Crypto & DeFi
What Can You Do With DeFi Loans?
December 12, 2023
Crypto & DeFi
December 12, 2023
Use DeFi loans to pay off expenses, plan for large purchases, and make smart investment decisions.
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As the world transitions towards decentralized and blockchain-based systems, crypto loans have emerged as a powerful tool for individuals and businesses alike. Decentralized finance (DeFi) loans are a new and innovative way of borrowing money using your cryptocurrency as collateral. Unlike some traditional loans, DeFi lending offers more flexibility, lower interest rates, and faster origination.
You can use DeFi loans to access liquidity without selling your crypto, hedge against market volatility, and leverage your digital assets however you see fit. For example, you can borrow USDC against your Ether and use it to pay your bills, buy more crypto, or invest in other opportunities. Learn more about what you can use DeFi loans for: "What Can You Do With DeFi Loans?"
As the crypto market grows and matures, more and more people will benefit from understanding the loan options available to them. In this article, we will explain what DeFi loans are, how they work, and what you can do with them. We will also introduce you to Rocko, an innovative platform that makes taking out DeFi loans easy and safe.
Crypto loans allow you to borrow crypto assets or stablecoins (like USDC) by pledging your existing crypto holdings as a guarantee in the form of collateral. These loans operate through DeFi lending platforms which are open-source protocols built using blockchain technology.
Generally, crypto loans require over-collateralization, meaning you have to put up more crypto as collateral than the amount that you want to borrow. This approach minimizes risks for the lender and allows borrowers to take out funds quickly and in any amount as long as they have enough collateral.
Here’s how it typically works: You deposit your crypto collateral into lending pools powered by smart contracts, and in return, you can take out a loan in stablecoins or another crypto token. The amount you can borrow is determined by the value of the collateral you provide.
Let’s say you have some Ethereum that is worth $5,000 and you need some cash to pay for a business expense. You don’t want to sell your Ethereum, as you believe it will appreciate in value in the future. You also don’t want to go through traditional financial institutions and provide income verification or your credit history. So what do you do?
You can use your Ethereum as collateral for a crypto loan. By depositing your Ethereum into the lending pools of a DeFi lending platform, you can borrow funds against your collateral. Then, you can use the loan to pay for your expenses while retaining your exposure to the price of Ethereum.
Decentralized lending allows you to repay your loan over time, releasing your collateral once your loan amount is fully paid off.
DeFi lending is different from traditional loans in many ways. Here are some of the main differences:
There are many platforms and protocols that offer crypto loans, each with their own features and benefits. Here are some factors to consider when choosing the best one for your individual needs:
So, once you’ve got your hands on some cash through a crypto loan, what can you do with it? Turns out, quite a lot!
One of the great things about crypto loans is that you can use them for almost anything you can use a regular USD loan for. If you are borrowing stablecoins, or fiat USD directly, you have the freedom and flexibility to spend or invest your funds as you wish.
Here are some of the possible use-cases for crypto loans:
You can use your crypto loan to pay off your existing debt including credit cards, student loans, or personal loans, and enjoy lower interest rates thanks to DeFi. You can also use your loan to cover your everyday expenses like groceries, bills, or rent without having to sell your crypto assets.
Sometimes life requires getting the checkbook out. Whether you're buying furniture, paying for an education, or even buying a car, you can take advantage of the low interest rates and flexible repayment options offered by DeFi lending platforms and avoid the hassle and fees of traditional lenders.
One of the best uses of money is to make more money. You can use your funds to diversify your portfolio and invest in other assets such as stocks, bonds, real estate, or gold. For seasoned crypto enthusiasts, you can also leverage your existing crypto holdings and increase your exposure to the market. However, this strategy is risky and requires careful risk management.
A crypto-backed loan may be just the thing to kickstart a new business venture. Launch a product, hire staff, and grow your operations with your DeFi funds. You can access fast and cheap capital without giving up equity or going through lengthy approval processes.
It's important to set yourself up for the future and plan for any unexpected expenses along the way. You can use your crypto loan as a war chest for when you need money urgently for medical bills, car repairs, family emergencies, or anything else. If life comes up, a DeFi loan can get you extra cash without requiring you to liquidate your crypto assets at suboptimal prices.
Just like regular loans, DeFi loans provide extra cash for important expenses and investments. It's not just about borrowing and spending, crypto loans allow you to leverage your digital assets in strategic ways without sacrificing the earning potential of your crypto.
Taking out a crypto loan can be a smart and convenient way to use your funds, but it also involves some risks and challenges that you need to be aware of. DeFi lending protocols inherit the security and reliability of blockchains, but these platforms also come with their own set of risks:
Before taking out a DeFi loan, it is essential to understand some key loan terms that you'll run into. Here's a starting point:
Regularly Monitoring Collateral Value: The value of your collateral can fluctuate. It’s important to keep a close watch on it, as a drop in value may put your loan at risk of liquidation. Most DeFi lending platforms have indicators that you can use to monitor your loan health.
Having a Loan Repayment Plan: Have a clear repayment plan in place. Calculate your interest payments and principal amount and ensure you can comfortably cover them. Being proactive with repayments helps keep your LTV down and avoid a potential liquidation.
Maintaining a Safe LTV Ratio: You should aim to keep your LTV ratio as low as possible. You can do this by over-collateralizing your loan, which means depositing more crypto than the minimum required. You can also reduce your LTV ratio by repaying some of your loan principal or adding more collateral to your loan position.
Diversifying: Avoid putting all your eggs in one basket. Don’t use all your crypto as collateral for a single loan. Diversification across different assets reduces the risk of losing everything in case of a market downturn.
Staying Informed: Stay updated on market trends, crypto news, and changes in lending protocols. Being aware of potential shifts in the market helps in making informed decisions.
Stress Testing: Consider worst-case scenarios. Calculate how a significant drop in the value of your collateral would affect your loan and whether you’d be able to manage it without facing liquidation.
While crypto loans can offer many benefits and opportunities, they can also prove difficult to use, especially for beginners. DeFi lending platforms can be complex and confusing, and they sometimes require technical know-how.
Thankfully, there is a solution that can make crypto loans easy and accessible for everyone: Rocko.
Rocko is a soon-to-launch platform that enables crypto owners to easily and securely borrow from popular DeFi protocols like Compound and get funds in minutes — no experience needed! Use the loan to purchase real estate, pay down higher-rate debt, make everyday purchases, and much more.
Rocko also provides a loan management dashboard and tools like text and email alerts to help manage your loan and collateral. The Rocko team consists of crypto enthusiasts who are ready to help you with any questions you may have. You can join the Rocko Discord server, follow our Twitter account, or visit our resource center to learn more about DeFi borrowing.
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Join Rocko's waitlist today and be the first to be notified when they launch! You can also learn more on Rocko's homepage.
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