In this series, we want to find out what lending protocols are and how to find best options to lend and borrow tokens.
Lending and Borrowing on Ethereum: Here are your options
If you lend your tokens by locking your tokens in a lending protocol, you will - just like with a traditional bank - receive an interest, mostly shown as APY or Annual Percentage Yield.
Borrowing a token, on the other hand, you would need to pay the APR or Annual Percentage Rate.
What are lending protocols?
Lending protocols allow you to deposit funds and receive an annual yield in return. Besides depositing they also allow you to borrow tokens against your deposited tokens as collateral.
A lot of people use those applications as a way to borrow tokens for trading: They deposit - for example - ETH and borrow DAI for buying more ETH, thus owning a bigger exposure to ETH.
Having both lenders and borrowers in the same market, the price to borrow (i.e. the APR) is increasing with more tokens being borrowed.
Simply put: In a traditional market, tomatoes also get more expensive with less fresh vegetables available in the winter. Only that lending protocols do not offer vegetables but APY/APR.
Where can I start lending?
For every-day wallet users there are a couple of options to borrow and lend tokens in lending markets: Compound, Lendf.me, Dharma, Linen, Aave, Dai Savings Rate.
DAI token has its own lending tool: The Dai Savings Rate (DSR). The DSR is not defined by supply and demand on a market, but by the MKR token holders governing supply and demand of DAI itself: If a high demand of DAI decreases the stable coin’s price, MKR holders might want to decrease DAI supply by lowering the DSR.
Built-in interest - cDAI, aDAI, imBTC
Some of the lending protocols will actually send you a token into your wallet for lending. Depositing DAI tokens into Compound - for example - will send you cDAI tokens into your wallet. Lending one DAI on Aave will send you one aDAI.
Now, those Tokens will receive interest and can be traded on exchanges, which means that you can simply buy cDAI and start earning interest (e.g. on 1inch.exchange) without ever depositing DAI into Compound.
Other tokens have built-in revenue mechanisms by themselves: For example imBTC.
imBTC is an Ethereum Token issued with an 1:1 anchor to BTC. The holder can transfer, redeem, exchange imBTC as well as receive an income share of the Tokenlon platform fees while holding imBTC.
Margin trading - dYdX, Nuo
While we already mentioned that some people borrow tokens to trade those, we should add that there are platforms that make this use case very simple.
dYdX for one, let’s you deposit DAI tokens, which are then used as collateral in a number of trades:
- Margin Long ETH
- Margin Short ETH
Example: Assume your account has 1 ETH, 100 USDC and 0 DAI and 1 ETH = 200 DAI. By executing a ‘buy’ cross trade, you can take leverage and increase your ETH position. The cross trade in this case borrows DAI and sells it for ETH. If you went long 1 ETH, your balances at the end would read 2 ETH, 100 USDC, -200 DAI. The negative balance is an outstanding borrow, collateralized by ETH and USDC. This can also be achieved via the ETH-USDC market.
NuoLend works similar to this dYdx: Deposit a token which acts as collateral for margin trading.
Robo advisors - RAY
Similar to how some decentralized exchanges always find you the best price between different sources, robo advisors will find you the highest yield for your tokens.
The protocol with highest yield, however, changes over time which is why robo advisors automatically roll-over (i.e. withdraw and then deposit) your tokens into the protocol with highest yield.
RAY for example currently supports on-chain lending for ETH, Dai (DAI) and USD Coin (USDC) tokens via the Compound, dYdX, Fulcrum and Dai Savings Rate smart contracts, while Idle supports Fulcrum and Compound.
Hint: If you want to manually find the best rates, try Loanscan.io. They provide a comparison of rates plus changes in rates over time.
Enter the imToken wallet app to use lending protocols & Tokenlon.
Tokenlon DEX brings secure trading at your fingertips, trustless token-to-token exchange, based on the 0x protocol.
Thanks to instant confirmation, users see the final price before trading and finalize in just seconds. Since your tokens do not need to be locked, you can trade directly from your wallet. No need to deposit funds into the exchange and you keep full control of your own crypto (atomic swap).