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Tutorial: How crypto lending works

Updated: May 22, 2025
Published: May 20, 2025
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Discover how crypto lending works: a detailed guide on leveraging your assets as collateral, earning passive income, and understanding the risks of liquidation on platforms like Aave and Compound

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Video Tutorial

In this article, we’ll dive into how crypto lending works. Have you ever wanted to leverage the value of your crypto assets for short-term needs or use them as collateral for obtaining other tokens? Or perhaps you’ve considered earning additional income from your holdings? Crypto lending platforms make this possible! Using your tokens as collateral, you can borrow other assets, or earn annual percentage yields, or APY, by supplying them to the market, maximising your returns.

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How they work

Crypto lending platforms such as Aave and Compound, operate by connecting individual lenders and borrowers. Lenders provide tokens to the market, and in return, they earn a percentage of the APY paid by borrowers. On the other hand, borrowers must deposit assets as collateral to secure their loans, and pay an annual percentage yield. However, it’s crucial to understand the concept of liquidation. If the value of your collateral drops significantly, you might face liquidation, meaning your supplied assets could be sold off to cover the loan. The liquidation threshold indicates the risk level—for example, if it’s 80%, your loan will be liquidated when the borrowed amount reaches 80% of your collateral’s value. This often occurs during periods of high market volatility when the value of your collateral plummets.

Benefits and considerations

There are many benefits to crypto lending platforms. Lenders earn interest on their supplied assets, providing a passive income stream. And borrowers can access liquidity without having to sell their crypto holdings, allowing them to maintain their investment positions while meeting short-term financial needs. It's important to choose a reliable platform, understand the terms and conditions, and assess the risks involved. Research and risk management are key to successfully navigating crypto lending.

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