Crypto lending lets users borrow and lend cryptocurrencies for a fee or interest. You can instantly get a loan and start investing just by providing some collateral. This could be through a DeFi lending DApp or a cryptocurrency exchange. When your collateral falls below a certain value, you will need to top it up to the required level to avoid liquidation. When you return your loan plus a fee, your capital is unlocked.
You can also get collateral-free loans known as flash loans, which you must pay back within the same transaction. If you cannot do this, the lending transaction is reversed before it has the chance to be finalized. Crypto loans make borrowing and lending simple, and the process is completely automated by smart contracts. For many, it’s an easy way to earn APY on crypto assets they HODL or access cheap credit.
However, just like any project, smart contract, or investment on the blockchain, crypto lending also involves financial risk. For example, if you use a volatile coin as collateral, you can be liquidated overnight. Smart contracts can also be hacked, attacked, or exploited, which often leads to big losses.