What is crypto lending?
With crypto lending, a user can borrow or lend cryptocurrencies. These lending agreements will usually have a fixed payback term and come with a fee or interest.
There are different kinds of lending agreements (we'll cover them in more detail below), some of which can have you borrowing cryptocurrencies in as little as a few minutes.
There are a number of specific crypto lending platforms that specialize in this service, however, many of the better crypto exchanges also have some form of basic crypto lending available to their users.
What are the best crypto lending platforms?
If you want to learn more about how this all works and what you need to consider before getting into bed with a specific lender, scroll down. We have a lot of information lower down the page.
I'm also taking this opportunity to let you know that there is no single "best". The best depends on your needs and circumstances.
Make sure you DYOR and check out the customer reviews of the listed projects and lenders above.
Below I'll list a few of the popular lenders for you to consider.
1. Aave Protocol
Best for those interested in DeFi
Aave is one of the biggest lending providers in the space. It offers low borrowing rates and uncollateralized flash loans.
It has markets on Ethereum, Polygon, Optimism, Fantom, Arbitrum, and Avalanche.
Aave's flash loans are the first of their kind and provide users with short-term fixed-interest rate loans as well as an AMM market. The protocol boasts high LTV rates and low borrowing rates for its users.
This is the crazy bit. At the time of writing, the Aave community treasury holds $6,300,000,000 in assets across four networks: ETH, Polygon, Avalanche, and Optimism.
Lenders to the protocol deposit their funds and receive Tokens in exchange which accrue interest over time. This makes Aave one of the most popular DeFi platforms for those looking to take advantage of crypto loans without having to put up collateral or pay high fees.
2. Alchemix
Best for lower risk tolerance borrowers
Alchemix is another popular lender in the space.
It offers users the ability to tokenize and leverage their crypto assets, allowing them to access cash while maintaining ownership and preserving appreciation potential.
With Alchemix, users can unlock liquidity of crypto asset holdings by combining a variety of loan products together, providing an easy and efficient solution for responsible crypto-asset management.
Additionally, Alchemix has built a system of smart contracts that allow users to earn passive income through yield farming strategies without putting their funds at risk.
3. Nexo
Best for those who want insurance
Nexo is a popular CeFi lending platform that allows users to borrow against their crypto assets.
It offers over 60 different collateral options and 40 fiat currencies and stablecoins, as well as access to more than 200 jurisdictions.
Nexo has issued over $7B in credit to over 5M users since 2018.
It;s one of the established lenders that seems to be more trustworthy than smaller offers in the space.
Nexo is backed by $150 million in insurance from LedgerVault and an additional $125 million from Bakkt, making it a good choice for more conservative investors. The platform has processed over $130 billion in loans over the past five years and serves more than 5 million users.
Nexo's loan-to-value (LTV) rates are slightly higher than average CeFi loan providers, with borrowing rates capped at 13.9%.
On the lending side, you can make up to 17% APR. This makes Nexo an attractive option for those looking to get the most out of their crypto investments without taking on too much risk.
Additionally, Nexo provides its users with a suite of tools such as auto-investing and portfolio management features that make it easier to manage your investments.
4. Salt
Good for reward hunters
Salt Lending is a peer-to-peer crypto lending platform.
With Salt Lending, users can loan from as little as $5 up to a maximum of $25 million at competitive rates with the ability to increase their loan amount over time using the same collateral.
Salt Lending has multiple security measures in place such as automated smart contracts and fraud prevention protocols that minimize potential risks or losses on loan transactions.
They also have a passive income system called Stackwise which gives you a portion of your monthly payment back to your crypto wallet in the form of crypto rewards
It's a great way for businesses and individuals alike to access liquidity easily and quickly while hedging against volatility in the crypto markets.
5. Compound
Best for DeFi on Ethereum
Compound is one of the leading DeFi lending platforms, allowing users to borrow and lend without any minimums.
It operates solely on the Ethereum blockchain, meaning that investors can only use currencies that are on the ethereum blockchain.
This is a lower number than many competing platforms, but it still offers a wide variety of options for those looking to earn compound interest.
Compound has a somewhat steep learning curve, as its interest mechanisms work differently than most.
However, once users understand how it works they can take advantage of some of the best crypto loan rates available on the market today. Interest rates for stablecoins are between .6 and 1.3%, making Compound an attractive option for those looking to maximize their returns from DeFi borrowing.
What is a crypto loan?
A crypto loan gives traders access to liquid funds without having to sell their cryptocurrency.
Lenders can use their digital assets as collateral in exchange for cash or stablecoin loans. If you expect the value of your crypto to increase, this can be a great way to get some liquidity with very little downside.
