Best Lending Platforms For Crypto Loans

Odds are you have a savings account with your bank and you’re probably earning an abysmal interest rate on that money. Most savings accounts in 2021 offer less than 0.5% annual interest to their clients. 

But, what if you could be earning an annual percentage yield (APY) that’s 10 or 20 times more than your current interest rate with your bank? Cryptocurrency makes this possible through smart contracts, and you don’t even need to be exposed to risky assets like Bitcoin to do so. With stablecoins, you can earn around 7% annual interest on tokenized USD. Also, these platforms let you easily take out loans using crypto as collateral.

Cryptocurrency Loans Explained

Cryptocurrency loans operate similarly to a loan you would get at a bank. The bank receives funds from your savings account, which it then lends to borrowers. The bank offers you interest on your savings account and then charges borrowers a higher interest to earn a profit.

Two blockchain-related technologies make these phenomenal interest rates secure and risk-averse. First, smart contracts guarantee crypto loans are paid back, even without vetting the borrower’s credit. Smart contracts are codes on the blockchain that can perform certain functions, such as holding loan collateral in an escrow account.

Second, stablecoins allow you to earn great interest rates without being exposed to the high volatility of Bitcoin. Stablecoins, such as USDC, DAI and Tether, are cryptocurrencies always equal to $1. These cryptocurrencies are able to maintain a stable value through USD reserves, arbitrage and complex code backed by cryptocurrencies. 

There are 2 distinct types of cryptocurrency lending platforms on the market today: centralized lending platforms and decentralized finance (DeFi) protocols.

Centralized Crypto Lending Platforms

Centralized cryptocurrency lending platforms operate most similarly to banks. Platforms like Nexo allow you to earn interest on your cryptocurrency by storing your funds on its platform. Nexo then lends your money to institutional and corporate buyers. In light of centralized lending platforms collapsing in 2022, more investors are aware of counter party risks involved with centralized crypto lending.

The interest rate you earn is a floating interest rate, meaning that it changes with supply and demand. Over the past year, however, the APY for stablecoins on cryptocurrency lending platforms has remained relatively stable around 3%. The cryptocurrency you chose to fund your account affects the interest rate you earn.

Decentralized Finance (DeFi) Platforms

DeFi is a new industry that has recently gained popularity among cryptocurrency investors. DeFi uses smart contracts to replace centralized 3rd parties in transactions. Instead of having a bank manage loans, for example, DeFi uses escrow accounts and code to manage money autonomously.

Smart contracts are essentially just contracts on the blockchain. As this code is uploaded to a blockchain (typically Ethereum, as Bitcoin doesn’t support smart contracts), it's able to hold cryptocurrencies in escrow until specified functions are undergone.

For example, smart contracts can allow you to take out a loan without credit. If you want to take out a loan for a cryptocurrency, all you need to do is add collateral to the smart contract and then choose which crypto you want your loan in. Popular dapps to earn interest in DeFi are Aave, Compound, yearn.finance, Curve, and Convex. Due to the low-risk of these apps, interest rates however between 1% and 3%. That being said, protocols like Origin Dollar are able to boost these yields through active management between protocols, earning users higher interest than using any one app alone.

So what’s the point in taking out a loan if you need to put up collateral? For most retail users the answer is leverage. If you put up collateral in a cryptocurrency and receive a loan in cryptocurrency, you’re essentially doubling your leverage. If you pay back your loan, you will profit from the appreciation of the crypto you borrowed and the crypto you put up as collateral.

Best for Miners: Helio Lending

Miners benefit from the platform as Helio allows you to leverage your current holdings for cash. The cash can then be used to reinvest back into mining.

Helio Lending is a great platform that allows you to leverage your digital assets in return for short-term cash. It is simple and easy to use, and the company does all the work of finding the best loan for you. 

Helio offers loan-to-value ratios of 40%, 50%, 69% and 70%. Your APR depends on the loan-to-value ratio, which can be as low as 0%. The company also provides a flexible choice of repayment options that include interest-only or full repayments. 

Helio charges consumers no fees. In addition, you will generally not have to worry about any margin calls, can count on downside protection for loans and will feel secure knowing your digital assets remain in cold storage.

Best for DeFi Loans: yearn.finance

Interest rate: 1.3% to 18.65%

The yearn.finance protocol is a decentralized way to earn interest on your cryptocurrency. Instead of a trusted 3rd party like BlockFi, yearn operates on smart contracts. 

Yearn offers a suite of products in the decentralized finance industry. Its 2 most popular products are yearn vaults and yEarn. Yearn vaults pool users’ money into a smart contract that searches for the highest yield opportunities in the market. The contract autonomously allocates capital based on the opportunities present in the market.

yEarn, a lending aggregator, automatically allocates capital to different lending platforms based on the interest rate offered. The lenders which yearn.finance allocates funds to are Aave, Compound and dYdX.

Yearn token (YFI) is the governance token that allows YFI holders to vote on upgrades to the smart contracts. Since yearn token’s release, YFI has appreciated over 4,000%, and each YFI token is currently trading at around $34,000. 

Much like the centralized exchanges above, yearn.finance offers no-maximum loans based on collateral. Also, the interest you earn on your crypto is highly variant based on the cryptocurrency you fund the protocol with (TUSD offers the highest stablecoin yield at 14.5% APY). 

Best for Mobile Users: Argent Wallet

Interest rate: 1% to 24% APY

Argent is probably the best DeFi wallet around. What’s unique about argent’s wallet is that you can directly interact with several lending protocols to earn the most competitive APY. Argent currently supports protocols such as Aave, Compound and yearn. 

Argent is a great choice if you’re looking to hold your cryptocurrency in a crypto wallet that allows you to earn interest. There are a few drawbacks to argent when comparing it to centralized crypto loans, however.

First, argent is an Ethereum wallet. This means that you are only able to deposit Ethereum and Ethereum-based tokens (such as Tether, yearn and USDC). If you’re looking to earn interest on Bitcoin, there are ways to use Bitcoin on Ethereum’s blockchain by using Wrapped Bitcoin (WBTC).

Second, argent doesn’t offer its users loans. If you’re looking to get a loan using your cryptocurrency as collateral, you should consider using BlockFi. 

Is Crypto Lending Safe?

Generally speaking, the majority of risk one takes on in crypto lending is the volatility of digital assets. If you're lending a large market cap cryptocurrency like Bitcoin or Ethereum, the interest rate you earn will be relatively stable. However, the digital assets you use to earn this interest may fluctuate significantly in value. DeFi lending is also subject to smart contract risk, that is, the risk a hacker finds a way to exploit the smart contract's code.

Could Blockchain be the Future of Loans?

Yes, it could be. Cryptocurrency could be the future of money — making blockchain the future of loans. Although these projects have had billions of dollars locked into their protocols, they have a long way to go before taking over the multi-trillion dollar debt industry.

Right now most crypto loans are consumer-oriented. For crypto loans to truly become mainstream, developers need to create a better system of credit on the blockchain –– this will allow more users to receive loans and increase the utility of borrowing money through the blockchain.

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