What is Lending? Legal Considerations for Crypto Lenders

Lending is no longer a strange term to investors in the crypto market. The emergence and development of Crypto Lending platforms have become a new trend in the world of finance in general and the cryptocurrency market in particular. So, what exactly is Lending? What forms of Lending in the Crypto market should investors pay attention to? And how does Lending impact Coin prices?

If you’re interested in these questions, let’s dive into the details in today’s article.

Let’s get started!!!

1. WHAT IS LENDING IN CRYPTO?

Lending in crypto refers to a form of lending coins or tokens in the market. This means that investors with idle coins or tokens lend them to borrowers for a specified period at a pre-agreed lending rate (interest rate). Once the lending term ends, the borrower will repay the principal amount along with interest to the lender.

1.1. Characteristics of Coin Lending in the Cryptocurrency Market

Lending in the cryptocurrency market comes with both advantages and disadvantages:

Advantages of Coin Lending:

• Users can choose to lend their idle coins/tokens to increase their holdings.
• Platforms offer a variety of lending durations to diversify options for lenders.

Disadvantages of Coin Lending:

• The biggest risk of lending is that the value of the coin may decrease during the lending period, and the interest earned may not compensate for the loss due to the drop in the coin’s price.

Example: On Binance Lending, you open a lending contract for ETC coins with an interest rate of 6% per year for a 15-day term.

• On October 5, 2021 (when lending starts): The price of ETC is $6.6.
• On October 20, 2021 (when principal and interest are paid back): The price of ETC is $4.6.

If you lend 100 ETC, the total return at the end of the term will be:
100 + 100 x 6% x 15/365 = 100.247 ETC = $661.627 (calculated at the time of lending).

However, if we calculate it based on the price of ETC at the time of repayment, the total you will receive will be:
100.247 x 4.6 = $461.134, a decrease of about 30%.

1.2. The Nature of Lending Activity

So what is the essence of the Lending service activity? Let’s explore it with TradaFX:

Lending Activity on Exchanges

The activity of Lending on exchanges aims to create funds for margin trading services. Investors will borrow additional coins/tokens from the exchange to leverage their trades. There are two ways investors can borrow:

• Option 1: Use coins/tokens in the exchange’s reserve wallet.
• Option 2: Borrow coins/tokens from other users at an agreed interest rate between the two parties.

How Lending Coin Platforms Work

On Lending platforms, the coins/tokens participating in lending are used to lend to borrowers. In addition, these platforms act as intermediaries and benefit from the interest rate difference between the borrower and the lender.

For example: The NEXO platform offers both lending and borrowing services to users. NEXO serves as an intermediary in this process.

2. KEY PARAMETERS INVESTORS NEED TO CONSIDER WHEN LENDING

Below are four important parameters that investors need to pay attention to when participating in Lending.

2.1. Lending Rate

This is the interest rate when you lend any coin/token. Naturally, as a lender, you would want this rate to be as high as possible.

2.2. Lending Time

The lending time refers to the duration for which the loan is made.

2.3. Lending Assets

Each trading platform will accept various types of coins/tokens, and you need to have the eligible coins/tokens in your wallet to lend them. The platform that supports more types of coins/tokens for lending gives users more options to participate in Crypto Lending.

2.4. Lending Total Value Locked (TVL)

This refers to the total amount of assets locked within the platform. This number reflects the level of interest and participation from users on the platform. The more assets locked, the more it impacts the price of the associated coin/token.

3. TYPES OF LENDING IN THE CRYPTO MARKET

Currently, Crypto Lending is divided into three types:

1. P2P Crypto Lending: Peer-to-Peer Lending
2. Over-Collateralized Lending: Over-collateralized Lending
3. Under-Collateralized Lending: Under-collateralized Lending

Over-Collateralized Lending and Under-Collateralized Lending are two types that use the Lending Pool mechanism, in which:

• Lenders will deposit supported coins into the liquidity pool (Lending Pool), in return, they will earn interest.
• Borrowers will deposit other coins into the liquidity pool (Lending Pool) as collateral, then borrow the desired coins from the pool and pay interest. The interest rate will be automatically calculated based on an available formula and depends on the supply and demand of each asset within the Lending Pool.

3.1. What is P2P Crypto Lending?

This is a direct lending model between the Lender and the Borrower without the need for a third party as an intermediary.

Specifically, by using smart contracts, Lenders and Borrowers can sign lending agreements and make loans without involving a third party. Instead, the Smart Contract will execute automatically and allow the transaction to take place.

The biggest advantage of this model is that the borrowing costs and interest rates are lower compared to the other two models because the intermediary is eliminated. As a result, the transaction information and customer details will be kept absolutely secure.

3.2. What is Over-Collateralized Lending?

This is a lending method where the collateral is greater than the loaned amount.

