What is crypto lending?

Crypto lending works by taking crypto from one user and providing it to another for a fee. The exact method of managing the loan changes from platform to platform. You can find crypto lending services on both centralized and decentralized platforms, but the core principles remain the same.

You don't just have to be a borrower, either. You can passively earn an income and gain interest by locking up your crypto in a pool that manages your funds. Depending on the reliability of the smart contract you use, there is usually little risk of losing your funds. This could be because the borrower put up collateral, or a CeFi (centralized finance) platform like Binance manages the loan.

How does crypto lending or crypto loan work?

Crypto lending typically involves three parties: the lender, the borrower, and a DeFi (Decentralized Finance) platform or crypto exchange. In most cases, the loan taker must put up some collateral before borrowing any crypto.

You can also use flash loans without collateral (more on this below). On the other side of the loan, you may have a smart contract that mints stablecoins or a platform lending out funds from another user.

Lenders add their crypto to a pool that then manages the whole process and forwards them a cut of the interest.

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