DeFi Lending: A Complete Guide to Earning Yield in Decentralized Finance

In decentralized finance (DeFi), lending your crypto holdings can work as hard as you do, raking in some potentially great yields while staying entirely in your control. 

This guide breaks down the nuts and bolts of DeFi, shows you how it stacks up against traditional lending, and why Liquidium is a great place to earn yield on your bitcoin. 

What Is DeFi Lending? 

DeFi lending refers to putting your digital assets to work for you by lending them to borrowers on non-custodial lending protocols built on blockchains, all without the need for any intermediaries like banks. 

DeFi lending platforms like Liquidium offer a fresh take on finance by enabling trustless transactions as your funds remain under your control. It’s just you, your crypto, and a bunch of smart contracts making things happen.

How Does DeFi Lending Work?

DeFi lending functions as an automated, trustless lending market where code runs the show without any human mediation. 

This is how it typically works but the process differs from platform to platform:

1. You deposit your crypto into an autonomous lending pool from which borrowers can access the funds they need.

2. Borrowers take loans by putting up collateral, which makes sure lenders don’t get the short end of the stick (i.e. they receive the collateral in case of a borrower default). 

3. Interest starts rolling in, and you earn a cut based on how much you contributed to the pool.

4. Smart contracts keep things running like a well-oiled machine, from setting rates to liquidating collateral if needed.

Some decentralized lending platforms, like Liquidium, take a more direct peer-to-peer approach, where borrowers and lenders agree on terms directly with one another, and smart contracts handle the lending process from there. 

CeFi vs. DeFi Lending: What’s the Difference?

Crypto lending falls into two main categories: centralized finance (CeFi) and decentralized finance (DeFi).  

Here’s how they compare: 

Benefits & Drawbacks of DeFi Lending

DeFi lending comes with plenty of benefits, but let’s not pretend it’s all sunshine and rainbows all the time. Here are the pros and cons. 

Pros

• Non-custodial: Your funds, your rules. No one’s holding them hostage.

• Always open: No 9-to-5 banking hours. DeFi never sleeps.

• Transparent and fair: Everything’s on-chain–no backroom deals or hidden fees.

• Fast and efficient: No paperwork, no delays. Just smooth operations.

• Higher interest rates and yields: Platforms like Liquidium offer eye-popping annual percentage yields (APYs)–up to 380% on Bitcoin lending.

Cons

• Smart contract vulnerabilities: If there’s a bug, things can go south fast. Stick to well-audited platforms.

• Crypto volatility: Prices swing hard, so collateral values can drop quickly.

• Regulatory uncertainty: Governments are still figuring DeFi out, so changes could be on the horizon.

DeFi Lending Risks: What Are They & How Do You Mitigate Them?

Much like anything in crypto, DeFi lending also has its risks. Here are the risks you need to be aware of:

Smart contract risks

As with any piece of software, smart contracts can have bugs. Hence, stick to reliable platforms with strong security records and audited smart contracts.

Collateral volatility

Crypto markets are susceptible to volatility, so make sure not to get caught off guard by price swings. It’s probably best to overcollateralize your loans to avoid getting liquidated during the roller-coaster market dips.

Liquidity concerns

Sometimes, a lending pool might not have enough funds to settle all the withdrawals. Make sure the lending pool is active and well-funded before getting in, as you don’t want your funds stuck in an inactive pool.

Regulatory changes

The DeFi space moves quickly. Staying in the loop with news and regulations can save you from nasty surprises and keep you ahead in the game.

How to Get Started with DeFi Lending on Liquidium

If you’re ready to start having your crypto work for you, here’s how to start lending on Liquidium. You have the option between custom manual loans and instant loans. Let’s begin with the manual loans option, which is available for Ordinals, Runes, and BRC-20s.

Head to Liquidium’s website

Open Liquidium’s website in your browser and launch the app. 

Connect your wallet

Liquidium supports multiple wallets, so take your pick between Xverse, Phantom, Magic Eden, OKX, and others and securely connect it to the platform.

Choose a suitable collection

In the app, navigate to the Lend page, browse the various listed collections (Ordinals, Runes, or BRC-20), and choose which you want to lend your assets against by pressing the ‘Lend’ button next to it.

Set and confirm the offer

You’ll see the interest rates, loan-to-value (LTV), APY, and loan duration–examine these and know what you’re signing up for. Decide on the lending amount and adjust/verify these terms to your liking.

Wait for a borrower to accept

Liquidium will notify you in-app (as well as via email or Telegram, depending on your settings) once a borrower has picked your offer and agreed to your terms.

Approve the loan

You’ll need to sign the loan. You can do this on your Portfolio page, under the ‘Lending’ tab, where the loan is listed under ‘Pending.’ The loan will begin once the transaction is confirmed in the mempool.

And there you have it! You can now sit back and relax, racking up those interest payments. Use Liquidium’s handy dashboard to keep an eye on your yield in real-time.

Instant Runes-backed loans

If you want to accept Runes as collateral when lending your BTC, you can speed up the whole lending process by using the Instant Loans feature on Liquidium. To do so, you'll need to follow the steps bellow.

Switch to Instant Loans

After connecting your wallet, select ‘Runes’ from the available collateral, and switch to ‘Instant Loans’ by clicking the upper-right button of the app. In either case, you can still proceed with the ‘Manual’ process if you like.

Create a vault

Next, after finding your favorite collateral, click ‘Lend’ and follow the steps to create a vault. You can also learn how you can access your vault without Liquidium's vault.

Deposit your bitcoin

Go to your Liquidium profile in the upper-right corner, click 'Manage,' and then 'Deposit' to set the required amount of bitcoin that will be sent to your vault to start lending. After signing the transaction, you'll receive your BTC ready for lending.

Start lending

Now, you can start creating loan offers and define their terms, such as duration, the amount of collateral (Runes) that your loan is for, and LTV. You can find all your pending offers on your Portfolio page. Your loans will begin automatically after borrowers accept the terms, and you don't need to take any extra steps. Keep in mind that your offers can be filled partially as well, which depends on a specific borrower's needs.

And that's it! Now you just wait for the borrowers to start repaying their loans and your interest. In case a loan defaults, you'll get your collateral. Also, you can withdraw your bitcoin available in your vault easily at any time.

Earn Up to 380% APY Lending Your Bitcoin on Liquidium

If you’ve got bitcoin just sitting in your wallet doing nothing when it could be making you money, you might want to lend it out in the DeFi market. On Liquidium, you can lend your BTC and earn up to 380% APY, all while keeping total control over your assets.

You can also seamlessly swap BTC for Runes (and vice versa) using the Liquidium Swap app to make access to Bitcoin DeFi even easier. 

The platform’s non-custodial system means you never have to hand over your private keys–your crypto stays yours. Simply lend your bitcoin and watch the interest pile up.

Connect your wallet to Liquidium to start growing your Bitcoin asset portfolio. 

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always do your own research before making any financial decisions.

FAQs

Is DeFi lending risky?

Like with anything in crypto, there are risks in DeFi lending. Here, they come in the form of smart contract bugs, market crashes, regulatory pickles, and liquidity concerns. But doing your due diligence before diving in and choosing a platform can help you avoid the worst pitfalls.

What are DeFi lending pools?

DeFi lending pools are like community fund reserves where multiple lenders deposit crypto. Borrowers use these funds to get loans, and interest earned is split among the lenders based on their contribution to the pool.