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The crypto lending space has seen significant traction in the last couple of years with many investors showing interest in lending their idle assets to earn greater interest on them. Besides crypto lending, new contenders are also offering additional services to attract new users. Crypto borrowing is one such service.
This article takes a deep dive into the crypto borrowing space helping the reader understand why people borrow crypto against their collateral and how DeFi borrowing platforms like Archimedes are planning to make asset lending/borrowing as profitable and user-friendly as possible.
Let’s get started!
Why Do People Borrow Crypto Against Collaterals?
Imagine getting a loan at a significantly low rate without going through the cumbersome processes of signing documents, pledging your valuable assets, or paying overhead fees including higher interest rates than the loan amount. Sounds great, right?
But the question remains unanswered — why would people borrow crypto against crypto?
Here are a few reasons –
- It is a fairly quick process
- It is more accessible and flexible
- Users can access liquidity without enacting a taxable event
- Greater transparency
- Easy repayments
- And Eureka! Opportunities to earn more.
That’s what we call “Leverage Taking”.
How do Borrowers Earn Up to 10x Leverage with Archimedes?
Archimedes wants to make DeFi lending and borrowing as convenient as possible. Additionally, the process of leverage taking through Archimedes will be fast, efficient, effortless, and transparent. We will be launching soon with leverage positions on OUSD, planning to expand to other yield bearing assets over time.
Let’s take the example of Archimedes to understand how investors can deposit an appreciating asset and borrow money to earn up to 10x of their appreciating stablecoin.
For example, Alice has 10,000 OUSD, her appreciating asset. She wants to HODL her OUSD, but at the same time, she also wants to increase the number of tokens she holds, so Alice turns to Archimedes looking for options.
Alice can participate in Archimedes’ leverage rounds and create a leverage position with OUSD. If OUSD offers 2% APY and she chooses to buy 4x leverage with her ARCH tokens with Archimedes, resulting in an 8% APY.
Let’s say $10M of leverage is available at Archimedes. In this example let’s assume that for 1 ARCH token, a user can earn $1,000 worth of leverage.
Alice wants to take 4x leverage by staking her 10,000 OUSD. She then needs to borrow 30,000 OUSD, so she has to deposit her 10,000 OUSD and pay 30 ARCH tokens to get a 4x leveraged position.
The possibilities in DeFi seem really vast, but by borrowing through Archimedes, Alice guarantees she can HODL her OUSD, and her leveraged position with a boost in yield. Alice can also choose to retrieve her assets whenever she wants by closing her position and repaying her debt.
Great. But what are the unique value proposition about the Archimedes borrowing mechanism? Archimedes is not live yet and it’s an experimental protocol, so if successful our leverage takes will be able to enjoy:
- Top of the market APY: x5-x10 leverage on an appreciating stablecoin.
- Set and forget: No need to manage the position. No manual compounding or switching positions.
- Tradability: We package the position with an NFT, so users can trade it without unwinding it. Since leverage allocation is limited, some investors might pay a premium for these NFTs.
- Predictable fee model: Leverage takers pay all their fees upfront. No need to keep track of variable interest payments.
- No liquidation mechanism: As simple as that — we do not have a liquidation mechanism, pursuing a sustainable rather than predatory model for our users.
Archimedes is planning to launch soon to allow users access to both opportunities we plan to provide: lending and borrowing.
Join us here –