During the last years, peer-to-peer lending sites have sprung up from the ground and it has become hard to differentiate the good from the bad, the sites that earn you real interest from sites that just don’t work or will even make you lose your funds.
As with all types of loans, if too many borrowers default on their loans, lenders will lose their funds.
One of the more recent platforms claims to have found a solution for exactly this problem – all while still boasting double-digit returns.
I recently had the pleasure of interviewing Frank Steffen, co-founder and managing director of the service on my podcast and we went through everything from the core idea of Lendary, its history, the team behind the product, to the lending market in general. With this review, I will complement what I’ve learned during this discussion and what I’ve seen on the Lendary platform.
What is Lendary.net?
Lendary describes itself as an alternative peer-to-peer lending service that generates returns by automating and optimizing a process that is quite different from the traditional activity of lending money to individuals or small businesses: ‘Margin funding’.
To understand margin funding, one needs to understand margin trading, i.e. the act of “trading on margin” or leveraged trading. ‘Margin’ stands for the margin of safety that every trader has to bring in equity before receiving a short-term loan that is then invested in a trading position. This in itself is an age-old practice and is known from almost all traditional markets (stocks, bonds, FX etc.).
Read more: The best crypto borrowing and lending platforms
Usually, a broker or a bank will act as a middleman and provide the necessary capital and will charge an interest rate in return. Some newer crypto exchanges, however, have started to open up those ‘funding’ markets to people like you and me – that’s how peer-to-peer financing of margin accounts started to emerge.
So, what is interesting about this and what does Lendary have to offer?
The interesting part is the dramatically different situation in terms of investment risk compared to traditional peer-to-peer lending. Whereas traditionally, the borrower may fail to pay back loan and interest due to all kinds of reasons (from bankruptcy to fraud), loans that are given in margin funding are protected by technology in the following ways:
1) Funds can never leave the platform, i.e. they can only be invested in cryptoassets but cannot be withdrawn.
2) If funds are invested in crypto assets – say Bitcoin or Ether – those investments are protected via an automated liquidation system.
Let’s have a look at an example to illustrate this:
Say a trader brings 100 USD in equity and borrows another 100 USD from you via the margin funding platform.
With the 200 USD he buys Bitcoin. Technically, as long as the USD value of Bitcoin doesn’t drop more than 50%, the trader would always be able to pay you back your loan in full, although the equity of the trader would suffer.
The automated liquidation system makes sure that any of the trader’s leveraged positions are liquidated (i.e. transferred back into USD) a long time before such a drop in value might occur – the threshold for this is usually already at 15%.
Also, since crypto markets are open 24/7, there is no risk of adversarial overnight moves in such trading positions, another huge advantage compared to traditional markets. Since stocks, futures or other instruments cannot be traded around the clock, this leaves room for situations where events such as news or sentiment changes appear before markets open and can then lead to huge jumps in related asset prices at market opening, leaving traders (or automated liquidation system) no opportunity to liquidate their positions for previous prices.
Similarly, traditional lending is mostly illiquid with loans often ranging from months to years.
Compared to those traditional markets, margin lenders are in a very favorable position and this is something that you simply don’t have in traditional peer-to-peer lending.
So how are the returns and how exactly does it work?
Given a risk profile like this, you would expect relatively low returns, right?
Far from it, in fact, you would have earned annual returns between 10-15% in the last couple of years by investing in margin funding.
The simple reason for that is the willingness of crypto traders to pay high daily interest rates. Since crypto trading is still rather short-term and speculative, traders don’t really care if they pay daily (!) interest rates of 3-10 bps (i.e. 0.03-0.1% per day!). If you compound this over a year, you end up with stable two-digit returns.
How does Lendary itself work?
At its core, Lendary is an automation software for margin funding and takes over the constant and optimal lending of your funds on a crypto exchange 24/7.
When onboarding on Lendary, you will need to create two additional crypto exchange accounts – this sounds like a lot of work but Lendary has a pretty good guide including quick videos that should make it easy for you to set everything up in ~15min. The reason why you need two additional accounts are the following:
Lendary recommends Bitstamp as the crypto exchange where you can easily transfer fiat funds (e.g. USD, EUR etc.). You can start with as little as 100 EUR/USD which I thought to be cool.
The actual lending, however, takes place on Lendary’s partner exchange Bitfinex. Since Bitfinex has a very lengthy KYC process for fiat deposits, Lendary has built a clever API system that automatically transfers all of your funds to Bitfinex so that they can be used for lending right away.
This way, you basically just create your accounts with your personal API keys, make your deposit, and let Lendary take care of the rest.
Lendary Onboarding Guide
Once you are set up, you get access to your personal Lendary dashboard where you can see each individual loan in real-time and where you can access some helpful additional features. E.g. Lendary offers a ‘rate-booster’ functionality that allows you to set a certain interest rate threshold (e.g. 25% p.a.) above which your loans would automatically be lent for a longer period of time (up to 30 days). This can increase your overall lending performance significantly.
