WTF Is Lending?
Sometimes extra liquidity is needed, but selling tokens is not an option. Or perhaps you simply want to deposit one token and earn some interest in a low risk strategy?
That's where Lending Protocols come in...🧵
#DeFiDecember
Sometimes extra liquidity is needed, but selling tokens is not an option. Or perhaps you simply want to deposit one token and earn some interest in a low risk strategy?
That's where Lending Protocols come in...🧵
#DeFiDecember
Protocols like Banker Joe not only allow users to earn a passive yield on their assets but also borrow against them for some extra leverage.
For example, investors can deposit $AVAX and borrow $USDC, receiving stablecoins without selling a single red coin.
🔺
For example, investors can deposit $AVAX and borrow $USDC, receiving stablecoins without selling a single red coin.
🔺
If borrowers want to receive their $AVAX back, they simply need to repay borrowed $USDC with all acquired interest.
Compared to traditional finance, the loan doesn't have a fixed term and can be repaid at any time or even never.
Compared to traditional finance, the loan doesn't have a fixed term and can be repaid at any time or even never.
To ensure the protocol is solvent and assets outweigh liabilities, #DeFi lending protocols utilise automated smart contract logic and Collateralized Debt Positions.
This means that to borrow $1 worth of crypto, users have to deposit more than $1 worth of collateral.
This means that to borrow $1 worth of crypto, users have to deposit more than $1 worth of collateral.
The exact Loan To Value (LTV) ratios depend on the type of collateral and will be lower for more volatile and riskier assets.
If any user's LTV falls below a specific mark, their collateral is sold on the market, and the loan is repaid in a process known as liquidation.
If any user's LTV falls below a specific mark, their collateral is sold on the market, and the loan is repaid in a process known as liquidation.
To incentivise repayment of loans before liquidations happen and otherwise ensure stability, many lending protocols employ variable rates model.
On Banker Joe, borrowing and lending APRs increase in line with market demand for specific assets.
On Banker Joe, borrowing and lending APRs increase in line with market demand for specific assets.
Because of this model and the fact that borrowers effectively pay interest to lenders, lending protocols are one of the most efficient sources of yield in DeFI.
Investors can deposit funds and receive payments from borrowers, even if they don't borrow anything themselves.
Investors can deposit funds and receive payments from borrowers, even if they don't borrow anything themselves.
Lending protocols are therefore highly efficient money markets, that operate in a fully permission-less P2P way. They are revolutionary when compared to the archaic traditional system in place right now.
Retweet so others learn about the protocols driving #DeFi forward ♻️
Retweet so others learn about the protocols driving #DeFi forward ♻️
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