The big problem with crypto has always been how you're able to use them in day-to-day life. This is what crypto loans are helping with.
They offer a secure and convenient way for people to access liquidity without having to sell their digital assets.
They also provide an alternative option for those who don’t want to pay the high fees associated with traditional banking services.
Crypto loans are typically offered by specialized lenders (many of whom are listed on this page), and borrowers must meet certain criteria in order to qualify. The process is relatively straightforward and can be completed quickly, allowing borrowers access to funds within a matter of days.
What do I need to get a crypto loan?
There's no one set of rules for this. Different lenders have different needs and checks that they'll use to assess how viable you are.
Here are a few of the check many lenders will ask of you.
You'll need a specific currency
The lending party will often only work with a handful of cryptocurrencies. If you don't hold the currency they work with they won't be able to give you a loan.
Most often, these currencies are the ones that are more stable. We're talking blue chip currencies like Bitcoin and Ethereum or stablecoins.
In short, currencies with lower volatility.
You'll need the right amount
Again, different lenders have different rules. but often there's a minimum amount you'll need to have in currency for them to work with you.
Basic KYC checks
Beyond this, you'll need to perform and pass basic KYC checks.
This is really to safeguard the lender and make sure that everything is above board.
How does crypto lending work?
Crypto lending generally requires three different parties.
- The lender
- The borrower
- The exchange
The exchange is usually a DeFi platform that allows P2P sharing and lending crypto.
As a general rule, the borrower will have to provide some form of collateral before borrowing anything. This is to secure the lender in case the borrower defaults on their repayment.
The lender retains the ownership of the cryptocurrency they're lending. However, for the duration of the lending agreement, they won't have any rights to use that cryptocurrency as they've given that permissions to the borrower.
Types of crypto lending agreements
There's a matrix of 2 x 2 when it comes to crypto loans. I\'ll split them between categories and types.
Let's first look at the categories.
Custodial crypto loans (CeFi loans)
Custodial crypto loans, also known as CeFi loans, are a type of loan where a central entity takes custody of the collateral.
This means that the trader cannot access their assets directly, but instead the lender holds the private keys to the assets.
The advantage of custodial crypto loans is that they are far more accessible and affordable than traditional loans.
However, this comes with a tradeoff; since these loans depend on a centralized lending provider, there is less transparency and control over how the terms of the loan are enforced. As such, many crypto holders have turned to DeFi for its greater transparency and decentralization.
Non-custodial crypto loans (DeFi)
Non-custodial DeFi crypto loans are offered by decentralized finance (DeFi) platforms such as Aave and Compound.
Unlike traditional custodial loans, these loans do not depend on a central organization to enforce the terms of the loan.
Instead, they rely on smart contracts that are programmed into the blockchain. This means that when a trader takes out a DeFi crypto loan, they retain control of their assets' keys unless they default on the loan.
Unlike custodial loans, DeFi platforms cannot directly lend fiat currency.
Instead traders receive stablecoins that can then be exchanged for cash. T
he interest rate for these types of loans is usually higher than custodial loans due to the lack of centralized control and increased risk associated with them.
However, many traders find this risk worth taking in order to gain access to quick liquidity without having to give up control of their assets.
Those are the two categories.
You'll also want to know about the two primary types of crypto loans.
Crypto Flash loans
Flash loans permit the borrowing of crypto without you having to put up collateral. They get their name because the entire process of getting and repaying the loan is handled in a single block.
If the loan cannot be repaid with the interest, the transaction is cancelled before it's written and validated in the block. Effectively making it so the loan never happened.
There's no human interaction with this kind of lending and all is handled by the smart contract that dictates the lending process.
So, if the flash loan is handled in a single block, what's the actual usage of this kind of crypto lending agreement?
It's generally used for quick trades that take advantage of price differences between two liquidity pools.
Imagine you're interested in token A.
In liquidity pool 1, that token is trading at $1.
However, in liquidity pool 2, it's trading at $1.20.
This is obviously a great opportunity for you to trade it and make a small profit on each token.
The problem you face is you have no available funds to make the initial trade. Rather than give up, you could use a flash loan to facilitate this trade and take advantage of this arbitrage opportunity.
Now let's imagine that you take out a flash loan for $10,000 USDT. You'd set up the flash loan along the below steps.
- You receive the funds to your crypto wallet
- You use them to purchase $10,000 of the token in LP 1
- You then sell those tokens on LP 2 for a total of $12,000
- You pay off the loan plus interest in the smart contract
Anything that's left of your $2000 profit after you've paid the flash loan fee is yours to keep.
