Crypto Lending is the lending of cryptocurrencies or stablecoins on the blockchain. Crypto Lending is always collateral-based lending – borrowers have to use their crypto collateral to secure their loans.
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% 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.
Crypto lending has a very high collateral ratio. For example, the collateral ratio in DeFi is ca 350-700%. This means the user has to put down his crypto collateral in the value of 700 units to borrow the 100 units. The exception here is SmartCredit.io, which uses a much lower collateral ratio.
The key use cases of crypto lending are:
Trading – 80% of crypto lending funds are going there
Tax optimization – 10% of crypto lending. Selling of crypto is a taxable event, with taxes as high as 40% to 50% depending on the jurisdiction. Instead of selling the crypto assets, it’s easier to use them as collateral for borrowing and to pay 10% interest annually.
Crypto economy – 10% of the crypto loans are used in the crypto to crypto businesses