How to use crypto lending and borrowing to diversify your investment portfolio and offset risks?

If you’re looking for a way to grow or diversify your investment portfolio, you may want to consider crypto lending and borrowing. Crypto lending and borrowing is a process whereby you loan out your digital assets in exchange for an interest rate / borrow against them and pay interest rate or … 0% interest rate if you are part of the Radar community. This can be an effective way to generate additional funds, which can then be used to reinvest in your portfolio, hedge against your current positions or used to cover other expenses.

What is Crypto Lending and Borrowing?

Crypto lending and borrowing refers to the act of loaning out digital assets in exchange for an interest rate. The borrower is typically a person or entity who wants to use the digital asset for a short period of time but does not want to purchase it outright. Once the loan period is up, the borrower returns the digital asset to the lender, along with any interest that has accrued.

Crypto lending platforms work similarly to traditional lending platforms; however, instead of using fiat currency, they use digital assets as collateral. Some popular crypto lending platforms include Nexo, AAVE, and MakerDAO. These platforms allow users to deposit their digital assets and then receive a loan in either fiat currency or another cryptocurrency. The interest rates on these loans are generally quite high, ranging from 5–20%. This is because the underlying asset is more volatile and there is more risk involved. However, the upside is that you can get access to capital much faster than with a traditional loan.

Furthermore, thanks to the innovative nature of crypto and blockchain, platforms such as Radar were created. Radar’s isolated lending platform enables 0% interest loans through integrating yield-producing solutions and usage of its own stablecoin USDR. The model of USDR is by far the safest system you can choose for a decentralized stablecoin (based on overcollateralizing for any new debt positions). Moreover, the lending platform itself is isolated-risk, meaning that even if a collateral type is compromised, the rest wouldn’t be affected as it would happen in the cases of the majority of other lending platforms.

Why Use Crypto Lending & Borrowing?

There are a few reasons why you might want to consider using crypto lending and borrowing as a way to grow your investment portfolio. First of all, it’s a relatively low-risk way to generate additional income. Unlike other forms of investments, such as stock trading or Forex trading, there’s no chance of losing more money than you put in.

Another reason why crypto lending and borrowing can be an attractive option is that it allows you access to liquidity without having to sell your digital assets. This is important because it allows you to keep your position in a particular asset while still being able to generate income from it. Finally, crypto lending and borrowing can help you diversify your investment portfolio without incurring any additional costs.

Is Crypto Lending and Borrowing Risky?

As with any investment, there is always some degree of risk involved. The key is to do your homework and understand the risks before you lend or borrow any cryptocurrency.

One of the biggest risks involved with crypto lending and borrowing is platform risk. Since these platforms are relatively new, they may not have the same level of security as established financial institutions. This means that your crypto could be hacked or stolen if the platform is not properly secured.

That is why it is best to verify the code of the platform you intend to use, or at least look for any bug bounties and existing audits if you lack the knowledge to read and understand smart contracts. A good example would be established auditors such as Certik where you can find the full code audits history of certain projects that do their best to ensure the security of the users on the platform: https://www.certik.com/projects/radar

Another risk to be aware of is borrowers defaulting on their loans. If this happens, you could lose your collateral. To protect yourself from this, make sure to only lend to trusted borrowers with a good track record. Diligently research both the borrower and the platform before entering into any loan agreement.

In some cases, such as with Radar this is not a problem because any user who wants to borrow any certain amount, has to provide more collateral value than that of the loan taken out. That is what overcollateralization is all about, ensuring that the loan is paid back even in case of approaching a default, which is, however, never reached. What would happen instead of default, is liquidation of collateral, meaning that the collateral would be automatically sold to cover the entire outstanding debt.

Outlook

Crypto lending and borrowing is a great way to earn passive income from your investments across the crypto space. It’s important to do your research before choosing a platform, as there are both centralized and decentralized options available, each with its own advantages and disadvantages. If you’re looking for more information on crypto lending and borrowing, be sure to check out our blog for more posts on the topic!