, to name a few. BlockFi also offers USD loans with rates starting from 4.5% backed by cryptocurrency to hodlers willing to offer their digital assets of bitcoin, ether, or litecoin as collateral.
Celsius Network is a crypto lending platform similar to Hodlnaut and BlockFi, where users can borrow and lend cryptocurrencies. They also have their own native token called CEL. Through the Celcius Loyalty Rewards program, users can earn additional interest rates once their overall wallet reached a certain threshold in CEL tokens.
As for the interest rates, Celsius Network offers 15.89% APY for USDT, 6.13% APY for BTC, and 6.13% for X AUT (Tether Gold), among other cryptocurrencies that they support. Founded by Alex Mashinsky in 2017, the company has a mission to help people to unbank themselves and challenging the current financial structures with a new model that's decentralized.
While in centralized crypto lending, the lending and borrowing processes are trusted to a company or a group of people. It is governed by a set of protocols in decentralized crypto lending, also popularly called DeFi (decentralized finance). The protocols rely on smart contracts created to automate the distribution of crypto loans and interest rates payments.
Typically, DeFi platforms are non-custodial, without KYC, and focus on cryptocurrencies only. The interest rates offered also varies depending on the supply and demand in the market; however, they're generally are lower than the rates offered by centralized platforms. DeFi is more transparent than centralized as anyone can access the protocols, and the transactions are recorded on public blockchains.
Examples of decentralized finance crypto lending platforms:
Maker is a decentralized lending platform on Ethereum that supports DAI, a stablecoin whose value is pegged to USD. Deemed as the first DeFi project, Maker allows any user to take out a DAI loan autonomously by staking their digital assets like ether (ETH) as collateral. There is no KYC involved, and smart protocols perform all lending activities.
Compound is a lending protocol running on ethereum that lets users lend and borrow crypto assets without any middlemen. In a nutshell, it is a pooled algorithmic money market protocol where the lenders don't directly lend their assets to borrowers but a liquidity pool where borrowers can borrow money. The pool is not governed by people, a bank, or the creator's team (Compound Finance) but a series of smart contracts.
These contracts match borrowers with available assets and automatically manage interest payments from borrowers to lenders. Looking at the supply and demand on compound, the protocols use algorithms to determine the interest rates. Similar to Maker, it is permissionless as there is no KYC or ID verification, and anyone in the world can start lending and borrowing at any time.
Although crypto markets are relatively young and have only been around for a few years, there's a lot of potential for crypto lending. It is an emerging concept that has brought quite an attention from crypto investors and traders. Whether you choose to participate in centralized or decentralized lending, expect to see further projects in both spheres spurred by convincing growth in cryptocurrency deposits and loans' productivity.
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