If, for any reason, any of the steps cannot complete, then the flash loan is cancelled before it can be written to the block. Meaning there's no risk for you unless you get the math wrong and don't properly account for fees and exchanges.
Collateralized crypto loans
Collateralized crypto loans are similar to regular loans you may be familiar with. These still require the three parties, however, the borrower receives more time to use the funds but must provide some collateral.
Because of the very volatile nature of most cryptocurrencies, you'll likely have to provide a very low loan-to-value ratio.
What this means is you'll have to provide a large percentage of the amount you're borrowing in collateral. Often around 50%.
What this means is that for a loan that equals $5,000 in value, you will have to provide $10,000 of an asset as collateral. You'll also need to keep an eye on price swings. If the value of your collateral drops below the agreed value, you'll need to top it up. And if it falls drastically, getting close to the borrowed value of assets, you may be forcefully liquidated so the lender doesn't make a loss.
In the above example of you putting up $10,000 for a $5000 loan, you might be liquidated as soon as the value of your collateral hits $6000.
The positives of crypto lending
- Easily accessible capital - Pretty much anyone can get a crypto loan. All you need for a flash loan is to find an arbitrage opportunity and have the ability to set up the steps. For a collateralized crypto loan, you just need the ability to put up the collateral requested.
- Smart contract automation - For the majority of loans, a smart contract manages the whole process which makes the system far more scalable than doing things manually.
- Passive income with little work - In addition to staking your crypto., lending can be a great way to earn good interest completely passively.
- Low interest rates - Not as cheap as home mortgage or car loans, crypto loans can be cheaper than credit cards and personal loans.
- Based on asset value - You can often borrow value that's equivalent up to 50% of your portfolio. Some specific crypto exchanges offer higher than this though.
- No credit check- It can be difficult to get fiat loans thanks to credit checks. With crypto loans and lending, you're assessed solely on the value of your portfolio which can make things easier. Crypto lending platforms and exchanges typically won’t run a credit check when you apply, making it an incredibly attractive financing option for people with poor credit or no credit history.
The negatives of crypto lending
- High risk of liquidation - Crypto is so volatile that even over collateralized loans can find themselves liquidated unexpectedly.
- Smart contract weaknesses - One of the many attack vectors for hackers and scammers is smart contracts. If there are issues, loopholes,. or poorly written code, attackers can take advantage of the contract and cause real damage.
- Increased risk - Crypto lending is risky thanks to the volatile nature of crypto. By lending por borrowing you increase the risk of your portfolio.
- Locked assets - If you lend your crypto, or if your loan has an outstanding repayment balance, you won't be able to use it for anything. If prices then fluctuate, this could be a significant problem.
- Repayment terms - Loans usually are built around typical installment repayment structure. Different platforms will have different terms and lengths. You need to know what these terms are before taking out the loan.
- Insurance - If lending your own digital assets, any funds in a crypto interest account might not be insured. That means oif the exchange fails, you're going to lose your money. If this is how you operate, you might want to talk to a good crypto insurance company to see if they can help.
How to choose a great crypto lending platform
If you have the funds to spare, are happy with the risk, and know that you want to borrow cryptocurrency, you just need to look for the right crypto lending platform.
The above list will be a good starting point. however, in addition to our recommendations, you need to look at each one to see...
- If they support the currency you want to lend/borrow
- Have terms you're comfortable with
- Have fees you can afford
- Are a reliable and stable lending platform that's not likely to collapse
If you're happy with the lending platform, and happy with the risks, you should be good to go on your crypto lending adventure.
What are the risks involved with crypto loans?
Whenever you borrow money there are always risks involved.
However, thanks to the unique elements of cryptocurrencies and their volatility, you need to know of these key considerations.
Margin calls leading to forced liquidations
Margin calls and forced liquidations are a common occurrence in the cryptocurrency market. When the value of a cryptocurrency drops to a point where many borrowers' loan-to-value (LTV) ratios exceed the maximum allowed by a lending platform, the platform will issue margin calls or force liquidations.
A margin call is an alert sent to borrowers informing them that they must increase the value of their collateral or risk liquidation.
If this call is not met, then the platform may liquidize enough of the borrower's collateral to bring their LTV back into compliance with the maximum ratio. This can result in traders forfeiting part of their deposit, incurring capital gains or losses, and being charged transaction and broker fees.
Forced liquidations are an important tool for preventing illiquidity during market downturns. By ensuring that lenders maintain adequate collateral levels, platforms can protect themselves from losses due to defaulted loans and ensure that there is sufficient liquidity in the system to meet demand.
