A crypto lending platform facilitates this process by managing deposits, setting loan terms, and ensuring that borrowers provide sufficient collateral. This system enables lenders to earn crypto lending passive income, while borrowers gain liquidity without selling their holdings.
How the crypto lending process works
1. Deposit crypto
Investors deposit cryptocurrency into a crypto lending platform, which either holds the assets in custody or moves them into a decentralized lending protocol. In custodial systems, the platform manages the assets and distributes loans. In decentralized models, smart contracts automatically lock the assets and issue loans based on predefined conditions.
2. Loan issuance
Borrowers apply for loans by pledging collateral, usually another cryptocurrency, to secure the borrowed amount. The platform sets a loan-to-value ratio (LTV), which determines how much a borrower can receive relative to the value of the collateral. A lower LTV means the collateral must be worth significantly more than the loan, reducing risk for lenders if crypto prices drop.
3. Interest accrual
Borrowers pay crypto lending interest rates, which vary based on platform policies, market demand, and asset type. Lenders receive interest as returns, often in the same cryptocurrency they deposited.
4. Repayment and withdrawal
Once borrowers repay the loan, the platform releases the collateral. Lenders can then withdraw their crypto lending passive income or reinvest it for compounding returns.
The two main types of crypto lending operate differently.
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CeFi crypto lending is a system where a centralized entity manages transactions, holds custody of assets, and sets loan terms.
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DeFi crypto lending is a system where decentralized lending protocols use smart contracts to execute loans automatically, ensuring transparency and eliminating intermediaries.
Lenders must assess crypto lending interest rates, collateral requirements, and the LTV in crypto lending to determine potential returns and risks. Higher interest rates can increase earnings but may indicate higher borrower risk. Stricter collateral requirements provide more security but limit borrowing flexibility. Choosing the right platform and loan terms helps balance risk and maximize passive income.
Both crypto lending and staking offer some of the best ways to earn passive income with crypto, but they function differently.
Crypto lending generates income from borrower interest payments, where lenders deposit cryptocurrency into a crypto lending platform and earn returns as borrowers repay loans with interest. The lender retains ownership of the assets and can often withdraw them based on platform terms.
Crypto staking secures a blockchain network by locking cryptocurrency in a Proof of Stake (PoS) system. Instead of lending assets to other users, investors stake their crypto to validate transactions and maintain network security. In return, the blockchain distributes staking rewards, typically in the form of newly minted tokens.
Lending provides more liquidity, while staking requires assets to remain locked for a set period. Risk factors also differ. Crypto lending exposes lenders to borrower defaults, platform risks, and market volatility, while crypto staking depends on network stability and price fluctuations.
The key difference between crypto lending vs. staking lies in where the returns come from. Crypto lending generates income from borrower payments, while crypto staking earns rewards directly from the blockchain network.
Another major difference is liquidity. Crypto lending platforms often allow lenders to withdraw funds based on loan terms, making assets more accessible. Crypto staking, however, requires locking assets for a fixed period, during which they cannot be withdrawn. The length of this period varies by blockchain, with some requiring weeks or months before assets become available again.
Risk also differs between the two methods. Crypto lending exposes lenders to borrower defaults, platform security risks, and interest rate fluctuations. Crypto staking avoids counterparty risk since there are no borrowers involved, but it depends on the stability of the blockchain network. If the network fails or the price of the staked asset drops significantly, returns can be affected.
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