Why Borrow And Lend On Chain?
1/ Access: DeFi allows a much wider range of people to access loans and can significantly expedite the time it takes to apply and be approved. Additionally, having crypto loans be overcollateralized allows borrowers to protect their privacy and not worry about a poor credit history.
2/ Put your assets to work: Whether you are utilizing crypto lending to free up cash, or earn additional interest on your crypto, crypto loans give token holders flexibility.
3/ Transparency: The full traceability of the blockchain allows involved parties to know where their assets are, how healthy their loan is and any risks they face in real time. This is much different than “trusting” a bank or centralized lender like Celsius was. Womp womp.
For those who want to dive in further, we’ve prepared a few guides fully breaking down crypto lending and borrowing. You can check them out below!
What We Did: Exploring The Aave Lending Protocol
We busted out the public wallet to explore the largest DeFi lending protocol, Aave.
Aave allows users to earn interest by depositing their assets, as well as borrow other assets against this collateral.
Within Aave’s platform, we conducted two transactions:
1. We supplied 500 USDC on Aave
- The dashboard on Aave allows us to see our positions, including our deposit of $500
- This deposit is currently earning 8.12% APY, or annual expected return
- We elected to use this deposit as collateral, meaning that we are able to borrow other assets by locking up this position as a safety deposit
2. We borrowed $200 WBTC against our USDC deposit
Depositing USDC into a smart contract allowed us to immediately borrow WBTC using just our wallet – all while maintaining our privacy.
We were able to borrow WBTC at an APY of only 1.05%. And since we are also receiving 8.12% for supplying USDC, the public wallet is netting almost 7% in net interest from this position.
Sounds great, but here’s what you need to be aware of:
- Due to crypto loans being overcollateralized, the most we would have been able to borrow against our $500 deposit was ~$380
- The cost to borrow different assets varies greatly
- There are liquidation risks (chance of losing your collateral assets) if you borrow very risky assets
Why We Borrowed WBTC Against USDC
For starters, WBTC is equivalent in value to BTC. WBTC is simply a wrapped version of a Bitcoin that allows it to “live” on Ethereum’s blockchain.
As a result, WBTC can be used in DeFi on different blockchains. So owning WBTC is a bet on the price or values of Bitcoin.
Here’s why we decided to supply USDC and borrow WBTC:
- Borrow rates were very cheap for WBTC compared to other assets, allowing us to capitalize on an attractive net interest rate
- We want to put Bitcoin to work in DeFi in the near future, and we didn’t own any prior to this transaction
- Both assets are very liquid on Aave and well trusted
Why We Chose The Aave Protocol
Because we’re still in the early stages of our public wallet journey, we’ve been sticking to market leaders and battle-tested protocols.
If you’ve been around crypto for a bit, you have probably heard or come across their platform. Aave is a true OG in DeFi. And their numbers back it up.
Aave had almost $20B of assets on its platform during the last market peak. That number impressively still sits at $4.5B+, giving us reliance in their protocol and smart contracts.
And since Aave has attracted so much money and demand on their platform, they are able to offer attractive rates on lending and borrowing. All while the platform is backed by deep liquidity and a very active team.
Step By Step Guide To Lending And Borrowing Crypto
Getting Started With Aave
Aave’s site offers a sleek and easy-to-use dashboard for lending and borrowing.
- The left column displays all of the assets in your wallet that Aave supports, as well as the APY you could receive for lending that asset
- The right column shows users all of the assets available to borrow, followed by the amount you are eligible for and the interest rate you would owe
- If you have any assets on Aave’s platform, they will show up at the top of this screen
Before you borrow any assets, you will need to supply a token you are holding. Once you connect your wallet and press supply, you will see this screen:
- Just like a swap or bridge, input the amount of funds you want to deposit
- Aave shows you your expected annual return on the deposit, and allows you to choose if you want to use the asset as collateral
- Your expected gas fee is listed at the bottom, but you will have a more accurate estimate when confirming the transaction in your wallet
Using Collateral To Borrow WBTC
The screen to borrow is very similar as the lending screen:
- The amount you can borrow is shown under the asset you choose
- The health factor shows your chances of being liquidated on your position, based on the underlying asset and amount borrowed
- Note that if your health factor goes below 1, you risk chance of losing your collateral to the platform
Considerations When Lending And Borrowing Crypto
While lending and borrowing in DeFi offers a lot of benefits, it does not come without risk. Here are some of the risks users should be aware of:
- Smart Contract / Provider Risk: Engaging with DeFi protocols puts your digital assets in the hands of a smart contract or an entity, opening users up to risk of hacks or mispractice. Additionally, lenders in DeFi do not provide things like FDIC insurance, leaving them without much protection if things go wrong.
- Margin Calls: If you cannot maintain collateral or rates change aggressively, you may be forced to pay back loans on short notice. It is important to fully understand the concepts around lending and borrowing before engaging yourself.
- Unpredictable Yield: Yields and interest rates can be hard to predict and are constantly changing.
We now have assets on several blockchains, tokens being utilized for multiple activities in DeFi and some fast-learning Roaders. And next week, we are going to take our next big step: putting some of our bridged funds to work!
One thing we’ll be doing is taking some of our findings from today to explore a lesser known lending protocol that allows you to lend/borrow assets across different chains.
For now, readers can track our wallet on their own through DeBank. Simply go to their site, paste in our wallet address and follow our journey in real time under “portfolio”.
Here is the Milk Road Public wallet address:
This report is for informational purposes only and should not be relied upon as a basis for investment decisions, nor is it offered or intended to be used as legal, tax, investment, financial or other advice. You should conduct your own research and consult independent counsel on the matters discussed within this report. Part performance of any asset is not indicative of future results.
It should also be noted that the writer(s) of this report may hold assets mentioned in the article at the time of writing.