Is Bitcoin Lending Safe?
It seems some people are making good revenue by lending bitcoin. Others are saving money by borrowing bitcoin. It’s all part of the new DeFi — Decentralized Finance — movement.
What is DeFi? And does it make Bitcoin lending safe?
Decentralized Finance — a New Financial Tool
Forbes wrote an impressive look at DeFi. They said:
“The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way,” says Alex Pack, managing partner at Dragonfly Capital, a $100 million crypto fund. “You only get that shot every 50 years.”
What is this shot they’re taking? This one shot every 50 or so years?
Binance, one of the world’s most trusted Bitcoin exchanges, defined DeFi like this:
“DeFi may be defined as the movement that promotes the use of decentralized networks and open source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.”
Coinbase, another of the world’s most trusted exchanges, builds on top of this definition by showing the power of DeFi with numbers:
“DeFi is now one of the fastest growing sectors in crypto. Industry observers measure traction with a unique new metric — “ETH locked in DeFi”. At the time of writing, users have deposited over $600 million worth of crypto into these smart contracts.”
Clearly, Bitcoin lending must be safe to some reasonable degree if people are willing to entrust more than half a billion dollars of their hard earned money into DeFi smart contracts.
That said, is bitcoin lending safe for you personally?
Bitcoin Lending — as Safe as you Make it
Many hacks and scams abound in the bitcoin space. Many of them are, unfortunately, due to human error.
Transferring and holding bitcoin is only as safe as the user makes it to be. For example, if someone types in the wrong bitcoin address when they are sending or receiving their coins, then those coins could be lost forever.
Likewise, if someone exposes their private key to the general public or sends it o a nefarious individual as part of a scam they fell for … then their account and funds could be drained right then and there.
Human error and scams such as these can all be mitigated by following good crypto info and guide sites.
That said, not all loss of funds is due to human error. That Forbes article admits to that fact.
“What are the biggest risks of DeFi applications? “The smart contracts could be hacked,” Pack says. “There could be a backdoor that allows someone to steal all of your keys. But you’re trusting in open-source code—over time, many eyes are looking at it.”
Yes, the smart contracts could be hacked. And that would be a problem that you could not necessarily avoid. The only way to try and avoid such an occurrence is by lending your bitcoin to DeFi sites that have a strong reputation staked on even strong security measures.
When you chose a DeFi site for your bitcoin lending needs, make sure to check the following factors and more:
- Reputation. Does the site have a strong reputation in the crypto community?
- Insurance. Some DeFi platforms offer insurance for their members. These insurance claims can protect against scams and hacks. Be sure to read the details.
- Rates. Make sure the interest rates you earn (if you’re a lender) or pay (if you’re a borrower) are competitive but also balanced. Some deFi platforms may attract people with great rates, but lack in security and insurance. Make sure these are balanced with your risk tolerance.
- Ease of use. Some DeFi sites make depositing and withdrawing your cryptocurrency easy and safe. This could help you avoid human error.
- Lock up periods. Some DeFi platforms may require you to lock the crypto you lend for a period of time. Make sure you know what that time period is beforehand so you don’t get stuck without your crypto when you might need it the most.
The Future of Finance is here.
All the pros and cons of decentralized finance aside — it does seem to be the future of finance. And therefore it’s worth taking a deeper look at and keeping up with it.
The fact is that with bitcoin lending, people no longer need to rely on their credit score. They no longer need to wait days for the loan to get approached and another few days for the funds to flow into their account.
Bitcoin lending allows people to borrow funds instantly and with no credit checks (thanks to the system of smart contract securing collateral). This helps lenders feel secure because they can get their money returned even if the market dips (since collateral will be automatically sold by smart contracts if the price goes down to the level of the loan).
These types of innovations will only get stronger as smart contracts increase in speed, efficiency, and security.
So keep your eyes and ears open as more DeFi innovations change finance forever.
Andreas Townsend Author
I am a technical writer, author and blogger since 2005. An industry watcher that stays on top of the latest features, extremely passionate about finance news and everything related to crypto.