In addition, your personal dashboard offers various analytics functions and a structured download of all your earnings that you can use for taxes and accounting purposes. The usability is really great, both on desktop and mobile.
For using the Lendary service, you pay a simple performance fee of 20%, i.e. 20% of your net interest earnings goes to Lendary. While this might seem a lot at first glance, you don’t have any fixed costs at all. This means that Lendary doesn’t charge any management fees, setup fees, withdrawal fees or anything that many other platforms or brokerage services charge. Lendary only earns if you earn, which I found to be quite fair.
Conclusion
What I liked most about Lendary is that it combines a few interesting features of investment products that you usually don’t find all at once:
It is a high-yield way of investing your money; it is completely uncorrelated to all other asset classes (also uncorrelated to crypto markets), it profits from a really innovative way of risk management (Lendary also didn’t have any drawdowns during the Covid crash in March as opposed to most traditional P2P services), and it has daily liquidity due to the short holding period for loans.
For anyone who is interested in earning daily interest rates on a level that exceeds most of the traditional products and who doesn’t shy away from trying something new, you should definitely give Lendary a try.
Summary
A unique platform that enables investors to easily profit from the crypto space without necessarily being very knowledgeable in the space and without getting involved with the risky business of day trading.
Hi Jean. Thank you for your blog! I’ve just recently stumbled upon it and find many articles very useful. Having browsed through several of your reviews, I especially appreciate your transparent and realistic approach – accurately describing the opportunity but also the risks involved.
While Lendary seems very interesting and innovative indeed, I was left wondering how come you haven’t covered the risks their customer will be exposed to. Where are customer funds being held? I’m assuming they will stay on the Bitfinex exchange for the entire duration of the investment period, and will not receive any better protection than a normal trading account would (essentially meaning no protection at all).
The reason I found your blog is I’ve been accumulating funds by crypto trading, and feeling uneasy about holding all my profits on these platforms, I started researching alternatives. None of the existing crypto exchanges can be considered safe. In my opinion, they represent a completely different risk level compared to anything else that has been reviewed on your blog (aside from crypto trading itself of course), so I find it a little eyebrow-raising that you make no mention of that in this review. As you are surely aware, adverse changes in the crypto space can happen really fast and they can be both unexpected and devastating.
I completely get the ingenuity and potential of Lendary’s concept, and would love to invest in it myself. However, their 20% fee is out of line, considering the substantial risk involved. Not only is it risky for the customer to put funds on a trading platform, but this platform is also a third party, over which Lendary has zero control over. If their fee came with reliable protection for the customer’s funds, it might be justifiable. Taking a percentage fee (20%) substantially higher than what the customer can expect to earn in terms of interest (10-13%), while exposing the customer’s capital to an exceptionally high level of risk, seems unfair to the point of being outright abusive. In other words, the skin in this game seems to be 100% the customer’s.
Now I am not one to never take risks; in fact I do choose to take even extremely high risks, in case I deem the potential reward worth it. In this case the expected interest would need to greatly exceed any other available options, such as high yield crypto savings accounts, for me to want to put anything more than pocket money into it. Perhaps people’s pocket money is all Lendary wants. Small amounts, coming from a large customer base, might create them enough profit already. If that is the case, I’ll just wait for some competition to appear that offers either a lower risk, or a lower fee.
Hi Saara, thanks for your comments.
I’ve spoken to Lendary this week and they assured me that they are doing very well and growing their customer base. So it seems that their fee model is accepted by the market.
What they do is provide an automated service that sits between the investor and the trading platform (Bitfinex) and automates the lending process. I don’t think that the 20% fee has anything to do with any risk involved, they are simply charging for the service. And since they are currently the only ones doing it, they are able to charge 20%, which in my opinion is not abusive. If other competitors join the space then the fees they charge might come down.
This remains quite a niche solution for profiting off crypto, and I find it totally understandable that not all people will feel comfortable with it. The word “risk” in crypto can mean a lot of things to many people. If you ask me, right now, I will probably tell you that crypto is the least risky investment considered the crazy worldwide situation we are going through. To others, the word crypto is synonymous with drug dealing, scams, tax evasion etc etc. so they will of course shy away from the whole space.
Ultimately you need to find your own view of the world, the various asset classes and of a particular investment and act accordingly.
I was going through the process today and made it to the Bitfinex steps. After verifying my account, I was met with the message that, since I’m a US resident, I am not allowed to use Bitfinex services. It seems I should have done a better job at due diligence.
Yes, unfortunately, some services are blocked in the US due to government regulations. In fact it varies state by state sometimes.
Hello Jean, and thank you for the interesting posts on your blog. I got interested in Lendry and started to dig a bit dipper on the platform and the crypto-exchange behind it. What I found abt Bitfinex is that there are couple of large unfinished lawsuits for fraud activities against the exchange. I think it might be useful for your readers to know such details prior investing, since they will entrust their funds to Bitfinex .. These are just my thoughts since probably such information might affect decision to invest into this option. Anyway, thank you for your work and wish you a good day ahead!
That’s true but Bitfinex is still doing business as usual, I wouldn’t worry too much but of course do your own research.