The possible applications in relation to cryptocurrencies are numerous and are constantly growing. With an important part of these investments that can take the form of what is called passive income. That is, a wise investment, source of interest paid in exchange for the provision of digital funds. An operation most often carried out within DeFi, but not only. And of which one of the often very profitable areas is the lending of cryptocurrencies.
Active trading is not the only possible source of income in the cryptocurrency sector. In fact, there are other less risky ways to make your digital assets grow. And even if zero risk never exists, it can be interesting to invest part of your funds in solutions that generate rewards. With interests often attractive and in any case much higher than the current negative rate of the Livret A, once inflation is deducted.
Because a real digital economy 2.0 has been built around crypto-currencies. With a constantly evolving DeFi as its nerve center. And within this decentralized environment, peer-to-peer offerings set up directly from investor to user. All this through one of the many protocols dedicated to all kinds of operations that have nothing to envy to the traditional economy. Like, for example, the possibility of lending one's cryptocurrencies against the collection of interest.
Lending: Lending your cryptocurrencies for interest
But it's impossible to talk about lending without discussing the associated borrowing system in parallel. Because in decentralized finance, these two parties must agree in order to carry out this procedure. On the lender's side, it is necessary to make crypto-currencies (or other assets) available. And as far as the borrower is concerned, the payment of the agreed - and sometimes variable - interest accompanied by the payment of a security blocked in safety. The best known protocols on the Ethereum network are MakerDAO (MKR), Aave (AAVE) and Compound (COMP). But these are not necessarily the most interesting ones, according to data from the DefiRate website.
A service that - within DeFi - does not require going through a KYC-type identification procedure. All you need is a portfolio like MetaMask and the necessary funds to get started. But first, it is important to take a quick look around to determine the best options available, depending on the desired strategy. Because depending on the protocols, interest rates can vary greatly depending on supply and demand. And this can quickly become very attractive or clearly problematic depending on the position held.
Lending: DeFi's lending protocols
A procedure supported by a smart contract system. And which can be the cause of a liquidation in the case of MakerDAO. This is when the value of the collateral blocked as collateral to create DAI stablecoins falls below the ratio needed to maintain the operation. A risk that should not be overlooked, due to the high volatility of the cryptocurrency market. And this is even though the protocol requires 150% of funds as collateral. With as the latest innovation, flash mint loans that automatically create the amount of IADs needed for the operation, and destroys them once the repayment is made.
A different logic in the case of the Aave protocol, with pools of liquidity that allow to receive in return tokens symbolizing the interest received (example DAI = aDAI). But also, the possibility of contracting flash loans which are very controversial. Because they allow their users to borrow cryptocurrencies, perform a transaction and make repayment in the form of a single transaction. This without the need to deposit collateral as security. An innovative financial tool that has been the source of funding for many of the attacks that DeFi has suffered. Because it allows the release of large sums of money from nothing.
Centralized exchanges and loans of cryptocurrencies
It is also possible to carry out these same operations through centralized platforms, but under very different conditions. For it is no longer a question of smart contracts or liquidity pools, but simply a service provided by a fintech. The main obstacle is the regulatory authorities, which are very concerned about limiting the development of these services through fines and territorial bans, most often in the United States. As in the case of BlockFi, which was forced to pay $100 million to resolve its dispute with the US Securities and Exchange Commission (SEC). But other platforms exist, such as Binance, Coinbase or Nexo.