How to Lend Your Crypto on an Exchange and Earn Interest? (Crypto Lending Explained)

Understanding Crypto Lending on Centralized Exchanges

1. Crypto lending on centralized exchanges involves depositing digital assets into a platform-managed pool where the exchange uses those funds for activities such as margin trading, derivatives settlement, or institutional borrowing.

2. Users retain custody of their assets only in name—the exchange holds private keys and controls asset movement, meaning users rely entirely on platform solvency and operational integrity.

3. Interest rates are set dynamically by the exchange based on supply-demand imbalances, market volatility, and internal risk models—not by open-market peer-to-peer negotiation.

4. Some platforms offer fixed-term deposits with guaranteed APYs, while others provide flexible accounts where rates fluctuate hourly and withdrawals may be subject to processing delays.

5. Regulatory scrutiny has intensified globally; jurisdictions like the U.S., UK, and Singapore have issued warnings or enforcement actions against unregistered interest-bearing products disguised as “savings” or “earn” programs.

Risks Embedded in Exchange-Based Lending

1. Counterparty risk dominates—there is no insurance or FDIC-like protection if the exchange becomes insolvent or suffers a catastrophic hack.

2. Withdrawal freezes have occurred during market stress, including during the 2022 Terra/LUNA collapse and FTX bankruptcy, where users were unable to access principal for months.

3. Token-specific exposure compounds danger: lending stablecoins pegged to volatile reserve assets (e.g., USDC backed by commercial paper) introduces off-chain credit risk invisible to most lenders.

4. Smart contract risk is minimal in centralized lending—but operational risk skyrockets due to reliance on internal treasury management, KYC bottlenecks, and custodial infrastructure vulnerabilities.

5. Tax reporting complexity increases as each interest accrual may constitute a taxable event depending on jurisdiction, and exchanges rarely issue standardized tax documentation.

How Interest Accrual and Payouts Actually Work

1. Daily interest is typically calculated using a compound formula based on the prior day’s balance, with compounding occurring at midnight UTC or platform-defined settlement windows.

2. Payouts may be distributed in-kind (same token lent) or converted to platform tokens (e.g., BNB, HT, OKB) offering bonus yield but introducing additional price and liquidity risk.

3. Minimum balance thresholds often apply—lending less than 100 USDT might yield zero interest despite interface displays suggesting otherwise.

4. Slippage between advertised APY and realized yield is common due to rate resets, withdrawal fees, and rounding in micro-amount calculations across millions of accounts.

5. Some exchanges deduct “platform service fees” from gross interest before crediting user balances—these deductions are buried in terms-of-service documents rather than displayed transparently.

Comparing Major Exchange Lending Programs

1. Binance Earn offers flexible and locked staking options, but its “Dual Investment” products combine options strategies with lending mechanics, increasing complexity without proportional disclosure.

2. Bybit Savings features tiered rates based on total account equity, incentivizing concentration of holdings on one platform despite diversification best practices.

3. OKX DeFi Wallet integrates centralized lending with on-chain bridges, yet cross-chain transfers introduce bridging risk and failed transactions that halt interest accrual silently.

4. KuCoin’s “Earn” tab displays APR prominently but excludes mandatory 0.1% early redemption penalties that erase weeks of yield for short-term lenders.

5. Crypto.com’s “Crypto Earn” previously offered high yields in CRO tokens, creating artificial demand and exposing lenders to extreme token depreciation when incentives ended abruptly.

Frequently Asked Questions

Q: Do I maintain legal ownership of assets while they’re in an exchange lending program? No. Legal title transfers to the exchange upon deposit. You become an unsecured creditor with no priority claim in insolvency proceedings.

Q: Can I lend Bitcoin directly to other users via exchange interfaces? Not on mainstream centralized exchanges. Peer-to-peer crypto lending occurs exclusively on specialized DeFi protocols or niche platforms—not Binance, Coinbase, or Kraken.

Q: Are interest payments taxed as ordinary income or capital gains? In most jurisdictions—including the U.S., Germany, and Australia—they are treated as ordinary income at the time of receipt, regardless of whether funds are withdrawn or reinvested.

Q: What happens to my interest if the exchange delists the token I’m lending? The exchange may convert accrued interest into another token, suspend payouts indefinitely, or force migration to a new product with altered terms—users receive no veto power over such decisions.