Earning interest on crypto is possible primarily due to crypto lending and borrowing.
What is lending?
With traditional savings accounts, you deposit funds in an interest-bearing account. The bank then pays you interest according to current rates and typically on a monthly basis. This process is you lending your money to the bank, as the bank then uses your deposited funds to lend to other customers.
The interest rate varies depending on many factors. Rates change over time and have been relatively low in recent years. As interest rates rise at the federal level, we anticipate traditional savings account interest rates will go up. However, they have been near zero for a long time, and even accounts marketed as “high interest” rarely break 1% APY.
Enter crypto lending accounts
Based upon the traditional lending model of savings accounts, crypto lending services allow you to deposit cryptocurrency so they can lend it out to others. They pay you interest for the deposits.
Crypto savings accounts are a way to generate passive income on your existing cryptocurrency assets; double-digit interest rates are possible, even common.
What is borrowing?
Loans are the best-known form of borrowing. Just like with lending, you can borrow money and use crypto as the backing currency. Deposited assets into platforms are typically leveraged in loans or other applications that allow the service to earn returns on those funds, and they share the yield with you in the form of interest.
Many services offer direct lending/loans. Nexo is just one choice and allows you to borrow against deposited crypto instead of other secured assets you would need for a more traditional loan (like your house or a financed car).
With cryptocurrency that doesn’t natively earn interest on its codebase (known as staking), like Bitcoin, lending is the main way that services are able to pay interest on the coin. Otherwise, you would simply hold your crypto in a wallet (hardware or software) where it would not grow in amount over time (beyond price appreciation).
Crypto Lending Risks
Crypto lending is not without its risks. As you are effectively giving up your crypto, you are entrusting it to the service to someday give it back (plus interest)! However, high returns are often associated with some level of risk; most crypto lenders are OK with this for the potential returns. But that is a very personal decision to make, and recent headlines, specifically with Celsius Network, have proven that even popular platforms that engage in crypto lending can be risky. Even popular services may not be able to return funds in a volatile market.
We recommend that you never invest more in anything than you can and are willing to lose, and diversification across platforms can reduce total loss. Still, even healthy diversification cannot prevent losses and might increase your exposure to failure. Some investors keep a certain % of crypto in a lending service but another % in a cold/secure wallet.
TLDR;
Crypto lending allows investors to lend out their crypto assets to other platform users known as borrowers. Similar to securities-based loans in traditional banking, cryptocurrency-backed loans are secured loans, one difference being that they collateralize digital currency. Lending out their crypto gives investors an easy way to generate passive income on existing assets.
Defi Lending is a decentralized finance protocol that enables lending and borrowing through smart contracts.
Crypto lending services, available through most crypto platforms, allow you to deposit cryptocurrency into a dedicated wallet which they lend to other users, known as borrowers, and pay you, the lender, interest for the deposits.
You can earn passive income by holding your crypto assets in interest-bearing wallets offered through most major cryptocurrency platforms. Your assets are loaned to other users through the platform’s dedicated lending service while you earn a percentage back in interest. Double-digit interest rates are possible, even somewhat expected in crypto lending, and often combined with compounding interest earnings paid out daily, providing investors with the opportunity for multiple streams of passive income.
