Many people who want to generate income with cryptocurrency investments are faced with a question – how do generate passive income? It’s a very reasonable question because most of the crypto users do not want to take up the trading risk, but they would still like to earn the revenues on their assets. The key to this is lending the assets.
There are two key types of crypto lending:
- Custodial lending – the user does not control his assets (the platform has the users private keys)
- Non-custodial lending – the user controls his assets (the platform does not have the users private keys)
Custodial lending has 80% (and declining) of the crypto lending market. A platform user has to deposit their crypto into the platform wallet. The platform will lend users assets either in the peer to peer mode or will consolidate them and will lend them via the OTC (Over The Counter) to the counterparties. Or the platform will lock these assets as collateral and will lend fiat or stablecoins. The borrower will receive either crypto, stablecoins, or fiat on this platform. When the borrower is not paying his loan, then the crypto collateral will be liquidated.
Non-custodial lending, also known as DeFi lending or Decentral Finance lending, has the other 20% of the crypto lending market. Their focus is on the Ethereum blockchain-based assets. Users control here their keys and the platform does not have access to the user’s private keys. Users can borrow crypto or stablecoins. Borrowing fiat is not possible in DeFi lending.
In our view, the idea of the custodial lending defeats the purpose of the blockchain by giving control of your assets to third parties. That’s exactly the same as how it works with traditional banks. Therefore we recommend always non-custodial lending, where users do not have to give away control of their assets to third parties.
Non-custodial lending has two categories:
- Money Market Funds – that’s what the Compound, Aave, et are offering. Practically it’s a big pool of funds, where the lenders are earning interest and the borrowers pay interest. But the interest is fluctuating (usually driven by the market moods), the loan durations are unlimited and the spreads are high (because the lender’s money is often sitting idle)
- Fixed Income Funds – that’s what SmartCredit.io is offering. Instead of offering fluctuating interest rates and variable loan durations we do the opposite – we offer fixed-term loans and fixed interest rates for the borrowers. The lenders. on the other hand, can define their Personal Fixed Income Funds, which will invest rules-based on the borrower’s loan requests.
What is the Crypto Fixed Income Investment Fund?
Crypto Fixed Income Investment Fund is designed specifically for passive cryptocurrency investors. Users define the investment rules and the investments are executed automatically. The investment amount grows continuously thanks to the reinvestment of the earned interest.
This has a major impact – passive investors earn new crypto from the cryptocurrencies they already own. They are not exposed to the daily variable interest rate fluctuations, but both borrowers and lenders are winning with a fixed interest rate.
And the best part – the Fixed Income Investment Fund is only on your name. It’s not shared with others, there are no third parties controlling your assets like in the custodial lending. It’s just you and your assets.
How You Can I Invest in Crypto with SmartCredit.io?
You can create an account at https://app.smartcredit.io for free and then log into the marketplace by choosing between lender and borrower roles. When you choose the lender role, then you can define your Personal Fixed Income Funds.
Is Crypto Lending Safe?
Lending is always connected with credit risk management. That’s how SmartCredit.io is doing this:
All loans are collateralized. If the collateral value sinks too much or if the borrower is not paying back the loan, then the borrower’s collateral is liquidated.
Loss Provision Fund
The basic mechanism that provides credit protection within the system is called the Loss Provision Fund. Part of interest payments is allocated into the Loss Provision Fund, which will be used at that adverse market conditions.
Borrowers can fill in the cred scoring data. This is fully optional. Having a better credit score means fewer interest payments into the Loss Provision Funds and better Collateral requirements. The users can monetize their data and pay less interest. Or they can stay fully anonymous and pay more interest. Every borrower can choose what they do.
Limiting Borrowers with Personal Borrowing Capacity
In addition to all these, the Smart Credit system creates a market balance by limiting borrowers within the framework of their personal capacity to borrow. In this context, if a borrower wants to borrow money at a rate that goes beyond one’s limits, the credit protection fee increases rapidly. All credits offered within the Smart Credit system are protected via the collateral and Loss Provision Fund. An increase in protection fees means an increase in interest rates. Therefore, the borrowing process of a user who wants to go beyond one’s own borrow limits is indirectly limited. This ensures that lenders’ money-back process is also guaranteed.
Conclusion: Making Money Safely with Crypto Investment Funds
Let’s summarize here:
- The Lenders will earn passive Income via their Personal Fixed Income Funds
- These Fixed Income Funds are only on the name of the Lender, only the lender can control his assets
- The loans are protected via a Credit Risk Management Framework