Wouldn’t it be nice to borrow $20,000 against your house in 15 minutes? You would just have to prove you were the homeowner, the home’s value, and wham, you have your collateralized loan. This may not be the case in TradFi—but, welcome to DeFi 102.
Before I get started, please check out Passive Income in DeFi 101, where I talk about stablecoins. Stablecoins are vital to the framework of everything that happens in decentralized finance.
Thank you, back to borrowing and lending in DeFi. When you get a home loan in TradFi, you use your future home as collateral to the loan. If things should go bust, then the bank will happily take your home.
The Future of Decentralized Finance
In DeFi, if you can provide the collateral for your loan and take the money instantly. This loan speed is possible because your crypto assets are already on the blockchain, available for all to see (your identity is hidden). Let’s walk through a scenario.
Josh wants to get a quick loan to invest in a hot new coin. He puts 3 ETH (currently worth $3,200 each) into a liquidity pool to collateralize his loan. He takes $4,000 USDC stablecoin for his loan. He pays interest on his loan until he pays it off.
Why would he take a loan against this ETHER? If he expects the price of ETH to continue to rise, taking out cash against it is a great idea to keep his assets. We can use this analogy for homes, Pokemon cards, gold, etc.
If you want some liquid funds but want to keep the asset, taking a collateralized loan may be the answer. The best part about DeFi is that it all happens on the blockchain via smart contracts. Everything happens quickly, as you may have your loan money in less than 15-20 mins, or faster. No middle-men (banks) required.
But we are here to talk about passive income, right! We are not worried about taking out loans and paying interest; we want people to pay us interest. Remember I said something about a liquidity pool?
Let Get Rich with NFTs
The borrower puts his collateral in a liquidity pool that protects the lender. The lenders (us) also have a liquidity pool—this is where the borrower withdrew the USDC from. We can add our own crypto to the liquidity pool and start earning interest immediately.
In fact, you don’t even need to have an account at some of the DeFi apps (Dapps). You just connect your decentralized wallet and place the amount of crypto you want into the pool. You will start earning interest immediately.
Algorithms control the interest rates on the different coins, such as Bitcoin, Ether, Tether, and USDC. The algorithms base the rates on how much of each currency is in the pools. However, my favorites, stablecoins, are always in high demand.
Stablecoins can quickly move in and out of DeFi transactions, so many borrowers prefer them over other assets. This is an excellent time to give you an important reminder.
I just talked about the DeFi version of borrowing and lending. However, if you haven’t gone full DeFi yet, you can take advantage of lending by using your centralized wallet, i.e., Voyager and Coinbase. I am getting 9% interest on my USDC on Voyager as we speak.
Let’s Invest in Crypto Together!
Why go the decentralized route then? The centralized path is great for standard, safer investments, but how do you make out-sized returns? If there is a new coin that people want to borrow against, then the interest rates will be ridiculous.
Having some of your cryptos in DeFi will allow you to be a first-mover in first-come-first-serve situations like this. I know people that were getting 40% interest by staking their cash in a starter coin.
We will get more into yield-chasing mechanisms as we progress through the series. For now, you can safely earn good yields on centralized wallets, but I would look into moving a small number of your assets into DeFi wallets.
I am a hypocrite because I don’t have any assets on DeFi, YET. But I plan to get this done once some of my crypto recovers from the great crash of April 2021. In the meantime, read “How to DeFi- Beginners” to get the step-by-step guide on borrowing and lending in DeFi Dapps.
What do you think about borrowing and lending in DeFi? Would you lend your money to collect interest? Do you prefer the centralized route or the DeFi route? Let me know in the comments! Enjoy and Happy Investing.
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