Crypto lending has become a viable venture for people looking to make extra money from their digital assets without actually selling them. There are multiple platforms in the blockchain industry offering such a service but selecting the right can be challenging.
This guide is dedicated to helping identify the appropriate platform. We will explore all the aspects to look for, such as the platform’s reputation, loan terms, safety measures and many more.
What is a Crypto Lending Platform
A crypto lending platform is an online service that allows people to borrow or lend digital assets. The APY (Annual Percentage Yield) offered in such a platform is usually higher than that of a traditional financial institution.
A Crypto lending platform can be decentralized or centralized. The latter adheres to various regulatory protocols such as anti-money laundering (AML) and know-your-customer (KYC), while the former allows users to transact without providing personal data.
One major benefit of crypto lending platforms is that anyone can access their services.
However, they carry several risks. For example, there is a possibility you could lose all your funds, considering that the crypto space is full of bad actors. Therefore, choosing a reliable platform vital to mitigate this risk.
How to Pick the Right Crypto Lending Platform
If you wish to invest in a crypto lending platform to earn interest or secure a loan, it is important to conduct proper research first. Here are the aspects to consider to determine if a platform is reliable.
Security
It is crucial to assess the security measures adopted by a crypto lending platform to ensure that your funds are safe. Also, Unlike banks, crypto lending protocols do not have federal deposit insurance that assures depositors will be made whole in case of insolvency or theft. Therefore, make sure you only invest in a platform with adequate security protocols to avoid losing money.
Interest Rates
The interest rate is another factor to consider when selecting a crypto lending platform. As a borrower, you want to take a loan from a platform that offers low interest rates to avoid over-repaying your loan, while as a lender, you should look for platforms offering high interest rates to earn more.
Loan Terms
Some crypto loans require collateral, while others do not. For one that must be collateralized, users are requested to provide a particular amount of digital assets to back the loan. After paying it off, you can then reclaim the collateral. However, if you fail to honor repayment, that collateral is liquidated to cover the loan.
Loans that can be secured without collateral are known as flash loans. However, this option needs you to have a comprehensive understanding of the blockchain space because it can be challenging to fathom how it works.
Liquidity
Liquidity measures the ease with which users are able to convert one crypto asset into another or cash. This helps you to gauge a crypto lending platform’s operational efficiency. Note that when the liquidity is low, especially on a decentralized platform, the smart contract automatically increases the interest rate to attract lenders to invest while compelling borrowers to settle their loans quickly.
Loan-to-value Ratio
A loan-to-value (LTV) ratio is a metric adopted by crypto lending protocols to determine the level of risk associated with a particular loan. LTV compares the loan amount with the value of digital assets offered as collateral. If the LTV ratio is high, it means the risk associated with the loan is also high, and therefore, a high interest rate is imposed. The vice-versa is true.
Platform’s Reputation
When selecting a lending platform, it is advisable to pick one with a good reputation. Check reviews of the platform to determine if its services are reliable.
Popular Crypto Lending Platforms
As mentioned before, lending platforms can be decentralized or centralized. Some of the popular centralized platforms include Binance, Kucoin, OKX, and Bybit, while decentralized platforms include YouHolder and Bake, also known as Cake DeFi.
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