Lending in Crypto : Earn Massive Returns on Your Crypto Holdings

Crypto lending recorded over 120% increase in assets reaching a maximum of approximately $22 billion in 2023. This was, however, a huge drop from the 2022 peak of $54 billion; which may have resulted from the challenges faced due to the collapse of some crypto lending platforms.

The collapse of these lending platforms displayed how crypto lending can be affected by massive crypto price drop or surge. 

However, the statistics show a great recovery, and the crypto lending sector is set for further growth as digital asset adoption and crypto investment continue to grow.

What is Crypto Lending?

The concept of crypto lending is quite similar to what happens in traditional lending. Crypto lending involves crypto users lending out cryptocurrencies and earning interest.

Crypto lending is part of decentralized finance (DeFi) where crypto investors place their cryptocurrencies and stablecoins in a pool, then borrowers access the crypto at an interest. The process is facilitated by a crypto lending platform and the interest payments are called crypto dividends.

Although the lending concept in crypto is similar to traditional finance lending, the regulation is not as rigorous.

There are two types of lending platforms in crypto; centralized and decentralized, both operating on blockchain technology. 

With decentralized lending platforms, smart contracts are used to automate the lending process; eliminating the need for an intermediary.

Centralized crypto lenders, however, operate like traditional banks. An example is Binance, which acts as the intermediary between borrowers and lenders. Centralized platforms often require crypto collateral for loans and offer higher interest rates for the lenders.

Types of Collateral in Crypto Lending

In crypto lending, collateral refers to the crypto assets that a borrower is required to pledge to guarantee the crypto loan payment. In traditional banking, one can use a house, land, or any other physical assets as collateral when applying for a loan.

Types of collateral in crypto lending include:

• Stablecoins

• Altcoins

• NFTs

• Bitcoin and wBTC

  
  

Although not all lending platforms accept stablecoins as collateral, there are a significant number of crypto lending platforms that accept stablecoins as collateral such as Nexus. Stablecoins are a great choice for collateral due to their stable nature; they are not as volatile as other cryptocurrencies.

Altcoins generally refer to all other cryptocurrencies were created after BTC. Almost all crypto lending platforms allow for the use of altcoins as collateral. 

Borrowers can lock up their NFT assets as collateral in NFT lending platforms to receive loans. These landing platforms have tools to determine the market value of the NFTs.

Lending Protocols

Aave

A non-custodial, open-source protocol that enables users to earn interest on the crypto assets they deposit. This is its liquidity pool where lenders deposit a variety of cryptocurrencies increasing capital efficiency. The platform has a native con AAVE, that can be traded in other exchanges and staked within the protocol to earn rewards.

Aave has been in the DeFi lending space since 2017 when it was launched. It is known for collateralized loans, allowing borrowers to access up to 80% of the value of the collateral.

Lenders earn interest paid in cryptocurrency they deposited. If you deposit ETH for lending, you'll earn interest in ETH. Also, one of the rules embedded in the smart contracts is the automatic liquidation of collateral if the value of the collateralized asset drops by a certain percentage.

The feature, flash loans, which allows borrowers to access loans without collateral, makes the lending platform stand out. However, the loans are designed by smart contract developers and are to be borrowed and paid back within the same block.

Morpho

A non-custodial and permissionless lending protocol operating on the ethereum blockchain. It utilizes a P2P mechanism to match lenders and borrowers; achieving an absolute capital utilization and the best rates for users. 

If the system fails to find a P2P match, the required loan is matched to liquidity pools in underlying lending pools.

Morpho has two versions; Morpho optimizers and Morpho Blue. Morpho optimizers improve the borrowing and lending rates through P2P matching while Morpho Blue enables the creation of crypto lending markets.

Examples of Morpho optimizers include:

• Morpho AaveV2 optimizer

• Morpho AaveV3-ETH optimizer

• Morpho CompoundV2 optimizer

Fraxlend

Fraxlend protocol is a DeFi lending platform built to enable secure and efficient transactions. It allows users to create isolated markets between two ERC-20 tokens. This isolated market allows all users to lend or borrow.

Lenders deposit their assets into the pair; receiving fTokens which are yield-bearing. Interests are earned and the fTokens can be redeemed by the lender to receive the deposited amount with the earned interest.

Unlike Aave and Morpho protocols, Fraxlend allows undercollateralized crypto loans; meaning borrowers can access loans greater than 100% value of the collateral. However, the borrower has to be whitelisted.

