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The decentralized finance
Over the past couple of years, the decentralized finance space has grown to become a key part of the larger crypto market. This is, perhaps, thanks to the massive earning potential which DeFi protocols offer users with their solutions.
Unlike traditional financial products, DeFi solutions operate in a decentralized, permissionless and borderless environment, allowing anyone to access a new financial economy powered mainly by blockchain technology and smart contracts.
Although DeFi is a catch-all term representing a paradigm shift in the financial world, three key pillars of DeFi exist, namely, DEXes, stablecoins and staking/lending/borrowing. Out of these three, DeFi lending remains the most lucrative way to earn passive income in the crypto space.
For the unfamiliar, DeFi lending is a decentralized lending model where participants give out and obtain crypto-backed loans. In plain English, you lend your crypto assets to other users and earn interest, or you take out loans by opening debt positions with your crypto as collateral — all without any third-party involvement.
It makes a whole lot of sense when you consider the top DeFi protocols by total value locked (TVL ) — i.e., the total amount locked in their smart contracts. According to DeFi Pulse, the top three spots are occupied by lending protocols, namely, Maker, Aave and Compound who all hold a valuation of over $12 billion put together.
The Current State of Lending
In traditional money markets, loan options are often limited to certain income levels, credit scores and even regions. Additionally, many loan options require collateral to be locked for some time, and institutions determine the amount charged as interest.
DeFi lending plays a similar role to traditional banks providing loans to an individual or business. However, it has some interesting benefits which make it desired over traditional lending solutions.
For instance, in the case of DeFi, you can use your crypto assets as collateral to take out loans, or earn interest on your holdings without an account. As a result, you’re able to unlock the full value of your crypto assets without having to part with your funds or your personal information.
DeFi lending allows anyone with an internet connection to obtain loans. You can borrow any amount and the loan can be repaid anytime.
Although you can only borrow fiat in a traditional lending market, DeFi lending protocols unlock limitless possibilities, thanks to smart contracts. You can borrow cryptocurrency or fiat (using different stablecoins) against your crypto collateral.
How It Works
DeFi lending is no doubt one of the most valuable use cases of cryptocurrency throughout blockchain technology’s entire history. We’ll briefly look at how it works below:
First, it’s noteworthy that DeFi largely revolves around the Ethereum network. As such, the premise is simple: you can lend out (and borrow) popular Ethereum-based tokens.
Instead of buy/sell order books, decentralized lending protocols rely on algorithmic trading robots known as AMMs and liquidity pools to allow you to borrow and lend out your crypto assets in a permissionless manner. The developers of these protocols cannot control your holdings since they’re locked in smart contracts.
In addition, interest rates are usually based on market demand and supply (i.e., borrowers and lenders, respectively) and therefore vary. As an example, you can either borrow out Maker’s DAI decentralized stablecoin for 3.3% on Compound or borrow for 4.3%. At Aave, 25% and 40% must be borrowed (invest in AAVE here).
Furthermore, lending protocols usually maintain decentralization through governance tokens. Compound started the trend in June 2020, launching its governance token, COMP. By holding these governance tokens, you’ll have a say in critical decisions affecting the protocol, and vote or suggest changes to update the protocol.
DeFi lending is permissionless and This probably makes you wonder “What happens if the borrower runs off with the funds and ‘skips town’?”
Bottom line: s/he can’t.
However, as a precaution, loans need to be overcollateralized to provide you (the lender) with some level of insurance in case a borrower defaults on loan repayment and skips town.
Hence, if a debt obligation isn’t sufficiently collateralized, it’s liquidated automatically (i.e., sold on the loan market) and your loan is repaid.
How to Make Money Lending Your Crypto Assets
Crypto lending platforms exist in their numbers in the larger cryptoverse. However, since this article is meant to teach you how to make money by lending out your crypto assets, we’ll only focus on the top lending solutions in decentralized finance.
(Side note: all figures were gotten at the time of writing and, naturally, they’re subject to change.)
Let’s start with Bitfinex!
You might recognize the name Bitfinex among the top cryptocurrency exchanges. But more than that, Bitfinex is another platform in the DeFi space where you can put your money to work through crypto loans.
Bitfinex’s Lending Products solution allows you to access third-party lending services and earn interest on the crypto assets in your Bitfinex wallet. Currently, Celsius Network is the integrated lending services provider and the service is exclusively available to verified personal account holders.
To get started, navigate to the Lending Products page and read/accept the “Notice and Consent”. Then, select the cryptocurrency and specify the amount you’d like to lend out through Celsius.
For clarity, Bitfinex’s lending solution supports popular cryptocurrencies like BTC, USDT, TSD, ZRX, DAI, BAT, OMG, PAX among others. Once you’ve deposited, a pop-up will appear with the transaction notification. Keep in mind, interest rates on Celsius Network depend on the demand for specific cryptos and overall market performance.
Thanks to the integration with third-party lending provider Celsius, Bitfinex offers you flexible lending with low minimum deposit and withdrawal at $50 and $25 respectively. Even more, there’s no lockup period so you can terminate lending and easily withdraw at any time.
With DeFi lending solutions offered by popular platforms like Exodus, Bitfinex, you can now put your money to work and grow your wealth without the hassles of traditional lending solutions.
Okay, now for our next stop… Exodus
Originally designed as a multi-crypto, user-friendly wallet, Exodus has morphed into a well-rounded crypto and DeFi asset management solution. This started with the addition of its first dApp, Compound.Finance.
You can earn high interest on the US-pegged Dai stablecoin through Compound. You can earn as high as 11.53% annual interest by lending out DAI on Compound using your Exodus wallet. Other supported crypto assets include USDT, ETH, WBTC, USDC, BAT, COMP and UNI.
User experience is still a big issue in the DeFi space. The Exodus team has made it easy for you to interact with the Compound protocol right from your wallet. This means no KYC, no ID verification and no minimum deposit. You can start earning interest from anywhere in the world by lending out your crypto assets on Compound.
And the last but not least : SwissBorg
Check the full review of swissborg here.