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John Martin 22 Jan 2024 ◦ 11 min read

The Current State of Crypto Lending

The Current State of Crypto Lending

Cryptocurrencies, such as Bitcoin, appeared as a peer-to-peer means of payment, and over time, they also became investment instruments. The next logical step in their development was to work on lending.

Lending provides the user with the opportunity to deposit their funds and receive interest from them or, conversely, open a loan secured by their own funds. Crypto lending allows you to lend funds of interest to an exchange or a lending platform that uses them at their discretion: increasing liquidity, subsequent issuance of loans, lending to margin trading, and so on.

In this article, we will overview the crypto lending market and how it works, take a look at the regulatory landscape, explore different events in crypto lending including bankruptcies, scandals, etc., and provide you with the future outlook.

How Crypto Lending Works: Lenders Perspective

You can act as both a lender and a borrower

In the first case, you provide your funds that are sent to the smart contract of the lending platform. These funds are provided to other users on credit. They will pay little interest from them, which will be sent to you because you have provided a loan. Everything happens one-on-one as in the banking system, except that there is no intermediary in the form of a bank; everything happens directly, in a decentralized manner.

For example, there can be two types of lending options:

  • an indefinite contract. It has a low interest rate, but funds from such contracts can be withdrawn or added at any time;
  • a fixed contract. It is usually set for a certain period (10, 15, 30 days, etc.). They have higher interest rates. Funds from such a contract cannot be withdrawn until the end of its validity period.

The interest rate for USDT stablecoins deposits is usually around 1.2% per annum. A higher interest rate is 3.3% per annum for a perpetual 1Inch token contract.

The fixed contract of the Axie Infinity token (AXS) offers 15% per annum. However, funds invested in the contract are unavailable for 14 days. An indefinite landing in USDT stablecoins is available on the BlockFi decentralized platform at 9.3% per annum.

How Crypto Lending Works: Borrower Perspective

You have the opportunity to take out a certain amount of credit. However, the principle of operation of the system is radically different from that of its banking counterparts. To obtain loans, you must invest in your funds. 

For example, if you need to invest in ether, then the platform will give you an equivalent amount in USDT, and your ether will be frozen in a smart contract. To return it, you just need to deposit the borrowed USDT back into the platform account plus a small percentage for opening a deposit. Thus, the landing page allows you to almost double your capital.

Why practically? No one will give you 100% of the value of all funds. In the best case, you will receive 80% of the current price of one ether invested by you (i.e., for 4,000 per ether, you will receive only 3,200). This is necessary for the additional insurance of the landing platform. After all, if an asset goes down and reaches a certain value, it will be sold forcibly, and all funds will be given to the platform (and you will simply remain with borrowed funds). You will lose your ether, but you do not have to give back borrowed funds. This is similar to futures trading (but not risky). If the asset goes down strongly, it is liquidated. However, the plus is that you will not lose everything but only a part.

You can also specify a lower percentage of funds received: 60%, 50%, and 40%. In this case, the risk of liquidation is greatly reduced. You will receive much less funds in the loan, but you will definitely not lose the ether you have invested.

Benefits of Сrypto Lending

  • High Returns: Crypto lending platforms offer the potential for high returns, with many platforms offering annual percentage yields (APYs) of up to 10%, which is significantly higher than that of traditional savings accounts.
  • Diversification: Crypto lending provides an opportunity for diversification in investment portfolios, which can help mitigate risk.
  • Flexibility: Crypto lending platforms offer more flexibility than traditional financial institutions with features such as short-term lending and early withdrawal options.
  • Lower Interest Rates and Quick Transactions: Borrowers can often secure crypto-backed loans at lower interest rates than traditional bank loans, and the process is typically quick and efficient, leveraging blockchain technology.

Risks of Сrypto Lending

  • Depreciation of collateral below debt due to volatility;
  • Technical errors and platform hacks;
  • Bankruptcy of the company and loss of funds;
  • Scandals and regulation.

Key Players and Events in Crypto Lending

One of the most significant scandals involved Celsius Network, a major player in the crypto lending market. The company's decision to suspend withdrawals and cryptocurrency has raised the fear of a regulatory crackdown.

The SEC's actions against other lending firms, such as BlockFi, have further highlighted the industry's vulnerability to fraud and the need for stricter regulation. Major players like Celsius, BlockFi, Genesis, and Voyager Digital have faced reputational damage due to collapses and other issues.

These scandals have highlighted the challenges that law enforcement agencies and financial institutions face in combating money laundering and other financial crimes within the crypto space. This has also underscored the risks associated with crypto lending, including a lack of legal clarity, cybercrime, hacking, and volatility, followed by regulators’ attention.

The progress in crypto lending regulation varies across countries, with some taking proactive steps, while others are still in the early stages of formulating regulations. Unlike traditional banks, crypto-lending platforms operate with limited regulatory oversight and offer less consumer protection. This has led to instances of insolvency and the loss of funds without the safety nets provided by traditional banking regulations. High-interest rates and a lack of deposit insurance further contribute to the risks associated with crypto lending. Celsius could promise its clients 18% of revenue while the market was bullish, but then crypto winter started, and all these projects fell and lost the money of its clients.

In response, financial regulators in various countries have started focusing more on the crypto-lending sector. For example, the United States has recently seen significant developments in crypto regulation, with President Biden signing an executive order aimed at ensuring the responsible development of digital assets.

This move is a significant step towards regulating the crypto industry in the US and may serve as an example for other countries. Similarly, the European Union is exploring avenues to regulate crypto lending within the framework of its financial services regulation. The EU is considering subjecting crypto lenders to stringent licensing and prudential requirements, aiming to level the playing field between traditional banks and crypto lenders.

Regulatory Landscape

The crypto-lending market is likely to face increasing regulations, as financial authorities around the world recognize the need to ensure consumer protection and financial stability. Recent developments in the US and the EU, along with proactive efforts in countries such as Thailand and Hong Kong, indicate a growing trend towards regulating the crypto lending industry. However, the extent of regulation and its impact on the market will depend on the specific measures adopted by each country and the evolving nature of the cryptocurrency industry.

The potential consequences of increased regulations in the crypto-lending industry are multifaceted. On the one hand, the application of prudential regulation to crypto lenders is expected to increase compliance requirements, potentially eroding profits. However, it is argued that the unregulated nature of crypto lending currently offers these lenders an unfair advantage over regulated institutions, allowing them to take excessive risks and potentially engage in fraudulent activities. Therefore, increased regulation could level the playing field and mitigate these risks, contributing to enhanced market stability and greater investor protection


Lending is attractive to both investors and cryptocurrency developers. It allows one to establish mutually beneficial relationships, which contribute to the rapid growth of capitalization. However, despite their simplicity and attractiveness, investors should carefully approach deposit placement in this direction. The limits are often quite high, and there is also a high risk of fraud or being left without capital in the event of a sudden closure of the project or insufficient security.

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