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How to earn passive crypto income with DeFi?

How does crypto lending market work? How to earn passive crypto income with DeFi (Decentralized Finance) platforms? What are alternatives?

Earning a passive crypto income is the key driver of the crypto lending market. The yearly crypto lending volume exceeded 40 billion USD in 2019. This market is growing 25%-35% quarter to quarter. 2 Billion USD of this 40 billion USD is borrowed/lent via the DeFi – Decentral Finance – platforms.

Following key questions are analyzed in this article:

  • What are the key segments of this market?
  • DeFi lending overview
  • How to earn passive income via DeFi?
  • What’s special in

This topic is analyzed in the following way:

  • At first, you could look at our webinar presentation
  • After that, the analysis of the crypto passive income will follow

Recording of the Webinar

Key use cases in the Crypto Lending

  1. Using loans for trading – ca 80% of the market will feed into the crypto exchanges. Traders use their collateral to get the loans, because either the crypto exchanges do not support these collaterals or traders get better terms via crypto lending
  2. Liquidity creation – instead of selling crypto, which in most countries would be a taxable event, the users would rather monetize their crypto-assets via using them as collateral for the loans. This is approximately 10%-15% of the market
  3. Crypto economy – borrowing crypto for using it in the crypto- sphere – 5% -10% of the market

Key market segments in the Crypto Lending

There are 3 main channels for crypto lending:

  1. Crypto Borrowing / Lending via the Crypto Exchanges for margin trading
  2. Custodial Lending Platforms (Nexo, Celsius, Genesis Capital) – they control your private keys (i.e. they control your assets)
  3. Non-Custodial Lending Platforms (Maker, Compound, Ethlend, – the do no control your private keys (i.e. they do not control your assets)

Crypto exchanges are the biggest player in this market. They are offering the margin lending – that’s for the traders, which can leverage their positions via the margin lending. For example, the trader puts down 1 Bitcoin as collateral, he borrows 3 Bitcoins against this collateral and he has to pay daily interest for these 3 Bitcoins. This will take a long position with these 3 Bitcoins. When the market goes up, then the trader will earn a profit. However, when the market goes against his trades, then the traders’ positions can be liquidated.

Crypto lending market size

The estimated market size is the following.

Crypto Loan Originations in 2019
Crypto Loan Originations in 2019

The market size for the crypto exchanges is based on the Bitfinex lending statistics (which is publicly available), it’s circa 500 million USD loan originations at the moment. Let’s calculate with 20 biggest exchanges offering the margin borrowing/lending, let’s calculate with their active loans of 300 million USD and let’s calculate with 4 originations per year. This would result in the 4 x 20 x 300 = 24 billion USD originations per year.

The market size for the custodial solutions is based on the self-declared numbers.

The market size for the non-custodial solutions is based on the statistics.

DeFi Lending overview

The key platforms in the DeFi lending are:

  • Maker, which allows borrowing against your collateral without the counterparty
  •, which is a money market fund with a variable interest rate
  • Aave, which is a money market fund with a variable interest rate
  • dYdX, which is a margin trading platform
  • nuo, which is a margin trading platform
  • bZx,  which is a margin trading platform

Here is an overview of total lending volume via DeFi (the screenshot was taken at 17.06.2020, via )

Defi - Loans originated
Defi – Loans originated

Here is an overview of outstanding loans in the DeFi protocols (the screenshot was taken at 17.06.2020, via )

Defi - Loans outstanding
Defi – Loans outstanding

The key in these DeFi platforms is that the KYC is not required and the user can directly execute lending and borrowing transactions. These platforms are practically user interfaces, which offer access to smart contracts.

The missing KYC might be one of the handicaps here – the AML law states, that from a certain size of transactions (in EU for example 15’000 EUR) one needs to identify the counterparty. The DeFi platforms share of then the standpoint, that they do not need to do the KYC on the counterparties. That’s a valid point of view for the platform providers, however this approach delegates the identification liability to the platform users. These users don’t have any means to identify their counterparties …

How to earn passive crypto income in DeFi?

In the case of the money market funds it works as follows:

  • User needs to deposit his funds into the DeFi protocol (for example Compound or Aave)  and receives money market fund tokens – in case of Compound the “cTokens
  • The borrowers borrow directly from this money market fund. The interest rate is not market-driven, but it’s based on a linear formula,  see more in the review and Crypto Fixed Income
  • The interest is accumulated in the user’s money market fund tokens
  • Users can withdraw any time his funds by converting his money market fund tokens into underlying assets. However, there are some side-effects to be considered, see more in the review and Crypto Fixed Income. Users can only withdraw their funds when there is enough liquidity in the protocol. The reason is the maturity mismatch in these protocols. In traditional finance, one needs to match borrowers and lender’s durations. In the Compound platform, however, the borrowers have unlimited loan durations and the lenders have daily durations. If the borrowers are not paying back their principals, then the lenders cannot withdraw

In the case of margin trading platforms it works very similarly:

  • User needs to deposit his funds into the DeFi protocol (for example dYdX, nuo or bZx)
  • The borrowers borrow for leveraged trading from this money market fund
  • The interest accumulates in the lender’s tokens
  • User can withdraw any time his funds

Both money market funds and margin trading platforms are utilizing very similar concepts.

Passive crypto income and – How does it work? offers crypto loans beginning from 7-day loans. The current version is based on active lending, where the lenders will actively accept the loan requests. The next version of will contain automated acceptance – active participation of the lenders is not required.

The key advantages of are:

  • Low collateral ratios for the borrowers – all DeFi systems and most of the custodial lending systems do have very high collateral ratios. See more in the Why is collateral ratio so high in DeFi? This means that borrowers can borrow little against their collateral assets. In borrowers can borrow 2x – 3x more on their asset basis
  • Transferability of the loans to the lenders – the lenders receive the Credit-Coins (ccDAI, ccETH, etc), which are transferable. This enables liquidity for the lenders
  • Passive investment via Fixed Income Funds for passive investors – the passive investors will earn passive interest income

The key difference to the DeFi platforms is, that while DeFi platforms focus on the money market fund business models (for borrowing or margin trading), then focuses on the real crypto fixed income markets. And it’s done with the focus on the borrowers, which are the key driver of this market. The market has more supply than the demand – the lenders follow the borrowers and earn passive crypto income.

Our Webinar Series

We started with the regular webinar series with the focus on the blockchain, crypto lending, and coronavirus economic crisis.

Additional information

For more information check out the related articles from the blog:

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