Interest is the price to be paid for someone else money, the interest rate is the ratio of interest to the loan value. So, but how to earn interest on crypto assets?
There are two key ways to earn interest in crypto:
- 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% 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 20% of the crypto lending market. DeFi focus is on the Ethereum blockchain-based assets. The key in DeFi is that the users control here their keys. The platform does not have access to the user’s private keys and the user’s assets. That’s where the term non-custodial is coming from.
The issue with custodial lending is that these platforms control your assets. The advantage of non-custodial lending is that you control your assets – the assets are in your wallets or in smart contracts. It’s you, who chooses which transactions to do or not to do. It’s you, who is always controlling your own assets. That’s why we always recommend non-custodial lending.
Passive Income via Personal Fixed Income Funds
SmartCredit.io allows the lenders to earn interest either:
- Via active approval of the loan requests in the order book or
- Via the Personal Fixed Income Funds
Personal Fixed Income Funds are created for passive investors. The investor needs to define his investment rules and deposit funds into his Personal Fixed Income Fund. Like the name is saying – that’s his personal fund, it’s not shared with anyone else. It belongs to the investor.
The Personal Fixed Income Fund invests into the borrower’s loan requests based on the investment rules. The borrower’s loan requests are secured with the crypto collateral. If the borrower will not pay, then the collateral will be liquidated and the proceeds will be used for the principal and interest payments.
Personal Fixed Income Funds will receive the principal and interest payments. And they will re-invest them based on the investment rules.
If a passive investor wants to withdraw his funds, then he needs to stop his Personal Fixed Income Fund. The open loans will be sold via the SmartCredit.io marketplace and the investor can withdraw his funds.
That’s exactly the construct for the passive investors, who would like to have a capacity of the Fixed Income Fund, but fully on his own name.
SmartCredit.io is a peer to peer crypto lending solution, co-founded by two ex Credit-Suisse Vice Presidents and CFA’s (Chartered Financial Analysts). The key problem’s which this platform solves are the following:
- Borrowers have today too high collateral requirements (i.e. Maker, Compound have ca 350% 400% collateral ratio), meaning their capability to borrow is low
- Limited choice of collateral – Borrowers on Maker or Compound have limited choice of collateral (just 4 or 8 tokens)
- Lenders cannot transfer their loans (or parts of the loans) to other parties during the loan term
- Other platforms would like to earn revenues with value-adding services (like credit as an API service)
- Investors would like to earn passive income (with no activity)
- The majority of existing solutions control the client’s private keys. For example, Nexo or Celcius is technically online investment platforms, which control clients’ assets. They can take clients’ funds at any time and in return, they pay interest to the client. The client can withdraw his funds, but technically Nexo / Celcius have custody of the client’s funds. This results in the “honey-pot” risk
SmartCredit.io offers the following solution:
- Non-custodial lending – only borrowers/lenders control their assets; no-one else has access to the borrowers/lenders assets
- Borrowers have 2x smaller collateral requirements
- Borrowers to have a wide choice of collateral
- Lenders to receive loan tokens after creating loans. Lenders can use these loan tokens as a mean of payment (loans are tokenized and transferable)
- Holders will receive interest for the loan tokens (interest-bearing to the holder)
- Passive Investors will have Personal Fixed Income Funds, which enable passive income on the investors assets
- Non-custodial API for the other platforms – wallets, payment engines, marketplaces