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What Is USDT Lending and How Does It Work

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Earn interest on your tether by lending USDT

Over the last few months, there has been a ton of crypto news to digest. After all, the market has been more volatile than it was just one year ago, and talk of exchange collapses and a crypto winter dominate the news cycles. But perhaps one of the most surprising crypto phenomena occurred in May 2022 when the value of a well-known and respected stablecoin, TerraUSD (USTC), crashed from its peg at $1.00 to a little over $0.30 cents.

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. In the crypto world, stablecoins are the closest equivalent we have to dollar bills, so to have a trusted coin fall like Terra did is cause for concern.

That said, there are still tons of other stablecoins that have less likelihood of volatility, including USDT or Tether tokens. Like Terra, USDT is a stablecoin, but unlike Terra, the recent USDT volatility, which occurred when it dropped to $0.95 from $1.00, was brief and unexpected — and it occurred as a direct result of the drop in Terra’s value. If you’re holding USDT, you may have questions about what you should do with your assets, 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 does — 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 for any number of purposes 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 exchange (CEX). These exchanges are more user-friendly and are simpler to navigate than their counterpart, a decentralized exchange (DEX), in both how and why they work.

Lending to a CEX allows you to earn interest because you’re essentially acting as a lender on the platform. The CEX acts as the middleman, accepting tokens from investors and offering them to borrowers who are seeking loans of certain tokens or coins. The borrower is typically required to put up collateral and pays interest on the loan. The interest payment is then split between the lender and the exchange, which takes some off the top for facilitating the loan.

The process of lending on a DEX, on the other hand, is a lot less streamlined. Unlike a CEX, a DEX 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 fashion, meaning that lenders are directly interacting with another user who wants to borrow their tokens.

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 coin.

These AMMs are able to make these trades happen because of liquidity pools, 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 DEX, 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 on a DEX will get a portion of the trading fees paid by the borrowers. The amount you’re paid for lending on a DEX is directly proportional to the assets you contribute to the pool.


Is USDT lending Safe?

In general, yes, lending USDT is safe. The main risk when you’re lending USDT is that the borrowers default on their loans or that the currency doesn’t have enough backing and crashes. Aside from those risks, lending can be a solid option for USDT holders who want to earn interest on their investments.

Should I Lend My USDT?

Whether or not it makes sense to lend your USDT will depend on what your goals are for your tokens. 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 extra income.

What Are The Risks Of Lending USDT?

Because USDT is a stablecoin, the risks tend to differ from the risks with traditional lending. One of the risks is that borrowers default on their loans, and the other is that your USDT tokens could have been better capitalized on in other ways. As long as you do your homework, though, the risks related to lending USDT are typically minimal.

How Much Can I Earn From Lending USDT?

How much you can earn from lending your USDT will depend on a number of factors, like the type of exchange you use, the demand on the exchange from borrowers, the rate of interest offered by the exchange, the number of tokens you offer up, and other factors. In general, you can make anywhere from a fraction of a percentage of each fee borrowers pay for a loan on a DEX to steady interest payments on loans offered on a CEX.


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