- Cryptocurrency (or crypto currency) has been increasingly popular for investors and even as an accepted payment at businesses around the world.
- As it gains popularity, cryptolenders are becoming more common as an alternative source of small business and personal lending.
- Find out more about cryptolending and the rise of digital currencies from Nav’s small business experts.
Cryptolending (or crypto lending) is the process of using crypto currency, such as Bitcoin (BTC), as collateral, as you would with a secured loan. It’s a decentralized finance (or DeFi) service that uses the blockchain to lend crypto assets to borrowers and then get crypto interest. For a cryptolender, it can be compared to opening a high-yield savings bank account, where you earn interest on the money in the account, but using crypto currency instead.
It sounds straightforward and like a great deal, but because digital currencies are still new and the crypto market isn’t necessarily always stable, it’s not common for traditional lenders to participate in cryptolending yet. However, cryptolending is quickly becoming one of the most popular DeFi services on cryptocurrency platforms and exchanges.
How Does Cryptolending Work?
With cryptolending, lenders and borrowers use a crypto platform or exchange as a lending marketplace. Both will sign up to the platform using their digital wallets. To engage with cryptolending, a cryptolender will move their cryptocurrency from their digital wallet, or crypto wallet, into a high-interest lending account on the platform. Borrowers can then apply for cryptoloans through the platform, which will approve the borrower and set interest rates and fees. The loan will be paid for using funds from the cryptolenders’ accounts. As the borrower repays the loan through monthly payments, the cryptolender and the platform will collect the interest.
Every platform will have its own interest rates and fees. Lenders may get a higher annual percentage yield (APY) if they’re willing to keep their cryptocurrency locked into the account for a certain amount of time without making withdrawals, giving the platform more access to the funds for lending purposes.
There are also automated methods for cryptolending. In this scenario, borrowers and lenders simply connect their digital wallets to a centralized lending protocol which handles the approvals and transfers based on certain conditions being met. These conditions are called smart contracts, and they’re made up of code running on blockchain networks that automatically determine when a loan can be approved.
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