Curve lend

The Curve platform is an automatic market maker (AMM) with features similar to Balancer and Uniswap. However, unlike the two, Curve only accommodates liquidity pools consisting of assets that behave in a similar way such as stablecoins or wBTC and tBTC; wrapped versions of Bitcoins.

Curve Lend protocol has its stable coin; crvUSD. The platform allows borrowing of crvUSD against crypto collateral or borrowing of other crypto tokens against crvUSD as collateral. It benefits from soft liquidation provided for by LLAMMA. 

LLAMMA is Curve Lend's isolated market infrastructure that allows users to create markets permissionlessly and enable borrowing and lending using $crvUSD stablecoins.

The platform's differentiated approach to enabling overcollateralized loans mitigates risks and enhances the user experience for asset borrowers. As such, Curve lending allows users to earn interest by supplying the market with their assets to be borrowed by other users.

The stablecoin infrastructure encourages the minting of crvUSD through the use of various crypto collaterals.

Notably, the platform manages positions passively. If the price of a collateralized token drops; the associated loan enters the soft-liquidation mode automatically. With soft liquidation, some amount out of the collateral is traded for crvUSD. 

On the other hand, if the price of the collateralized crypto increases after this soft liquidation, the system automatically converts the crvUSD back to the collateral token to reclaim the collateral.

Some crypto that can be used as collateral on Curve lending include:

• wstETH

• WBTC

• tBTC

• sfrxETH v2

• ETH

RWA-backed Crypto Loans

RWA refers to the tokenization of real-world assets. The real-world assets examples include real estate, bonds, securities, and commodities. This has been used as an innovative way of providing accessibility and liquidity for these assets in the digital space.

Through the use of RWA, decentralized finance can build a large pool of assets that are typically used in traditional finance, to expand loan access options fostering financial inclusion to a wider user base.

The use of RWA  tokens creates the potential to access another level of yields for crypto lenders in the DeFi industry. In comparison to collateralized cryptocurrency loans, using RWA as collateral offers lenders some advantages that result in more stable and higher returns.

The stability of RWA such as real estate reduces the possibility of sudden price changes that are common with cryptocurrencies.

Taking Advantage of Yield Changes

In crypto lending, APY changes fast depending on price fluctuations of the deposited assets which affect yields in the long run. It is advisable to move assets to benefit from assets with the highest yields at a particular time.

However, if the invested amount is low, you should be aware of gas fees so as not to end up spending more on transactions than interest earned.

Also, crypto investors with low capital can opt to deposit stablecoins, which are not affected by volatility; having a higher yield with a fairly stable APY.

Bullish and Bearish Markets

When the market is bullish, the demand for borrowing increases, especially by traders looking to benefit from the bull run. Also, activity and trading volumes increase in the crypto space. In turn, yields are elevated substantially.

Additionally, during a bullish trend, DeFi projects tend to offer more token incentives and the price surge increases the value of these incentives further. Thereby, increasing the potential for higher yields for crypto investors.

In the 2021 bull market that created abuzz, prudent crypto investors were earning yields of approximately 25% in annualized returns.

In contrast, lending yields are low when the market is bearish. In a bearish market, borrowing and trading activities tend to slow down. Most traders would be hodling, waiting for the bull market. As such, the yield is lowered, in some cases to 0.

However, with RWA assets such as tokenized bonds collateral, the opposite behavior is observed. When the bond price drops, yields are elevated. As such, as a crypto lender, you should be ready to move your assets and rotate positions into these opportunities to realize higher yields in a bearish market.

Interesting Yields in the Crypto Lending Space

The yield returns earned by investing in crypto lending can be much higher than the interest traditional finance institutions offer on savings products. According to Business Insider the banks in the U.S. offer an average of 0.46% APY on savings accounts. In contrast, APY in crypto lending goes as high as 20% depending on the crypto asset. 

Here are some interesting APYs at the time of writing:

• Morpho: lending eUSD at 15.06% APY

• Frax Lend's 27.35% APY on the TON-USDT pair

• Curve lend’s 19.46% APY on crvUSD

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Conclusion

Crypto lending is one of the major ways in which crypto investors are making profits in the crypto space. As the crypt market grows with increased adoption, the DeFi space grows even faster; lending being part of it. 

Research further and take a step to start earning in the crypto space with crypto lending. If you're new to crypto investing the SOPHIE project is a good place to start. Sophie is working on a new yield-optimized token which might just grow to offering the highest APY in the market soon.

Read Liquid Restaking : Redefining DeFi and Crypto Investment Landscape, to learn about other ways to make money in the crypto space; and crypto investment.