what exactly are the uses of decentralized lending platforms?

 

Lending

Crypto holders can lend on decentralized lending platforms so that they can earn passive income on their holdings through the interest fees paid by borrowers. This is an attractive opportunity for crypto holders as lending can help them earn relatively low-risk interest on their existing holdings without the need of giving away their private keys to a centralized third party service. 

Borrowing

The most popular use case for borrowing crypto is margin trading. Borrowing from decentralized lending platforms allows traders to get leverage which multiplies gains and losses while trading. It also gets leverage from short selling, which is a trading strategy which makes money when the price of an asset goes down. 

Collateralized Borrowing

At the moment, the most popular decentralized lending platforms use a form of borrowing called collateralized borrowing. Collateralized borrowing means that users who are looking at borrowing crypto must lock up collateral of greater value than the value of what they’re borrowing. The collateral serves as an insurance that lenders will be repaid even if the borrower never repays the loan. 


For example, a trader wants to borrow $100 worth of LTC. The trader needs to lock up more than $100 worth of collateral in another asset. He or she can choose to lock $150 worth of BTC or ETH, depending on what the trader has. Now if the trader defaults on loan, the lender who provided the trader with $100 worth of LTC can just seize the collateral, which is worth even more. 


We all know that cryptocurrency value changes over time and the value of LTC, BTC or ETH won’t stay the same. If the price of the collateral falls and is worth lesser than the lending value, the lender wouldn’t be able to get the money back anymore because it’s not worth as much as the debt. This is where the concept of liquidation comes in. 


Liquidation is when the debt is automatically repaid by selling off some of your collateral to buy back the asset owed to the lender. This concept happens when the debt falls below some required level of collateralization, which is usually between 115%-150%.

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