The advantage of Over-Collateralized Lending is that users can optimize their capital. For example, on some exchanges, investors can deposit their coins/tokens and borrow money from the exchange to engage in Futures trading.

In this case, in addition to profits from the price increase of the underlying asset, you can also earn money from Futures trading (if successful).

However, with high profits come high risks. If the Futures trade does not go as expected, losses may result in your assets being liquidated.

3.3. What is Under-Collateralized Lending?

Under-collateralized lending is a form of lending where the collateral is less than the loaned amount. Another term for this is Credit lending—using your reputation to borrow with less collateral.

However, as of now, this form of lending is not widely accessible to general users but is typically applied to projects that are on the Whitelist of the lending platform.

4. What is Lending Coin? What You Need to Know About Crypto Lending

Lending Coin is a form where owners of coins/tokens are willing to lend their idle coins for a certain period in exchange for an interest rate (which can be fixed or variable).

Some Popular Lending Coins Today: Bitconnect, RGX, Hextracoin, and more.

Currently, you can perform Lending Coin on:

• Exchanges such as Binance, Poloniex, Gate.io, Bitfinex, etc.
• Standalone Lending Platforms, including both DeFi and CeFi.

Among them:

• In DeFi Lending: A lending platform in decentralized finance. This platform eliminates intermediaries and is non-custodial. Some notable DeFi platforms include: InstaDApp, Maker, Fulcrum, Constant, etc.
• In CeFi Lending: A lending platform in centralized finance, where an intermediary always controls the transaction between the lender and the borrower, and it is always associated with custodianship. Some notable CeFi platforms include: Nexo, BlockFi, Salt, etc.

5. TOP LENDING COIN PLATFORMS TODAY

In this section, let’s explore some of the top Lending Coin platforms today.

5.1. SALT Lending

SALT is a financial platform that offers loans backed by blockchain technology.

To become a member of this platform, users need to use their cryptocurrency to purchase access to SALT’s services. The higher the membership level, the more financial options are available. Additionally, SALT allows borrowers to use their crypto assets as collateral for a loan in fiat currency without needing to sell their digital assets.

The conditions for a loan are quite simple. The borrower is required to pay a fee to become a member of the platform. Additionally, there are various subscription packages available depending on each person’s usage needs. The loan amount will be equivalent to the cryptocurrency collateral provided by the borrower.

5.2. ETHLend crypto lending

This is a decentralized lending platform based on Ethereum Blockchain technology, enabling P2P Lending supported by Smart Contracts.

ETHLend crypto allows Lenders and Borrowers to connect from anywhere in the world. The operation of this platform is essentially a website that connects investors and lenders with potential borrowers. Both Lenders and Borrowers have access to a credit liquidity pool without restrictions.

To complete a transaction, users need to fill in the required information about the loan cost, the percentage of the insurance fee, and the number of coins/tokens needed for collateral. If these conditions are agreed upon by the Lender, a loan agreement will be created.

5.3. BITFINEX coin lending

Bitfinex is renowned as one of the most reputable cryptocurrency exchanges in the world, and it also provides cryptocurrency lending services.

Since 2016, users on this exchange have been able to borrow or lend their assets to those in need of borrowing.

Additionally, Bitfinex also provides a service to earn daily income by lending USD or cryptocurrency. Therefore, you only need to create an account and deposit your cryptocurrency assets into the Funding wallet. Once set up, your account will automatically start receiving interest.

6. IMPACT OF LENDING ON COIN PRICE

According to the lending mechanism mentioned by TradaFX, coins/tokens participating in Lending will be locked for a certain period. This will have a positive impact on the price of that coin/token.

• Lending Total Value Locked: The total locked value will cause the circulating supply of that coin/token to decrease during the lending period.
• The demand for buying coins/tokens to participate in Lending increases.

As analyzed above, these factors, according to theory, will have an effect and help drive the price of the coin/token upwards. However, investors should also pay attention to other factors affecting the price of the coin/token, which may cause the price to not increase. The reason is that the amount of locked coins is too small compared to the total supply, making the impact of supply and demand almost negligible.

On the other hand, the Lending model is also a game played by exchanges with Margin:

• In Lending, the exchange holds a large amount of coin/token (from the lender’s deposit).
• The exchange can sell the coins/tokens, causing the price to drop significantly.
• Then, they use the money to buy back at a lower price.

=> As a result, the exchange can increase the amount of coins they want to hold.

7. SUMMARY

Thus, through today’s article, TradaFX has shared with you knowledge about various issues such as what Lending is, the parameters investors need to pay attention to when performing Lending, the Lending model in the cryptocurrency market, the best Coin Lending platforms today, as well as analyzing the impact of Lending on the price of coins/tokens. We hope the information we’ve provided will help you in your understanding and research of this term.

If you have any questions, please leave a comment below, and TradaFX will respond promptly.

Wishing you success in your trading career!!!