Anyone can borrow crypto by depositing collateral into DeFi lending
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The basics of borrowing in DeFi
DeFi allows people to borrow cryptoassets from a pool of lenders. The lenders receive yield from the interest borrowers pay. If you are new to the idea of lending or borrowing in DeFi, please read the following article: What is crypto lending?
To borrow, you’ll first need to deposit funds into the protocol. These funds will act as collateral for your loan. If you haven’t deposited any cryptoassets yet, check out this support article on how to lend in DeFi.
If the value of the collateral falls below a certain amount, your collateral will be liquidated automatically by the protocol. Before borrowing anything, please read the Loan-To-Value and Health factor sections below.
Borrowing use cases
The current primary use case for borrowing in DeFi is to increase exposure to cryptoassets. Here are some examples of how people often use their loans:
Increase exposure to markets: This allows you to hold a cryptoasset you have strong convictions about and use it as collateral to further participate in markets. For example, deposit $1000 in ETH → borrow $500 in DAI → buy $500 in ABC token using DAI.
Leveraged long: This allows you to hold more of a cryptoasset than you could otherwise. For example, deposit $1000 in ETH → borrow $500 in DAI → buy $500 in ETH using DAI. With this strategy, you’ll have 50% more ETH than you could have. Another way to put it is that you will have leveraged your ETH position by 50%.
Earn time sensitive yield: Many DeFi protocols offer transient attractive yields on borrowing platforms like Aave to attract liquidity and mind share. More advanced users take advantage of yields offered on both the borrow and lend side during these limited windows. For example, new token ABC is offering 15% APY on Aave for ABC deposits and 7% APY for borrows. Deposit $1000 in ETH → borrow $500 in ABC (Paying 2% on the loan means you will earn 5% overall) → deposit $500 ABC (earn 15%).
What you need in order to borrow in DeFi
You will need three things to borrow cryptoassets on a lending platform:
- Digital wallet
- Cryptocurrency
- Lending platform site
Digital wallet: These wallets, also called crypto wallets or web3 wallets, hold cryptocurrencies and other digital assets. The best wallets are self-custodial like the Bitcoin.com Wallet. Self-custody means you have full control over the contents of the wallet, whereas in custodial wallets a third party has ultimate control. Learn more about self-custody and its importance here.
Cryptocurrency: The wallet will need to contain cryptocurrency to pay for transaction fees as well as to swap. Transactions fees are used to pay for actions that make changes to a blockchain. They will be paid in the blockchain’s native currency. For example, ETH is used to pay for transaction fees on the Ethereum blockchain. In order to borrow on a decentralized lending platform, you will first need to post collateral to borrow against. Since this is functionally the same as lending the platform your cryptoassets, see this support article on how to supply your assets.
Lending platform site: It’s important to use a reputable lending platform that accepts a good number of quality cryptoassets, and has competitive yields. The next section introduces just such a platform.
Introduction to Aave
Aave, a leading DeFi DApp, exists on multiple chains, including Ethereum and Avalanche. The Bitcoin.com Wallet supports DApps on both chains through WalletConnect.
You can read more about WalletConnect here.
Here’s a guide for how to use WalletConnect.
The importance of Loan-To-Value
The ratio between a loan and collateral is called Loan-To-Value, or LTV for short. The LTV ratio defines the maximum amount of assets that can be borrowed with a specific collateral. For example, imagine you deposit ETH for collateral. The LTV can change over time, but let’s imagine it has an LTV=75%. This means that for every 1 ETH worth of collateral, you will be able to borrow 0.75 ETH worth of the corresponding asset, such as DAI or USDC.
High volatility cryptoassets like Wrapped Bitcoin, Ethereum, and particularly other lesser known coins can see rapid decreases in value. If you use these assets as collateral and the value of those assets rapidly depreciates, you can be liquidated before you can add more collateral. Stablecoins are much less volatile, and are the preferred collateral for that reason.
In Aave, it’s important to watch the Health factor of your loans. This article will teach about Aave’s Health factor.
How to borrow
To get started borrowing on a DeFi platform, first go to a reputable lending protocol such as Aave. Connect your web3 wallet to the DApp. Before you can borrow, you will first have to deposit some cryptoassets that you can use as collateral. Please see this guide here on how to lend.
Once you’ve deposited collateral, go to the “borrow” section of the DApp. Lending platforms will have a list of cryptoassets you can borrow. Each cryptoasset will have a different interest rate you will have to pay. Choose a cryptoasset you wish to borrow, and specify how much you want to borrow. The maximum amount the DApp will let you borrow is based on how much collateral you have available. It’s prudent to borrow less than the maximum amount, since that will protect you against liquidation if your collateral decreases in value.
For step-by-step instructions on how to borrow on Aave with the Bitcoin.com Wallet, use this support article.
