“Wealthy people don’t sell their investments.” This is something I learned alongside a few of my newfound friends in the crypto-space, as we ventured from yield farm to yield farm, searching for gold and gems to fill our bags with.
My friend once told me that he funded his whole DeFi venture by loans, and I thought, wow, isn’t that highly dangerous? “No, no, I don’t mean leveraged loans. I’m talking about collateralized loans.” I shake my head, and he begins to explain this further.
He’s been keeping a portfolio of blue chip U.S. stocks, which he invested in a long time ago, and they’ve appreciated over time. And basically, if he never sells his stocks, he can continue earning dividends and let its value appreciate more and more.
In the meantime, though, there’s one problem. He’s a dad, and so he’s got mouths to feed, bills to pay, therefore he needs cash money. But how does he get that unless he sells his stocks?
Here comes the unique solution:
The platform extends a line of credit — a cash loan, that’s backed by his stocks as collateral. Now ‘collateral’ means that, should he be unable to repay (i.e. defaulting on) the cash that has been lent out to him, the company will then sell his stocks to cover the loan, deduct a service charge, and then return the remainder to him, if any.
However, if he continues to make minimum repayments to the company every month, they will happily allow him to extend the repayment period as long as he needs, at a low yearly interest rate. In the meantime, the stocks in the portfolio continue to appreciate over time, earn dividends, etc. So by the time my friend decides to repay the loan in full and regains full custody of his stocks, they will be worth more than when he started. In essence, he has lost nothing, and in fact gained more.
Now let’s talk about how you can do this with your crypto-assets through Unit Protocol. Because your investments should pay your bills, not just look pretty on your phone.
Here’s the reality: Crypto-investors need to eat, but they also want to hold their assets.
You could be a weekend investor, or you could be someone who’s neck-deep in crypto, and chances are, you own a bunch of digital assets which aren’t “mainstream”, i.e. altcoins, liquidity pool tokens, yield-bearing tokens etc.
But in order to get any cash out of them, you’d probably have to sell them for ETH/BTC/ USDT, move those to an exchange, and convert it into fiat. But once you’ve sold it, you’ve lost your position. And when the price appreciates, you can’t buy it at the same price that you bought it at before.
The solution with Crypto-loans? Borrow, don’t sell.
On a more practical standpoint, your crypto portfolio probably looks more like this one, with a mix of tokens, LP, and yield-bearing assets:
Money markets like AAVE or Compound accept “blue chip” cryptocurrencies like ETH and BTC, and stablecoins as collateral for loans. And since money markets are a two-way deal (depositors want to earn yield too), interest rates can really hike up based on supply and demand. Although crypto-loans generally charge lower interest rates than banks, on AAVE, if you were to say, borrow 1000 USDT ($1000) at a period of high demand and low supply, the rate could be as high as 18% per year! Even the fixed rate is not much better at 11.86% (at time of writing).
Unit protocol bypasses this cost and gives the savings to the borrower, by offering a different kind of interest rate called a ‘stability fee’. Instead of fluctuating market interest rates, the stability fee is determined by governance. Right now, you can borrow 1000 USDP (unit protocol equivalent of $1000), for only a 1.9% fixed stability fee!
This means when you repay, you only have to repay your borrowed sum, plus an additional 1.9% of what you borrowed as a fee for using the service. Just by using unit protocol, instead of paying $180 in fees, you only pay $19! You just saved almost 90% in fees, and your wallet will thank you.
Treat your crypto as real estate which appreciates over time. By using your crypto as collateral and borrowing USDP against them means you can pay bills, rent, and buy food etc. without ever having to sell your crypto assets! In the meantime, you continue to collect any fee-sharing, yield, or price appreciation from your assets.
Unit protocol allows you to deposit multiple types of appreciating assets, including: LP tokens, yield bearing tokens like cUSDC (compound USDC), DPI (defi pulse index), yvLINK (yearn vault LINK), which continues to earn while you sleep, work, or otherwise live your life.
The best part is, it’s accessible to anyone with an Ethereum or BSC wallet. There are no credit checks or minimum loan requirements, and disbursement is instant. Basically, without selling your underlying assets, you can unlock some of the cash value and spend it for your needs.
In this next section, we’ll show you a step-by-step tutorial on using Unit protocol to turn your crypto-investment from a capital-liability, into a true performing asset that pays for your living, not the other way around.
