The rise of Crypto lending

The first spate of crypto lender services gained popularity in 2017 on the back of the ICO boom. In the following bear market, a few key players were able to establish lending services by letting investors spend cash without having to sell their crypto assets.

With the bulls returning and the market showing signs of recovery, crypto lending has continued to grow. Now, one of the industry’s biggest players has entered the lending space.

The Binance exchange, which seems set on infiltrating every corner of the cryptocurrency ecosystem, has released a suite of lending products with yield rates of up to 15 percent for those willing to lend Binance coin, Tether, and other crypto assets.

The reason for the emergence of crypto lending platforms is simple – they solve a big problem for existing crypto users. Crypto holders now have an opportunity to leverage their crypto asset holdings without having to liquidate them.

Now, crypto users who want access to capital can receive loans using their digital assets as collateral. That’s a game changer as you can now get a loan, backed by your crypto, and use it to do anything from paying off debt to buying a home. All without having to sell any of your crypto assets.

Secondly, by depositing their assets with a crypto lending platform, crypto holders can now earn interest on their coins while still gaining exposure to long term upwards price movements.

Month on month growth

Binance’s lending service is up against a host of other startups.

Market leader Celsius Network, which distributes 80 percent of its revenue to depositors, has originated over $2 billion in loans and boasts more than $300 million in assets under management. The lender offers rates of up to 10.53 percent on dollar-backed stablecoins, higher than competitor BlockFi’s offering of 8.6 percent, and Nexo’s 8 percent.

These lenders all let the customer stake cryptocurrency as collateral, but some credit lines are shifted to provide new possibilities of lending against other forms of digital collateral.

Blockchain-based credit platform FinWhaleX allows assets from Steam games to be loaned in return for spending power. And by accepting The Worldwide Asset Exchange (WAX) token as collateral, Nexo theoretically accepts anything on the WAX block explorer, which lists a range of virtual and physical goods — from in-game laser guns to real-world Nike trainers.

With insurance protecting customer funds, these fledgling platforms are able to instill the customer trust needed to compete with peer-to-peer lenders from the realm of legacy finance. Nexo co-founder Antoni Trenchev says the growing interest from the big banks is positive for the industry.

"At Nexo, we have seen enormous month on month growth for both our Instant Crypto Credit Lines and the Earn Interest product," Trenchev told Brave New Coin. "In my opinion, this is due to the recovery of cryptocurrencies as an asset class but also the wider adoption and trust in the industry as we see both retail and institutions like JP Morgan, Facebook, Allianz and Fidelity get involved with crypto."

The ability to earn a healthy return in an era of low-interest rates is a likely factor in the growth of crypto credit. Typical interest rates offered by traditional peer-to-peer lenders pale in comparison to the blockchain-based equivalents.

Popular U.S. platforms Lending Club and Funding Circle only offer historical annual returns of up to seven percent — a full one percent lower than peer-to-peer crypto platforms like Nexo and Celsius.

While teaser rates like Binance’s 15 percent are expected to fall as competition mounts, blockchain-related efficiencies, and the willingness of borrowers to pay more interest to avoid a credit check could help keep interest rates higher than legacy peer-to-peer services.

Individuals and institutions

As the wider crypto markets move towards a bull cycle, the demand from both retail and institutional players will drive continued industry growth.

"The growth in lending activity reflects a natural maturation of the financial services built around the crypto asset class," said BlockFi CEO Zac Prince to Brave New Coin. "Demand for products in the sector spans retail and institutional use cases for earning yield and accessing debt capital."

As the cryptocurrency industry continues to grow, the growing demand for lending is fuelling the development of new platforms — like institutional service Lending Block that launched in September.

Instead of having to prove creditworthiness by applying for a loan from conventional lenders, individuals can bypass gatekeeping banks and credit agencies to get instant funds. Businesses, that might be holding large amounts of funds raised via token offerings, can also quickly gain spending power without losing a stake in the market.