What is Crypto Lending?

BeginnerNov 21, 2022
A thorough explanation of what crypto lending is and how you can earn passive income.
What is Crypto Lending?

You can borrow money in different ways. For example, you could take out an informal loan (also called a private loan) from friends or family when you don’t have enough money on hand. It is also possible to take out an official loan from the bank. In the crypto industry, it is possible to lend money in the form of crypto for a fee or interest in return. We call this “crypto lending”.

If you’re holding some crypto for the long haul with no plans to sell, why not add value to your digital currencies by lending it to other users? Compared with the traditional savings account, lending your digital assets in exchanges often leads to a hefty return and minimal risk. So, is crypto lending worth giving a try? What are the benefits and risks involved?

What is Crypto Lending?

Crypto lending is a form of investment where investors lend money to borrowers on a decentralized cryptocurrency exchange or CEX, like Gate.io. The lender offers crypto as collateral, or without collateral, which the borrower then uses for a fixed duration (of 10 days). In return, the lender obtains profit in the form of interest or a fee from the borrower. It’s a win-win situation for both parties. Since interest rates can sometimes be high, crypto lending is an incredibly popular way to earn a return on your crypto assets. Against the high returns, of course, there is also an increased risk. There are several platforms available for these services which offer different rates and fees.

Crypto lending with or without collateral

There are two types of lending for you to choose from, let’s explain them in detail.

Collateralized loan

We talk about collateralized lending when you must put up collateral to take out the loan. This way, the lender knows that you can repay your loan. This is because it is difficult to determine whether someone is creditworthy enough on the blockchain.

The blockchain is completely decentralized. There are no central bodies that can provide information about creditworthiness. It is also challenging to determine the identity of users. Fortunately, more and more solutions, such as KYC, are emerging to make that possible.

Undercollateralized loan

More and more protocols are offering a solution to the problem of creditworthiness. This makes it possible to take out loans where you don’t have to put up any collateral, or at least a lower amount. We call this undercollateralized lending.

The advantage of undercollateralized lending is that it is also possible for people without a large budget to borrow crypto. With collateralized lending, you can only borrow crypto if you own cryptocurrency with the same value.

The disadvantage for the lender is, of course, that there is less certainty that the loan will be repaid. So the lender runs a greater risk here.

How to lend your crypto on the Gate.io platform

Crypto lending takes place between a lender and a borrower on a digital assets platform, such as the Gate.io exchange. There is no need for an intermediary, which means costs are lowered, the settlement period is faster, and a more diverse and potentially equitable market emerges. Users can submit an order to lend at a specified daily interest rate of their own choice and wait for the borrowers to match the order. The order will be executed for a fixed duration. After the end of this period, the borrowed amount will be repaid by the borrower to the lender plus interest rates.

Overdue loans exceeding this duration will trigger mandatory repayment. The repayment will be deposited into your account immediately. The Gate.io platform enables you to lend the repayment again by using the “Auto-renew” function.

Borrowers are also able to repay in advance. In this case, the actual loan duration is subject to the repayment date.

The earnings of crypto lending come from the interest and are calculated hourly.

Calculation rule: less than 4 hours are calculated as 4 hours, and more than 4 hours are calculated based on the actual period. Less than 1 hour is calculated as 1 hour.

Interest formula: Interest = loan amount daily interest rate / 24 number of loan hours

After the lender receives the repayment (principal + interest), Gate.io will charge a percentage of fees from the interest. The benchmark fee rate is 18%, and a tiered discount is offered to VIP users.

Benefits of crypto lending

Crypto lending is an attractive option for all investors. The following are some of the benefits of crypto loans:

  • Interest rate: crypto lenders can make a huge amount of money in terms of interest rates. Some lenders have even made a bigger profit than the value of their crypto lent.
  • Forget about crypto volatility: cryptocurrencies can be highly volatile at times. Some people worry about losing their investments due to sudden price fluctuations. Crypto lending can save you that hassle. When someone borrows your crypto, you no longer have to worry about price volatility. However, keep in mind that you will be responsible for balancing the value of the collateral.
  • Instant Repayment: if you are a verified crypto lender, you can get the payment quickly.
  • Passive income: you can earn money away from your computer, while asleep or on vacation.

Risks of crypto lending

Although borrowers must put up collateral, you could still lose money through crypto lending. This is because lending takes place entirely on a smart contract. These are fully automated and something can always go wrong.

  • Security risk: A security breach can occur in the smart contract or the platform on which you have lent your coins. In that case, hackers manage to steal coins, causing you to lose money.
  • Risk of liquidation: There’s the possibility of a sudden drop in crypto prices, which could eventually lead to liquidation, even in over-collateralized loans.

Conclusion

Crypto lending means lending part of your cryptocurrency to borrowers on a decentralized crypto exchange and is a great way for users to earn passive income. When you lend crypto, you receive an interest rate on the number of crypto coins you tie up in the order. This transaction has benefits for both lender and borrower when done correctly. Against a high interest rate, there is also a high risk. The borrower may not be able to repay the loan, or the platform or smart contract may be attacked. Always make sure you invest only what you can afford to lose.

Author: Joyce
Translator: Joy
Reviewer(s): Mauro, Edward, Joyce
* This article represents only the views of the observers and does not constitute any investment suggestions.
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