Best USDT Lending Platforms
Key Takeaways
- Stablecoins have different lending risks than traditional crypto, but in general, USDT lending is a safe and potentially lucrative avenue to take.
- Lending USDT typically results in a very solid return, especially considering that demand for stablecoin lending stays high.
- There are some risks associated with stablecoin lending, though, like loan defaults and market crashes, which we saw with TerraUSD in 2022.
Earn Interest On Your Tether By Lending USDT
The value of a well-known and respected stablecoin, TerraUSD (UST), crashed from its peg at $1.00 to a little over $0.30.
That may not seem like a significant dip when compared to other crypto tokens and coins, such as Bitcoin, which has been known to rise and fall by thousands of dollars in a day. However, TerraUSD is a stablecoin— which means that the value of the coin is meant to stay aligned with the value of the U.S. dollar.
Like UST, there are a whole cohort of stablecoins (such as USDC, DAI, etc.) but the biggest one? It’s USDT – the world’s largest stablecoin by market cap.
If you’re holding USDT, you may have questions about what you should do with your funds, especially if you want to earn passive income on the tokens you’re holding. Well, the good news is that USDT lending can be a lucrative and relatively safe path to earn on your tokens. Here’s what you need to know.
What Is USDT Lending?
Like other stablecoins, USDT differs from most other cryptocurrencies on the market. While we typically think of fiat currency as being directly linked to a governmental body and crypto as unregulated, the waters get muddied when talking about stablecoins. Because USDT is a stablecoin, it’s directly linked to the value of the U.S. dollar, so it functions more like a third-party crypto-dollar bill than a token like Bitcoin or Shiba.
That said, USDT is still a cryptocurrency, which means there are a limited number of tokens available, and it does not function like the U.S. dollar — at least not when it comes to exchanging currency. One of the ways you can use your USDT coins is through a process known as lending.
In the crypto world, lending means that you’re allowing borrowers to use your tokens in return for interest payments on your assets. During this process, you are essentially locking down tokens for a period of time so that others can use them, which means you cannot interact with them. That’s the tradeoff for earning interest on what you loan to other crypto users.
How Does USDT Lending Work?
One of the ways we can choose to lend our crypto is by way of a centralized platform. These platforms are more user-friendly and are simpler to navigate than a decentralized protocol, in both how and why they work.
Lending via a centralized platform allows you to earn interest because you’re essentially acting as a lender on the platform. The platform acts as the middleman, accepting tokens from lenders and offering them to borrowers who are seeking loans of certain tokens or coins. The borrower is typically required to put up collateral and pay interest (APY) on the loan. The interest payment is then split between the lender and the platform, which takes some portion as a fee for facilitating the loan.
On the other hand, a decentralized lending platform does not act as the middleman in a loan deal. The loans (and other transactions) on these platforms occur in a direct peer-to-peer (P2P) fashion, meaning that lenders are directly interacting with another user who wants to borrow their tokens.
CeFi USDT lending
Pros And Cons Of CeFi USDT Lending
Pros
- Verified borrowers
- Easy interchange of fiat and crypto
- Simple to navigate for any type of user
Cons
- Temporary loss of token custody
- KYC verification requirement
Pros of CeFi USDT lending
Verified Borrowers
The identity of anyone who engages with a centralized platform has been verified before transactions taking place. That’s because these platforms are required to follow the Know Your Customer (KYC) requirements, which means that they’re vetting every single account that is created on the platform.
Fiat On And Off Ramps
The interest payments you receive on the funds you loan are typically issued in crypto, not fiat currency. One big benefit is that centralized platforms typically make it easy to swap between fiat and non-fiat currency, which means that it’s easy to cash out and move the profits to your bank account when you want or need to.
Simple To Use
Centralized platforms are intuitive and user-friendly, which makes them a great option for new users, who may otherwise struggle to navigate the complicated DeFi platforms. After you create an account and are verified, you log on, offer your USDT tokens for lending purposes, and then receive interest payments according to the platform’s APY (annual percentage yield) and interest payment schedule.
Cons Of CeFi USDT Lending
Token Custody Is Given To The Platform
When you use a centralized platform to lend your tokens, you’re giving up temporary custody of your coins to the platform. This is antithetical to the idea of cryptocurrency, and opens users up to a number of risks, including losses from hacks, platform closures, and other related issues.
Requires KYC Verification
CEX users are also required to verify their identity to create an account, which typically includes offering personal information, identification documents, and other personal information. As such, you’re forfeiting anonymity and privacy, and in some cases, you may not even get approved for an account after offering up this information.
Best USDT Lending Platforms (CeFi)
Nexo
With over 5 million users worldwide, Nexo is one of the biggest crypto lending platforms and provides some of the highest returns (called APY, or annual percentage yield) on loaned funds.
To promote the use of its platform, Nexo encourages transactions that use its native $NEXO tokens and rewards users accordingly: If you opt to receive your returns in $NEXO tokens rather than in whatever token you originally lent out, the platform gives you an extra 2% bonus.
- Holding $NEXO tokens = APY bonus
- Daily interest payouts
- Nexo provides daily proof of reserves, a snapshot of their money situation and ability to pay back debts.
SALT
4.4
Specialised in Bitcoin-based lending and borrowing, SALT is a platform that lets you lend / borrow cash or other cryptocurrencies using your Bitcoin as collateral.