How to take a collateralized loan: Step-By-Step
The process will be similar to other decentralized lending protocols like AAVE, Compound, and there are even centralized apps that allow you to do so like Nexo and Celsius, so there are definitely a lot of options in the market.
In this tutorial, we’ll show you how to do this via Unit Protocol.
First navigate to the Unit Protocol website:
- (ETH) https://unit.xyz/,
- (BSC) https://bsc.unit.xyz/
Next, connect your wallet, and accept the terms of service to do so.
After that, simply select your chosen collateral. Today we are going to use OKB! You will see a green dot next to the token if you have it in your balance.
Click on the token name to continue:
Next, we will see some info about this token, and how much you can loan with it.
For now, just remember that you can only borrow up to the % indicated on the top left side. Pay attention to the Liquidation Ratio (LR), because if your loan amount reaches this % of your crypto collateral, your loan will be liquidated. Liquidation means that your assets will be sold to repay the loan, and a fee of 11% will be deducted if this happens.
To avoid this, always make sure you borrow less than the maximum amount available. Instead of borrowing 64%, for example, it is much safer to borrow only 45%, or 25% of your collateral value.
If the USDP available to borrow reaches 0, this means that the maximum amount of loans allowed by the protocol for this collateral has been reached, and no new loans can be made until older loans have been repaid. You will need to choose a different collateral if this happens, or wait until the pool is replenished by the protocol or borrowers.
If you scroll down, you’ll see the borrowing interface.
Let us go ahead and click “max” to deposit our tokens. We are depositing ~ $50 worth of OKB, which will serve as our collateral for this loan.
You will see that the maximum amount of USDP you can borrow appears after you have done so. To be safe, let’s borrow less than the maximum. You can see that the Liquidation price adjusts as you move the slider between ‘Safer’ and ‘Riskier’. Stay around the middle or towards the green to be safe.
The “safety” here refers to liquidations. Liquidations happen when your token price falls below the safe margin (liquidation price), or if you borrow more than your maximum amount (liquidation ratio).
You can avoid liquidations by:
- borrowing far less than your maximum
- adding more collateral or repaying your loans to reduce your borrowed ratio
- set price alerts on your phone a bit above the liquidation price (e.g. $9) so that you can react quickly if the price of your collateral starts dropping.
- depositing a stable/yield collateral like cUSDC, 3CRV, yvcrvUSDT etc. that has a more predictable price
Liquidations don’t make you “owe more money”, in fact it is the opposite. They help you repay your loans and keep the protocol solvent. Think of it as a circuit-breaker that activates to clear your debt during market volatility. But still, you will want to avoid being liquidated so that you don’t have to pay the 11% fee.
Now that we know the risks of liquidation and how to mitigate it, let us check our current borrow amount. If you are happy with it, click approve and execute to continue:
Tip: Ensure that your account has sufficient ETH or BSC to pay for gas before you continue. The author had to add some more ETH after realizing there wasn’t enough to execute the transaction after approving. 😂
You will need to click ‘confirm’ a second time on Metamask to execute the loan. Here is what it looks like after you submit the transaction:
Voila! You should now see your balance of collateral and USDP updated. Your wallet balance of the token will be 0, but your collateral amount will be increased based on how many tokens you deposited. You can withdraw these after repaying your loan:
In order to fully utilize your USDP, let’s head over to curve finance to swap for a more widely used stablecoin like USDC:
Send the USDC to your exchange account and sell/withdraw it into cash!
That’s it! As time goes on and your crypto collateral appreciates in value, you can consider repaying and making a withdrawal, or take more loans. To do this, just go back to the unit protocol site, and follow steps 1-3 to get to your token page where you can choose to repay your loan, or withdraw collateral to your wallet.
You can acquire USDP tokens from curve finance by swapping any other stablecoin (USDT, USDC, DAI, UST, sUSD, etc.) for it. Just like in step 8.
Or if your collateral appreciates vastly, you can withdraw part of your collateral first, and then sell it on an exchange for USDT/USDC/other stables, then swap it for USDP on curve finance and use it to repay your loan.
However, there is no fixed repayment period. You can manage your loan as long as you want without repaying it, as long as the collateral price stays above the liquidation price. Well that’s it for now! Thanks for reading and we hope that this guide has been useful.
Article written by DrCl4an.
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