What Is DeFi Lending?
The financial collapse of major lending platforms Celsius and BlockFi has led many cryptocurrency holders to reconsider their stance on centralized lending platforms. Users have shifted their trust away from regulated platforms in favor of P2P loans.
What are Crypto Lending Platforms?
Crypto lending platforms facilitate connections between lenders and borrowers and act as intermediaries in lending agreements. They earn revenue by charging a small commission for these services.
There are two main categories of these platforms: Centralized Finance (CeFi) and Decentralized Finance (DeFi).
CeFi platforms are managed by institutions and structurally resemble traditional banks. Despite being a focus for regulators, they are not entirely immune to risks, such as market fluctuations and cyber-attacks. In November 2023, for example, CeFi platforms accounted for 53.8% of all cryptocurrency-related security breaches.
DeFi platforms, on the other hand, operate autonomously through smart contracts, removing the need for intermediaries. They exist in a regulatory gray area. For instance, their registration and use are often limited for citizens of certain countries, like the USA.
Advantages and Disadvantages of DeFi Lending
Crypto lending, as a process, comes with its own set of advantages and disadvantages that individuals should carefully weigh before deciding to engage in this service.
Advantages for lenders:
- Diversified Income: Crypto lending presents a new alternative income source, distinct from traditional market investments.
- Competitive Returns: Lenders have the potential to earn higher profits compared to traditional loans or bank interest rates.
- Accessibility: Decentralized lending accommodates participants with varying levels of capital, enabling even small-scale investors to generate earnings.
- Inclusive Participation: Decentralized lending platforms support a wide variety of assets, allowing owners of nearly any cryptocurrency to participate in lending activities.
- Lack of Insurance: Unlike traditional banks, decentralized platforms lack federal deposit insurance. This poses a critical risk in the event a project becomes insolvent or is revealed as a scam.
- Market Volatility: Lending cryptocurrency during periods of market turbulence can limit the ability to respond to sudden price fluctuations. Furthermore, the income generated from the loan may not offset losses during a bear market.
- Default Risk: There is an inherent risk that borrowers may fail to make partial or complete repayments to lenders.
While crypto lending offers an enticing opportunity for income generation, it is not a universally applicable solution, and participants should thoroughly evaluate these pros and cons before getting involved.
How to Become a Crypto Lender?
Embarking on crypto lending requires a structured approach:
Step 1: Select a suitable crypto lending platform, focusing on its support for various digital assets and its reward scheme.
Step 2: Connect your digital wallet to the platform.
Step 3: Deposit your cryptocurrency, adhering to the guided instructions provided.
Step 4: Keep in mind that the profits from offering liquidity in a lending protocol, especially in the volatile digital market, might not meet your expectations.
Also, remember that patience and a tolerance for market swings are crucial in this venture. There's a genuine risk that potential earnings might end up being used to purchase calming medications at your local pharmacy.
If you're expecting a 100% return within a month, it might be worth considering alternative earning opportunities (like joining in on the pump of an obscure shitcoin, but only if you're willing to gamble with your funds).