The crypto industry has developed so much over the past decade that it's no longer just about buying and selling. There are now so many financial services tailored towards the DeFi realm, including lending and borrowing. But is it safe to lend and borrow crypto, or are drawbacks involved?

Let's discuss the pros and cons of crypto lending and borrowing to see if this financial option is for you.

How Do You Lend and Borrow Crypto?

Lending and borrowing crypto can be done on a centralized or decentralized platform. Exchanges like Binance offer crypto loans, but projects like MakerDAO offer similar options.

Borrowing and Lending Crypto on a Centralized Platform

Let's start with the centralized route.

On centralized platforms, one group of people generally controls what goes on. You're free to use any features you want on your account, but the addition and removal of features, the use of data, and customer experience are down to a number of higher-ups. Social media sites like Facebook and Instagram work in the same way.

When you borrow crypto on a centralized platform like Binance, you can usually choose from numerous assets to borrow, though you will need to provide enough collateral to take out the loan. Binance calculates how much collateral you need to deposit using its Loan to Value formula, as cryptocurrencies differ from each other in price and are constantly fluctuating. If the Loan to Value number is high, the loaned asset is riskier, meaning more collateral is needed.

Binance offers over 25 different assets for borrowing, ranging from Bitcoin and Ethereum to Filecoin and Monero. When borrowing from this platform, Binance looks after your collateral. You can also lend on Binance and other centralized platforms and receive some funds. You can customize how long you want to lend for and which asset you'd like to lend.

Borrowing and Lending Crypto on a Decentralized Platform

So, how does decentralized crypto lending and borrowing work?

On a decentralized crypto lending platform, no one entity is in charge, with power and data being spread across the network among nodes (or individual computers). When you borrow or lend crypto on a decentralized network, you're not dealing with any one entity or individual. Rather, lenders deposit funds into a pool, from which funds will be taken and lent to borrowers temporarily.

Decentralized platforms require users to deposit collateral to hedge against price drops during the lending window. Depending on the platform you're using, the type of collateral you can deposit will change, as well as the type of asset you can lend. The most common assets on a DeFi lending platform are Ethereum, Dai, Tether, USD Coin, and Bitcoin. You cannot deposit traditional money as collateral, as DeFi platforms only deal with decentralized assets.

Whether you're borrowing on a centralized or decentralized platform, remember that your collateral will be taken from you if you do not repay the loan.

As a lender, you can earn a small profit from providing funds to a DeFi or CeFi lending pool. The amount you earn will vary based on how long you lend the funds.

The Pros of Crypto Lending and Borrowing

Let's start with the advantages of lending and borrowing cryptocurrency to see what it can offer you.

1. Low Interest Rates

One of the toughest things about taking out a loan is tolerating the high-interest rates. Loan companies often profit through interest rates, so it's no surprise they will push the interest to make a greater return. Your typical loan company will charge an interest rate of around 10 percent, but this can climb to any figure so long as the person signs an agreement.

On crypto platforms, interest rates tend to be lower, even if you're using a centralized platform. Binance's interest rates differ depending on the asset being borrowed, but they can go as low as 0.95 percent. Rates will also differ depending on whether you want a stable or flexible figure, which is up to you.

On decentralized platforms, interest rates can drop to two percent but can rise to double figures. Again, this all depends on the asset being borrowed.

Be that as it may, crypto lending interest rates are still lower across the board than those associated with traditional lending.

2. Wide Selection of Assets

When you borrow from your local bank, chances are you'll only be able to choose from your country's national tender. But when borrowing crypto, you'll usually have a wide range of different coins and tokens to choose from. Bitcoin and Ethereum are commonplace on crypto lending platforms, but things don't stop there. You can also borrow lesser-known assets, as well as stablecoins.

This also works in the favor of lenders. If you have an asset you want to lend, you may be able to find a DeFi platform that wants your funds.

Here's a list of DeFi lending platforms and their accepted lending and borrowing assets:

• Aave: ETH, BAT, MANA, AVAX, MATIC, USDC, USDT, DAI.
• MakerDAO: DAI.
• Compound: DAI, ETH, USDT, USDC, WBTC, ZRX, SAI, REP, BAT.
• Curve Finance: DAI, USDC, USDT, WBTC, WETH, FRAX, TUSD, CRV, BUSD.

If you choose a highly versatile platform, you can lend multiple assets simultaneously, boosting your returns.

3. No Credit Checks

When you take out a loan from a traditional bank, the first thing looked at is your credit score. If your score falls below the minimum requirements, you won't be able to get a loan or will only be able to get one with high-interest rates.

On DeFi lending platforms, you won't need to go through a credit check to borrow funds, making it easier to take out a loan. However, you should still be cautious when borrowing any money, as you'll be liable to pay it back with interest.

The Cons of Crypto Lending and Borrowing

While there are some great perks to crypto lending, there are also a number of drawbacks to consider.

1. Volatile Assets

Crypto assets are volatile by nature, meaning no one coin or token remains the same price for long. If you borrow an asset and the collateral you deposit drops in value, you'll need to deposit more of that collateral to reach the previous value you provided. You may not have enough funds to increase this collateral, which leaves you unable to legitimize your loan. At this point, you'll have to give the borrowed funds back.

2. Shady Platforms

The crypto industry has become a haven for criminals. Whether you're trading, staking, investing, or borrowing and lending, you're always at risk of being targeted by malicious actors.

In terms of borrowing crypto on a shady site, you may be asked to deposit a large amount of collateral that far outweighs the value of the assets being borrowed. Alternatively, the malicious operators may boost interest rates so that you're paying an incredibly high fee to borrow funds that would cost less elsewhere.

If you decide to lend money on a shady platform, you may never see those funds again. A malicious platform could take the assets you deposit in a lending pool, transfer them elsewhere, and then hit the road. You want to be sure that the DeFi platform you borrow from or lend to is legitimate and has a long list of positive reviews and testimonials.

3. Lack of Regulation

Unlike the traditional financial sector, the crypto industry has a long way to go in terms of regulation. Certain laws have been passed in relation to cryptocurrency, with more restrictions expected in the coming years, but there are still a lot of legal pitfalls that put investors and traders at risk.

A crypto loan does not have the same insurance and backing as a traditional loan. You won't have an official bank facilitating the loan, and your collateral assets are not 100 percent secure.

This is also a downside for crypto lenders. If you lend crypto and the platform ends up being shady or vulnerable to cyberattacks, you may lose all your assets with no method of retrieval.

Should You Lend or Borrow Crypto?

If you want to borrow crypto, it's best to ensure you have a good reason. You don't want to deposit useful assets and pay interest rates if you have no real need to borrow funds. But if you need a holding of crypto but don't want to buy funds for permanent ownership, borrowing on a legitimate platform could work for you.

If you've got a holding of crypto that you're not doing anything with, and you don't want to outright sell it, lending it to a pool allows you to financially benefit from your funds without having to let them go. Just ensure the platform you use is legitimate and safe.

All in all, crypto lending and borrowing is a mixed bag of pros and cons, so it's crucial to keep these in mind before you commit to anything.