Been in the space since 2016, individuals and business alike have trusted SALT to go about their $BTC lending and borrowing business.
- The original provider of Bitcoin-backed loans
- Attractive APYs
- Wide range of assets
DeFi USDT Lending
This next might be a bit nerdy for some of you so proceed with caution:
This process of transacting on a DEX is regulated by smart contracts and automated money makers (AMMs). These terms are not required to understand how lending on a DEX works, but are interesting concepts nonetheless. These smart contracts act as automatic middlemen and are part of the coins being traded – which is possible because USDT is an Ethereum-based token.
These AMMs are able to make these trades happen because of liquidity pools (LPs), which are basically pools of tokens from numerous users that are meant for one purpose — which in this case is to act as the liquidity for the loans given to borrowers on the platform. Where the AMM comes in is that it takes from and adds to the pools as necessary, which makes lending smooth and seamless on these platforms.
In other words, if you lend USDT or other currency on a DeFi platform, you’re actually lending to a liquidity pool — and the token stockpile that comprises it. As a result, all lenders who contribute to a liquidity pool will get a portion of the trading fees paid by the borrowers.
Pros and cons of DeFi USDT lending
Pros
- No verification required
- Active trading pools
- Retain control of tokens
Cons
- Recordkeeping can be tough
- Smart contracts can be glitchy
- High liquidity in place
Pros of DeFi USDT Lending
No Identity Verification
There is no identity verification requirement when using a decentralized protocol, and therefore no loss of privacy or anonymity when engaging with these platforms. You simply connect your wallet and transact.
Active Trading Pools
Stablecoins, including USDT, tend to be in high demand, so the liquidity pools are typically very active. Lenders will typically see a high number of trades taking place related to stablecoins, and if you’re investing enough into the USDT pool, it can lead to very consistent returns.
Retain Custody Of Tokens
Decentralized platforms use smart contracts to make trades, which removes the middleman from the equation. As such, there is never a point at which you’ll lose custody of your tokens or be forced to temporarily give up custody to the decentralized protocol.
Cons Of DeFi USDT Lending
Independent Bookkeeping
When you’re using a DeFi platform, you’ll typically have to oversee any recordkeeping of the transactions you make for tax purposes or earnings calculations. A CEX has to keep their own records and allows users to access them, but a decentralized platform has no such feature — which can be a problem when you need to calculate earnings.
Smart Contract Security
A lot of the popular DeFi protocols have their own robust smart contract suites, but it’s not a guarantee of safety. That means there’s a chance for errors or bugs to appear.
High USDT Liquidity
USDT is one of the most popular tokens to make trades with due to its value being directly tied to the U.S. dollar. While the demand remains high, lending to USDT pools could feel like you’re just adding to an overfilled pool, and the gains you make per transaction may be less desirable as a result.
Best USDT Lending Platforms (DeFi)
Aave
Similar to Compound, Aave’s DeFi platform uses a series of smart contracts that allow lending and borrowing. Where Aave differs from Compound is in its range of blockchains and tokens; Aave supports 13 blockchains compared to the 7 on Compound. Aave also offers more token choices for lenders and borrowers.
DeFi without risk? There’s no such thing. But Aave offers a Safety Module, an investor-funded insurance pool that insures against shortfall events. For example, smart-contract bugs could cause lenders to lose money. Losses can also occur when the market moves quickly, slowing or preventing collateral liquidations.
- Aave supports 13 different blockchains.
- Easily swap cryptocurrencies on Aave to capture a better rates; if you see a chance to lend / borrow with more competitive rates, you can exchange your tokens for those tokens without leaving Aave.
- Biggest decentralized lending & borrowing platform in crypto
Compound
Compound Finance is the OG lending & borrowing platform in the DeFi space. It’s been around way before Aave was even born. Lending & borrowing rates vary based on demand. The platform supports lending & borrowing in $ETH, $WBTC, $USDC, and several other major cryptocurrencies.
• One of the OG platforms in the crypto space
• Occasionally provides more competitive rates on stablecoins
• Clean interface
USDT Lending Taxes
Crypto is defined as property by the IRS and gets taxed as any other income would. What that means is that if you have earnings from lending USDT, you’ll likely owe taxes on them.
If you want to find out more about the tax specifics of your personal situation, it’s always a good option to speak with an accountant or tax professional who has a solid understanding of the crypto market.
To Sum It Up
The USDT token remains one of the top coins used by crypto enthusiasts, which means that lending USDT can be a solid opportunity to gain some passive income.
Frequently Asked Questions (FAQs)
In general, yes, lending USDT is safe.
The main risk when you’re lending USDT is that the borrowers default on their loans.
Whether or not it makes sense to lend your USDT will depend on your goals.
That said, unless you’re going to use your USDT for other purposes in the near future, lending it to borrowers in return for interest can be a very solid opportunity to earn some passive income.
One of the risks is that borrowers default on their loans, and the other is that your lending platform (centralized or decentralized) can be attacked and you lose all your funds.
As long as you do your homework, though, the risks related to lending USDT are typically minimal.
It depends. Each platform offers its own USDT lending rate / USDT interest rate.
You can scroll to the top of the page to see the APY offered by Nexo and Aave for lending USDT.
Yes, you’ll likely owe taxes on the interest payments you earn from lending your USDT tokens to borrowers.
Crypto holdings are counted as any other property by the IRS and are therefore subject to taxation, just like any other form of income.
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