- Crypto Lending protocols are a subset of DeFi protocols that govern the lending of crypto assets.
- They allow users to lend their assets to borrowers, in return for interest.
Crypto Lending protocols, also known as DeFi Lending protocols, enable users to loan their crypto assets to borrowers who will repay the loans with interest. It is one of the methods for generating yield in the crypto market
How Do Crypto Lending Protocols Work and its Benefits
With the advent of DeFi (Decentralized Finance), activities are coming up from time to time in the crypto space. The crypto space has grown into a massive industry, reaching a valuation of 3 trillion USD. A lot of the reason for the same can be attributed to the emergence of DeFi which has opened numerous avenues in the cryptocurrency ecosystem. Crypto lending has established a prominent place in this ecosystem.
Crypto Lending protocols have been developed to facilitate easy crypto lending. A lender sends tokens they wish to lend out into a pool on a DeFi platform. A smart contract then processes the tokens to verify and make them available for borrowing. The borrower needs to put collateral, usually in the form of the DeFi platform’s native currency. These collateral tokens will be doled out automatically to the lender with the help of a smart contract.
The collateral is usually of more value than the loan itself. That gives greater security to the lenders. But as counterintuitive as it sounds for a borrower, there are multiple reasons why a borrower might want to do that. They could do so to release liquidity without losing money in taxes. When the assets rise in value, investors want to sell them but if they do so, they will have to pay taxes. That’s not the case if they use their assets as collateral for money (from the loan) in their pockets.
Apart from this, they also do this to take advantage of market arbitrage. These are facilitated through flash loans. On the other hand, it plays out in the lender’s interest for the simplest reason — crypto assets may keep seeing an increase or decrease in their underlying value, but sitting idle in the wallets doesn’t accrue any earnings. Interest will eventually add up to gaining yields. Besides, some dApps also reward the lenders, aiding their yield farming.
Top Crypto Lending Protocols 2023
- Aave: Aave is a leading crypto lending protocol. It’s an open-source platform for earning interest on deposits and borrowing funds acting as a non-custodial liquidity platform. When a user deposits crypto in its liquidity pool, they get ATokens in return, which is the native cryptocurrency of the platform. The protocol uses its embedded algorithm to adjust interest rates based on the demand and supply in its liquidity pool.
- Compound: It’s an Autonomous Money Market protocol that supports numerous open financial applications. After depositing funds, the user gets CTokens, which is the native cryptocurrency of the platform and earns passive income based on interest rates generated by the algorithm.
- YouHodler: It is a hybrid platform that provides lending in fiat money and stablecoins by backing them in crypto.
- Uniswap: It is another platform based on the Ethereum blockchain ecosystem. It fully uses smart contracts to give users extensive control over their funds.
- Maker: It allows users to borrow money using its native cryptocurrency, DAI tokens. Lending can be done using MKR, which is its native cryptocurrency.