Risks of Crypto Lending Platforms: Should You Lend your Crypto?
Due to extraordinary market conditions, major U.S. Bitcoin lending provider Celsius Network halted withdrawals and transfers without prior notice, causing a sell-off on all cryptocurrency marketplaces.
What we are going to learn?
What is cryptocurrency lending?
Crypto users who deposit their crypto at crypto lenders also make money, typically in cryptocurrency, just like clients at conventional banks do on their savings, which are paid interest in dollars or pounds or crypto. Crypto lenders give substantially greater returns at the very top end as much as 20 percent, albeit rates depend on the tokens being deposited. =
Savings at traditional banks offer pitiful returns due to historically less interest rates.
Lenders of cryptocurrencies profit by making loans that are also subject to charges. They loan virtual currencies to investors or cryptocurrency businesses so that they may use them as operating cash, hedging, or speculation. The difference between the interest rates they charge for loans and those they pay on deposits is how the lenders make money.
One of the most popular activities in cryptocurrency markets has been crypto lending. As the market for crypto loans has grown over the years, a number of crypto lenders have emerged. High-yield products are provided to users via centralized crypto lending companies like Nexo and Celsius.
Users get high-interest payouts by investing their cryptocurrency assets in these programs.
However, the current volatility in the cryptocurrency markets and issues with their business models have forced centralized platforms to deal with issues that emphasize the dangers of making a deposit in a cryptocurrency lending app.
The most recent example is Celsius. The crypto lending marketplace recently declared that it would stop allowing consumers to withdraw any money. In a crypto market that is already struggling, this has generated disagreement.
Risks associated with cryptocurrency lending
The collateral for CeFi loans is held in custodial status by a single organization. In light of the fact that the lender has authority over your private keys, you can only access the collateralized asset when he gives you permission to. DeFi lending mechanisms, as opposed to CeFi lenders, offer cryptocurrency loans without the use of centralized counterparties.
Here are a few potential dangers:
Loss of Liquidation
When a borrower’s debt falls below the collateralization limit, they suffer a liquidation loss and lose their collateral assets.
Every penny could be lost in a bankruptcy
In conventional finance, bank deposits are insured, providing a guarantee that, in the event of a bank’s failure, you will receive a portion of your savings back. As a result, there’s a low chance that you’ll lose your money on your deposits, and the lender will at least get something back in case that institution goes bankrupt.
Smart contract exploits
When a bad person finds a means to damage a platform by exploiting its smart contracts, they may gain partial or full access to the tokens that the platform has locked away.
Anytime, accounts may be frozen
Accounts on CeFi lending platforms may occasionally be frozen due to a variety of reasons, such as security lapses, worries about money laundering, or even platform liquidity. Sadly, if your account is frozen, you won’t be able to access your cryptocurrency holdings or conduct any transactions.
Flash loan attacks
When a person exploits a logical flaw in a platform, they can quickly execute several loans while making money off each one in turn.
How to pick a platform for crypto loans?
- Investors should check the TVL of the different lending protocols since that is a useful way to judge the legitimacy of them before putting their coins into a network’s contract.
- Users should check the security and safety procedures of the loan protocol they use, advises Puff. Software audits, bug bounties, insurance coverage, and the usage of decentralized price oracles are all common security procedures.
- The need for trust is what poses the biggest danger when taking out a loan from a crypto lending institution rather than through a DeFi protocol.
- Due diligence is therefore required on the side of consumers to confirm that the platforms they use have been audited, are safe, and are insured.
Risks Associated with Crypto Lending Platforms as a Depositor
If you are the one who wants to earn interest on your crypto, these lending platforms pay you interest just like banks.
However, we have seen recently that all of your crypto can be frozen and withdrawals can be limited anytime without prior warning.
After what happened with Celsius, Vauld, and other lending protocols, freezing customer’s accounts, it will take a great time to build trust again.
I personally would be staying away from any such lending platforms for taking a loan or earning interest.