Crypto Lending Platform
Just like banks make your cash deposits available for borrowing, crypto lending platforms also do the same for your crypto assets. In both cases, you receive an interest rate.
It is never a good idea for your money to just sit around, doing nothing. And that's exactly what it does if you are holding your cash in your home, outside of any pooling mechanism. Some cash may be useful for unforeseen emergencies, but the bulk of it should be employed to grow.
This way, while you are sleeping or doing something else, your money is working in the background to accrue more money. How is this possible, you may wonder?
Why Do People Need Borrowing?
In a word — time.
Time is the most valuable resource in human life. Every human being has a limited amount of time to use up. Consequently, people want to take shortcuts to make full advantage of opportunities. This is the essence of borrowing.
Borrowing allows people to acquire things without the money they already have. In return, they are willing to pay lenders a fee for this valuable service. This fee is called either APR (annual percentage rate) or APY (annual percentage yield). They both represent interest rates that the borrower has to pay for their loan, except that APY doesn't account for compound interest.
Central Banks Made Saving in Commercial Banks Pointless
After blockchain technology birthed decentralized finance, it is now far more profitable to use crypto lending platforms instead of banks to earn APR/APY. This is a consequence of central banking. When the economy is weak, central banks lower interest rates, so it is cheap to borrow. Of course, the entirety of money supply is under central bank control, so commercial banks are merely extensions of central banking policies.
In turn, when central banks lower interest rates, they try to spur economic growth with cheap borrowing and increased spending. Unfortunately, this makes saving in banks extremely problematic. In fact, across Europe, many banks have already instituted not just low-interest rates but negative ones. That's right, in many European banks, you are actually charged for your cash deposits!
Interest rates have been effectively near-zero or negative for years, depending on the country. Source: European Central Bank (ECB)
Crypto Lending to the Rescue
In contrast, crypto lending platforms offer up to 20x higher interest rates compared to those you would find in banking savings accounts. The reason is obvious; there is no central bank in the crypto space, so it operates on the principles of the free market. Meaning, the demand for borrowing decides what the appropriate interest rate to offer is.
Compared to banks' national average of up to 0.60% APY for “high-yield” savings accounts, crypto lending platforms are leagues more lucrative, as shown in the table below.
OSOM DeFi Earn is up there, near the very top, between 6–8% APY, subject to inherent crypto market volatility. How does this work in practice? When you lock in your crypto assets in liquidity pools — smart contracts — you make them available for lending or token exchange. Each time a borrower taps into a liquidity pool with your funds in it, you receive a cut in the form of APY.
More specifically, crypto lending platforms provide traders with an opportunity to keep holding crypto assets. Case in point, what happens when Karl doesn't want to sell his Ethereum (ETH) because he assumes it will go up much further in a month or two? Yet, at the same time, Karl wants to enter the crypto market to seize other investment opportunities.
Therefore, he would be in a conundrum — ETH will likely go up further from the purchase price, so he doesn't want to sell it. Yet, Karl needs extra funds for other crypto ventures. Cryptocurrency lending platforms make that possible by collateralizing his ETH to receive a loan. This loan is usually issued in the form of stablecoins so that the funds received are resistant to crypto volatility.
When Karl repays the loan in full — principal plus interest — his collateralized ETH will be unlocked and returned. On the other hand, if he breaches the terms of the loan, he would lose his collateralized ETH funds. Most importantly, the entire process is completely transparent and automated through the use of smart contracts — the backbone of decentralized finance.