Crypto Lending 101

Here is some basic info on low risk crypto lending, and how to get started.

Collateral Debt Lending

The way this works is that it’s collateral debt lending. To borrow you have to provide some assets to borrow against. What the means is you can just lend your asset (crypto), or you can lend + borrow.

The folks who lend + borrow, fall in 3 categories:

1. Don’t want to sell their crypto, b/c they believe it’s a good asset to hold and they don’t want to incur a taxable event. So if they need a short term loan, this is how they get it.
2. Traders/Hedge funds who want to either leverage their crypto to buy more, or more likely short a crypto. Example, they lend USDC and borrow Bitcoin, then they sell bitcoin on the open market, and buy it back at lower price and close up the loan.
3. Crypto payment processors. Instead of them having to have huge pools of every crypto pair (USD-BTC, BTC-ETH, ETH-USD, etc), they can use this service for short term liquidity to cover all the currency pairs for payment processing.

Stable Coin

The second half of this is how you lend, and the interest rates you can make. So you can lend out any crypto like bitcoin, but what about folks who don’t want to lend bitcoin, b/c they’re stuck with a very volatile asset. This is where stable coins come in. Crypto that is pegged to the USD. The one I am using is USD coin (USDC), which is pegged to USD by having actual fiat currency in a bank, which is audited by a big 4 company.

So now you can lend out USDC as your underlying crypto, and make 8.6%, almost risk free.

Risks

• Code hack on the blockchain, mitigation is that USDC is backed by real currency in a bank and has FDIC insurance.
• BlockFi gets hacked. They have built their service on top of Gemini’s crypto custodial services. Meaning Gemini does the cold storage (hardware storage) or crypto, and that cold storage is insured.
• Financial risk, the underlying asset someone has lent out or borrowed fluctuates, and their lend to borrow ratio is out of whack. In this case, since their underlying asset is crypto, BlockFi immediately liquidates the underlying asset to make sure it doesn’t fall below the lend to borrow ratio.
• There are no lockups or restrictions on when you can take your money out. Any amount, and you start earning right away.

Lending services

There are a few different lending services out there. They fall into 2 categories: centralized and decentralized.

• BlockFi is a centralized service, as in there is a company that is setting a flat rate, and they go out and find clients to borrow at a higher interest rate. It has an easy on-ramp to and from banks.
• Compound/DeFi app is a decentralized service, which means it’s running autonomously, using smart contracts, on the Ethereum blockchain. Interest rates are variable and dynamically set based on supply and demand.
• BlockFi is flat 8.6% yield, while Compound is variable based on up to the minute supply and demand.
• There is one more called Ledn.io that offers 12.25%. It’s centralized lending platform. They don’t have any on-ramp from bank to crypto, but you just need to use something like Coinbase to convert USD to USDC and then transfer over the blockchain.

How to get started

• Easiest: Send money into BlockFi and start earning 8.6%.
• Medium: Ledn.io, You will need to buy USDC on Coinbase, and then send the money over the blockchain. You can make 12.25%.
• Harder: Use a DeFi app. Send money to Compound/Aave/mStable/etc. You have to create a wallet, send money from Coinbase to your wallet, and then from your wallet to the DeFi App.

What am I doing

• I have put money in Compound, mStable, Ledn.io, and BlockFi.
• Most of it is in mStable, making a higher than average interest rate (20%+ at the time of this writing).

Closing thoughts

I think BlockFi is low risk if you use a stable coin as your underlying asset. You make 8.6% on your money, and it’s easy transfer back and forth to your bank. I recommend this for folks who are first dipping their feet into crypto lending.

If you feel a bit more adventurous, you should go the DeFi route. Compound/Aave are great options, but I like mStable. It’s a great gateway app to learning DeFi.

Shameless Referral Links

If you use BlockFi, Coinbase, Binance.us, or Ledn.io, here are my referral codes:

• BlockFi: https://blockfi.mxuy67.net/k7Bbz
• Coinbase: https://www.coinbase.com/join/sethi_fd
• Ledn: https://platform.ledn.io/join/888dfa0f2575addfd80a9f738587cef5
• Binance.us: https://accounts.binance.us/en/register?ref=52268026

Future topics

• Earning fees via currency swapping liquidity pools (Uniswap, Curve, Sushiswap, Balancer)
• Combining Yield farming + currency swapping to get highest yield with lower risk (Yearn.finance, mStable)
• DeFi Apps that are replicating traditional financial (BarnBridge, Synthetix)
• Arbitrage Strategies (Yearn.finance, Pickle.Finance)
• Degen level :)