This article will examine how to safely borrow and avoid liquidation. The goal is to highlight what to look out for and what to avoid. Safely borrowing can open up an unlimited amount of profitable strategies. Liquidations, on the other hand, can result in a loss of assets. While this may sound alarming, knowing how to protect your funds can help you to borrow with confidence.
Why Borrow?
With cryptocurrency, there are a few common reasons for borrowing:
- Acquiring an asset you plan to hold on to long term, and using it as collateral to borrow funds to invest into something else simultaneously, without having to sell.
- Accumulate protocol tokens given as rewards faster to either sell, or LP them for more returns.
- Depending on your jurisdiction, there may also be tax benefits.
- Borrow against your assets because you need funds in fiat (traditional finance assets, such as dollars, euros, etc).
There are many strategies to maximize returns and most relate to borrowing in order to earn more rewards in exchange for a small fee.
What To Consider?
The most important thing to consider is your collateral. Unless it is a stablecoin (USDT, USDC, DAI, etc), which is usually valued close to $1, or the asset has specific mechanisms to keep the value fairly stable, your collateral will fluctuate in value. Liquid coins such as stable coins and ETH typically have higher LTVs (loan to value), allowing you to borrow more against their value.
- Example: Today 1 ETH is valued at $1,600. At an 80% LTV Alice can borrow max $1,280 against that. One week later, 1 ETH is worth only $1,200. The price dropped significantly and if she borrowed her max amount, Alice would have been liquidated.
Another aspect to consider is what asset you borrow and the interest you pay. Interest is paid in the asset you borrow. Borrowing ETH will accrue interest in ETH, borrowing DAI will cost interest in DAI, and so on. Accrued interest will automatically be added to your position and paid back when you pay off your borrowed position.
- Example: Alice borrowed 1 ETH at 5% APY. After one year her borrowing position is 1,05 ETH. (This example assumes the price of ETH and interest APY stays the same over the period of a year.)
Borrowing a volatile asset can result in needing to pay back more value than you originally borrowed, if the asset rises in price. Conversely, if the asset drops in price, the value will be lower. Depending on the reason you borrow, this is important to consider.
- Example: Alice borrowed 1 ETH. Current market value is $1,600. Tomorrow ETH market price drops to $1,200. Assuming she sold the borrowed ETH and buys it again today to pay off her loan, she has a gross profit of $400.
- The opposite can apply as well. The day after Alice borrows, ETH price rises to $2,000. Assuming she sold the borrowed ETH for $1,600, buying 1 ETH to repay would lead to a loss of $400. If she kept her ETH this value change does not affect her.
On UwU Lend, interest rates vary and are not fixed. It is therefore important to check your positions and health factor (HF) on a regular basis to avoid being liquidated by interest changes.
Rewards
Similar to depositing, borrowing also grants rewards in UwU. They are displayed as APR on the Markets as well as the Borrow pages. All rewards accumulate under the “Rewards” section and need to be vested to be claimed.
How To Borrow
1. Connect your wallet.
2. Open the Borrow tab or use the Markets page to select the asset you want to borrow.
3. Enter the amount you wish to borrow and review.
4. Press “Borrow” and execute the transaction.
5. Add the token address to your wallet if needed.
You will now see the borrowed amount in your wallet as well as on your dashboard and borrow section. You will notice your borrowed amount increase over time due to the interest.
How To Repay?
First, verify you have the asset and amount you wish to repay in your wallet and connect your wallet to the UwU Lend dapp.
1. Open the My Dashboard tab on the UwU Lend dapp and click on “Repay”.
2. Enter the amount you wish to repay, or select “Infinite”, and execute the approval.
3. Enter the amount you wish to repay (select the “Max” button for full repayment) and execute the transaction.
Your position will reflect the repaid amount after refreshing and the assets will be removed from your wallet.
Collateral Toggle
On the dashboard, you will notice a toggle option that allows you to select whether you want to use an asset as collateral or not.
Disabling an asset as collateral will remove it from the HF calculation and lower your overall available maximum borrow amount. In case of liquidation, the disabled asset will not be sold to pay the debt. By default, all assets are used as collateral and count towards the HF.
