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How Lending Can Boost Your Bank by 50% in 5 Minutes
Recently, I started thinking: what do people who have invested in altcoins and are waiting for a “to the moon” moment do when they don’t even have enough for food? Sell at a loss?
The answer came from deep within: take a loan. And if dealing with traditional credit organizations isn’t appealing, and the chances of getting a crypto-backed loan approved are slim, there’s only one way — lending.
What is lending?
In crypto, lending is the process where a user deposits their assets as collateral to borrow another cryptocurrency.
In simple terms, it’s like a company that gives you cash against your crypto as collateral. For example, let’s say I bought 10 ETH with all my money and believe that in six months I’ll be able to sell Ethereum at $5K. I spent everything on it, so I don’t even have money left for food. Selling ETH at the current price feels like madness, so I turn to lending platforms. I lock up my ETH as collateral and get around 1–2% annual interest. With 10 ETH currently worth $26K, I can borrow up to ~19K in USDT. I take those USDT, say, at an interest rate of 10–12% per year, and can do whatever I want with them. If I want, I can buy a car and work as a taxi driver until the altcoin season kicks in, or if I believe it’s coming soon, I could even buy more ETH with that money.
It sounds like free money — almost like leverage for free — but not so fast. If the value of your collateral drops significantly, there’s a chance it will get liquidated. That’s why you need to keep an eye on a metric called “Account Health.”
What is Account Health?
Account health is a ratio that shows how safe your collateral is compared to the loan. If the ratio drops below 1, your position could be liquidated.
The larger your loan relative to the collateral, the closer you are to liquidation. And although lending platforms allow borrowing up to 80% of the collateral’s value, it’s safer to borrow a smaller amount to minimize risk.
In summary
Lending is an excellent tool for increasing your liquidity in a growing market. The only real risk that can wipe out your deposit is greed. The less you borrow relative to your collateral, the better. Any sudden drop in the market, and your position might be at risk.
When could this be useful? Anytime. If you need money for a short or long term, and you don’t want to sell your assets, this is a great solution.
While testing out lending platforms, I decided to collateralize my 1800 OP tokens and borrow some stablecoins. I ended up borrowing $1500 with $3100 worth of collateral. My account health was 1.29 (if OP drops from $1.43 to $1.11, my position would be liquidated.) Meanwhile, I can use my $1500 and only pay $13 per month in interest — pretty amusing. Renting capital.
Which lending platforms can I recommend?
There are two main types of lending platforms in crypto — centralized and decentralized. Just like with where you store your money, each has its pros and cons. No platform is entirely hack-proof, so choosing wisely is crucial. I tried Aave, one of the oldest and most popular platforms. I like to think that my funds are relatively safe there.
Find a lending platform that suits your needs and where you can use your crypto as collateral. Just remember, the market is always looking to take everything you have and even more. Fight for your money! Hug!
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Microloans on Blockchain was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.