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Increase potential profit
Now, as an avid crypto fan and investor, especially in decentralized finance, I’ve explored a lot of ground
. There are many strategies you can pursue in this area, such as a liquidity pool (LP) that earns you protocol tokens, a stable pool that earns fees in Curve Finance, a pool that Uniswap V3 method uses NFT as proof that you own part of it, and so on.
But, for beginners, I like to keep it simple. It’s as simple as borrowing money and it’s real life. In this article, we discuss a simple strategy:
A loan agreement.
Why are we doing this?
Just like in real life, why do we borrow? Paying for the things we want or need; This could be to pay for a house, another loan, a massage.
For investors, borrowing money helps increase their exposure to an industry.
For example, I have paid for a $2 million house. However, the opportunity of a lifetime presented itself, and the housing market plunged 25 percent. A $1 million house is now worth only $750,000. I can’t buy a second home because my money is tied up in that $2 million house.
Now, I’m borrowing against my current home to buy another house. The bank lent me $750,000 to buy the house I wanted to buy.
With that loan, I increased my exposure to the real estate market by another $750,000. When the housing market recovers, we can sell $750,000 for $1 million and make a profit of $250,000.
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How does this work in cryptocurrencies and DeFi?
In relation to the above example, a house is defined as an asset. Bitcoin and Ethereum are assets. These tokens have value. That’s what you see on sites like CoinGecko and exchanges like Binance. To simplify the process, this value is then shared to the DeFi space by prophecy machines such as Chainlink.
Now that the DeFi protocol has this value, they can use it to determine the amount you can borrow. Like the example above, if you have $2 million in bitcoin, you can borrow a certain number of different assets. Some common assets available for borrowing are USDC, USDT, DAI, etc. It is recommended that you stick to borrowing stablecoins to avoid confusion when the price of the borrowed asset changes.
After borrowing the stablecoin of your choice, you can purchase the asset of your choice. This can be done through a centralized exchange such as Binance or using other DeFi protocols such as Uniswap or Curve.
Congratulations, you have increased your crypto exposure and potential future returns when the bull market resumes.
The platform that provides these services?
In the DeFi space, there are a number of platforms that offer similar services to banks. Some of them I can mention are Aave, Compound, and MakerDAO. These are some of the biggest deals offering loans.
Matters needing attention…
This strategy is clearly not without risk. In essence, this is how the lever works manually. Therefore, this increases your risk.
To avoid problems, note the following points in this strategy:
Note that when borrowing an asset, the amount you have to repay increases over time because it has interest that you have to pay.
When there are large price fluctuations, the assets you deposited may be liquidated for not maintaining adequate collateral rates.
You must pay off the debt before you can withdraw the assets you deposited.
conclusion
This DeFi strategy is very simple and suitable for beginners. But this strategy can be very powerful in a bull market. This will help increase the potential profits in this area. However, it’s worth noting that this strategy does increase your risk.
This is the end of the article, I will do a more careful analysis in the communication group, if you want to join my circle, welcome private messages, all information platforms are (Crypto)
