Many DeFi users engage with lending DApps with the sole purpose of depositing some tokens to earn passive income. But opportunities offered by lending protocols are not limited to depositing only, and in this article, I am going to explain why to borrow and how to earn mindblowing profits (or avoid drastic losses) using advanced DeFi schemes.
Borrowing for spending
The simplest use case of borrowing is very straightforward: you just borrow stables using the token you are bullish on as a collateral. Imagine you are bullish on PUZZLE, and you want to buy a car but cannot afford it without selling your assets. In such a case, you needn’t wait for the next bull run to cash out - you can just supply PUZZLE as collateral to Puzzle Lend and borrow stablecoins. When your supply is up, you simply repay the loan using your yield from the increase in the price of the collateral. This will allow you to spend money on whatever and whenever you want while keeping a long position on your favorite token.
However, this won’t make you a millionaire, so let’s move on to more tricky applications:
Margin trading
The most common use of money markets comes as leverage for long or short positions in the spot market. Unlike futures, margin trading enables you to hold your positions for years paying about 1% per month, earning from medium- and long-term price movements.
Say, you want to long WAVES. For this, you need the following:
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Buy WAVES at Puzzle Swap, Waves Exchange or Swopfi.
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Supply it to the Main Pool of Puzzle Lend.
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Borrow USDN or any other stablecoin. Now, your Account Health can go as low as 5%, you will be able to increase it further.
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Buy more WAVES with the borrowed funds.
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Repeat steps 2-4 till your Account Health matches your risk tolerance. In the case of WAVES, this allows for more than 2x leverage. Still, I recommend keeping Health no lower than 20%.
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Wait until your supply skyrockets.
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Withdraw your supply and sell for USDN to repay the loan in portions.
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PROFIT!
Shorting is very similar, yet an inverted, process. As an example, let’s short the VIRES token:
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Deposit some of your tokens into Puzzle Lend’s Waves DeFi Pool. It is preferred to use stablecoins as the volatility of the collateral may lead to liquidation.
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Borrow VIRES.
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Sell it for USDN.
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Supply your gains into the pool...
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And borrow VIRES again repeating the subsequent iterations. Mind your account health!
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Wait until VIRES is low.
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Invert the process.
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PROFIT!
You should keep in mind, that using leverage increases your exposure to an asset and thus, amplifies your potential profit or loss.
Risk management
Most investments follow the empirical law: the higher the APY, the higher the risk. So it is in DeFi – the best earning opportunities usually involve dealing with volatile assets. Lending protocols enable you to always be on the safe side - you don’t have to buy risky assets if you can borrow those. Say, you borrowed WAVES in order to provide it to the WX pool paired with USDN and earn up to 80% APY. In this case, you have as many WAVES as you’ve borrowed, and even if WAVES plummets, you don’t lose a thing. (In fact, in this example you may end up with fewer WAVES due to the impermanent loss effect, but this is compensated for by a higher amount of USDN).
Another good example of this trick is borrowing USDN with USDT as collateral. If you doubt Neutrino, this gives you peace of mind at any level of depeg.
Your risks can be under your control.
Futures arbitrage
Since almost all tokens listed on Tsunami Exchange are also listed on Puzzle Lend, you can earn thousands of % in APY from arbitrage between the futures and spot markets. This is a rather complex matter to cover within this article, so if you are interested in the topic, you can learn more from the article in the Tsunami Blog.
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The most inspiring thing in the DeFi world is that you needn’t be a part of selected centralized entities to build your own profitable strategies. These mechanics are just bricks that can be combined with the mechanics of other protocols by any user in order to build a unique money-making scheme or leverage an existing one. You can try these too 😉