Lending and Borrowing

Crypto Lending

How does it work on DeFi?

  1. You can get access to cash without selling your crypto, if you think the crypto will rise in value
  2. You can potentially avoid capital gains taxes (by not selling your crypto and taking out a loan)
  • Your collateral can be in one token and you can borrow a different token
  • You can find another way to make a good yield on the tokens you borrow

Is it Unlimited?

  1. Available Liquidity — you can only borrow what is available in the pool
  2. Maximum LTV — Loan to Value ratio. For USDC the ratio is currently 82.5%, meaning if the user has deposited 1 ETH as collateral they can then borrow 0.825 ETH in USDC. If the debt in USDC becomes more than the LTV multiplied by the total collateral then a ‘margin call’ is made, where the protocol alerts you to give you time to add additional collateral to restore the LTV to below this maximum.
  3. Liquidation Threshold — when the debt is worth more than this value multiplied by the collateral value. To continue the example, when the debt in USDC becomes more than 0.85 ETH due to fluctuating ETH prices. At this point the collateral is used to pay off the debt, at least until the LTV is below the maximum value.

Optimisation

  1. Yield Optimisation — for example Yearn.finance, which has vaults of stablecoins that the smart contract automatically shifts around to different lending protocols depending on where the highest interest rates are.
  2. Flash Loans — by bundling several actions into a single Ethereum transaction you can borrow without collateral, use it to generate interest and repay the loan before the transaction is validated. If the loan is not repaid the transaction is cancelled as if nothing happened.

Concluding Remarks

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