While these measures can be inconvenient for traders, they are necessary for maintaining stability in volatile markets.
Counterparty risk
Traditional banks are subject to FDIC requirements that ensure a certain level of liquidity, but crypto loan providers are not.
This means that if the market crashes, an unexpectedly large number of clients default on their loans, or if a platform breaks or is exploited, the crypto-lending platform may find itself without the liquidity to return a borrower's collateral.
We've seen this in recent years with brands including FTX.
In order to mitigate counterparty risk, it is important for borrowers and lenders alike to do their due diligence when selecting a crypto loan provider.
It is also important to understand the terms and conditions of any loan agreement before entering into it. Additionally, borrowers should be aware of the risks associated with using leverage and should only borrow what they can afford to lose in case of a market crash or other unforeseen event.
Finally, lenders should diversify their portfolios across multiple platforms in order to reduce their exposure to any single platform’s potential failure.
Technical risk for smart contracts
Technical risk is an inherent part of cryptocurrency trading, and it is important in the realm of decentralized finance (DeFi).
This risk arises from the fact that all DeFi activity is algorithmically governed, meaning that there is no human intervention to prevent or mitigate any technical issues. There is a risk that protocols could break down due to a technical problem or malicious hacking.
In addition to this, non-custodial loans pose an even greater risk since they are not backed by any centralized institution.
This means that if something goes wrong with the protocol, users may not be able to access their funds or have any recourse for recovering them.
Furthermore, since these protocols are open source and can be modified by anyone, there is always the possibility of malicious actors exploiting vulnerabilities in order to steal funds.
It is important for users to take extra precautions when engaging in DeFi activities and ensure that they understand the risks associated with them before investing.
Crypto lending platform FAQs
We've pulled a few of the most common questions together her to give you some quick answers.
Can you borrow cryptocurrency without collateral?
As mentioned above, you can borrow cryptocurrency without collateral. However, you'll be limited to flash loans if this is your preferred method of lending crypto.
However, this is risky as market conditions will impact the availability and value of these loans.
Are crypto loans safe?
As with any loan, there is always a degree of risk associated with taking out a loan.With crypto being such a volatile asset, it’s important to be cautious about overextending your LTV and using crypto loans to trade on margin.
It’s also important to work with an established crypto-lending platform that has been in business for some time and understands the market well.
When considering taking out a crypto loan, it’s essential to understand exactly the terms of the agreement before executing it.
This includes understanding how much you will need to pay back in interest and fees, as well as what happens if you are unable to repay the loan on time or in full.
If you are extremely risk-averse, you may want to fully vet your chosen crypto-lending platform and find out how heavily they are insured against potential losses.
By doing your due diligence and understanding all of the risks involved, you can ensure that any crypto loan is safe for you.
How much can I borrow from crypto loaning platforms?
The amount of money you can borrow against your crypto will depend on the platform you use. As mentioned above, there are some platforms that will lend into the tens of millions.
However, you have to have the correct value of assets in cryptocurrency and understand Loan to value.
Generally, the loan-to-value (LTV) ratio is 50%, meaning that you can borrow up to 50% of the value of your crypto assets. However, some platforms such as YouHodler offer higher LTVs, up to 90%.
For example, if you have $1,000,000 worth of BTC, you would be able to borrow up to $500,000 in fiat on a 50% LTV ratio.
Bear in mind that if the value of your crypto falls below the LTV number, you could get liquidated and lose it all.
Do crypto loans count as income?
We are not accountants and we cannot speak for every territory. Make sure you check with a professional and don't just take general advice of the internet as gospel.
That being said, generally speaking, crypto loans do not count as income and therefore are not subject to taxation.
This is because the loan is secured against the value of the cryptocurrency deposited as collateral, rather than being considered an income-generating event.
In essence, taking out a crypto loan is similar to taking out a home equity line of credit.
The borrower receives cash in exchange for their cryptocurrency deposit, but this does not constitute taxable income since it is simply a loan against an asset. Borrowers should be aware that any profits or losses from their crypto loan will need to be reported on their taxes, but the loan itself will not be counted as income.
How do I pay back a crypto loan?
The terms will differ on an individual basis.
However, generally speaking CeFi loans offer repayment terms from three to 60 months, and upon repayment, you'll receive your collateralized crypto back in return.
DeFi loans offer more flexibility than CeFi loans as they are secured by smart contracts that lock up your collateral until the loan is paid off along with any interest accrued.
This means that you don't have to worry about missing payments or defaulting on the loan since the collateral will be returned when all payments are made.
