Crypto lending and borrowing have long been pillars of the burgeoning decentralized finance (DeFi) sector.
In fact, it’s no exaggeration to say these permissionless protocols have reshaped the way many individuals and institutions have accessed loans and earned interest over the last three years.
Understanding how crypto lending and borrowing works is vital for anyone looking to navigate this new realm.
In a nutshell, crypto lending and borrowing involves the use of crypto (including, in some cases, NFTs) as collateral to secure loans, or as a deposit to earn interest.
While lending lets token-holders lend assets to borrowers in return for interest payments – akin to a savings account in a bank but with higher yields – borrowing enables users to obtain loans by pledging their own holdings as collateral.
This mechanism provides liquidity to asset-holders without the need to sell their investments, a major advantage in a market notorious for its volatility but in which many investors have high long-term hopes.
The above sounds relatively simple, but the crypto lending and borrowing market has evolved at a rapid rate: there are so many competing platforms, it’s tough for industry newcomers to get up to speed and know what the hell’s going on.
Moreover, the financial primitives have also evolved: flash loans, native token staking, learn-and-earn, CeFi loans, liquidity pools.
In other words, it’s a minefield out there!
Crypto Lending & Borrowing: A Comparison
Whether you’re a budding crypto lender looking to put your holdings to work, or a prospective borrower who’d like to access capital, there is no shortage of options both from centralized and decentralized providers.
Platforms in the former bracket (Binance, crypto.com, etc) manually manage the process while DeFi alternatives (Aave, Compound) leverage smart contracts to automate the pairing of lenders with borrowers.
Aave is one of DeFi’s leading ventures with a TVL of over $16.5 billion. The multi-chain, non-custodial liquidity protocol lets users borrow against their collateral from across multiple networks and assets, or supply liquidity to earn rewards.
Details on Supply and Borrow APYs can be found here, along with other metrics such as the total supplied/borrowed capital. At the time of writing, the best APYs offered are for DAI, FRAX and LUSD.
Aave also supports flash loans, which require no upfront collateral and can be granted almost instantly.
These primitives see borrowers request funds from Aave under the proviso that they be paid back along with a 0.09% fee, within the same block.
If the borrower fails to do so, the transaction is cancelled.
Flash loans have often been used by malicious actors to manipulate the price of a cryptocurrency by artificially inflating or deflating its value.
Nolus is another popular venue for DeFi borrowing/lending.
The noncustodial cross-chain lease protocol operates a unique model that sees users pay only a small fraction upfront and gain ownership after repayment.
This approach is intended to reduce DeFi’s high over-collateralization standards, whereupon protocols insist borrowers over-collateralize loans to ensure lenders get repaid if the market dives.
Notably, Nolus offers a much lower liquidation rate than many competitors: in fact, liquidations constitute less than 0.5%.
Borrowers provide a down payment and can leverage it by the factor of three with a DeFi Lease, with the underlying assets safely stored until full repayment is made.
Interestingly, Nolus can liquidate only part of the trader’s position, meaning the latter doesn’t have to risk a complete wipeout.
Moreover, he or she can put the underlying leveraged assets to work through yield-bearing strategies whitelisted by the protocol.
At its core, Nolus tackles three of the biggest inefficiencies of DeFi’s money markets: overcollateralization, high liquidation risk, and a lack of genuine asset ownership.
Compound is yet another option.
Over the years, the autonomous interest rate protocol has been utilized by a great many DeFi users to earn attractive yields on billions of dollars worth of crypto.
Users can view a snapshot of up-to-date APY percentages, as well as metrics for total supply/borrow, here.
As one of the most trusted on-chain money markets, Compound offers low interest on lows, no trading fees, and no minimum requirements for borrowing. Interest earned on the platform can also compound – hence the name – leading to higher returns.
The lifeblood of Compound is its native token, COMP: every time a user interacts with one of its supported money markets (borrowing, repaying, withdrawing), they earn COMP, enabling them to participate in community governance.
Conclusion
Ultimately, crypto lending has so many moving parts, it’s impossible to make sweeping recommendations.
After all, your decision to opt for one protocol or another will depend on many disparate factors: supported assets, rates (flexible and fixed), liquidation threshold, collateralization terms, security, model (yield farming, lease, etc), repayment rules, platform fees, etc.
Asking what the best crypto borrowing or lending platform is a bit like asking ‘What’s the best bank to use?’
The answer depends on where you’re based, what you’re looking for, how much you earn, etc.
So it goes in the world of Web3.
If you’re looking to access lending and borrowing services in crypto, the best thing to do is stay abreast of the latest rates, the platforms’ history, and the risks of over-collateralization and liquidation.
Don’t rush to take out a loan or pour funds into a liquidity protocol without considering the pros and cons!
Disclaimer: The text above is an advertorial article that is not part of Cryptonews.com editorial content.
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