In the rapidly growing world of decentralized finance (DeFi), collateral plays a crucial role in securing loans and ensuring the stability of lending protocols. 

The selection of collateral available to users can significantly impact the efficiency and flexibility of lending platforms.

In this blog post, we'll discuss the role of collateral in borrowing, compare different types of collateral used in DeFi, and examine how Raft's approach to collateral sets it apart from other lending platforms.

Role of Collateral in Borrowing

Collateral is an essential component of lending protocols, as it provides security for loans and reduces the risk of default. 

In DeFi, borrowers must deposit collateral in the form of cryptocurrencies to obtain loans. If the borrower fails to repay the loan, the lender can liquidate the collateral (i.e. sell it for cash) to recover the funds. 

Collateralization ratios are used to determine the amount of collateral needed to secure a loan. They are often set higher than 100% of the loan amount to protect the lender against market fluctuations.

Different Types of Collateral Used in DeFi

Several cryptocurrencies can be used as collateral in DeFi, but not all are created equal. Some of the most common types of collateral include:

ETH: 

As the native currency of the Ethereum network, ETH is widely accepted as collateral across many DeFi platforms. 

However, using ETH as collateral comes with some drawbacks, such as exposure to market volatility and the loss of potential staking income.

stETH: 

Staked Ether (stETH) is a token representing staked ETH in Ethereum 2.0, that can be redeemed for ETH on a 1:1 basis.  As stETH’s staking rewards are paid in additional stETHs, hence the unit balance is not constant.

As most DeFi protocols require a constant unit balance mechanism for tokens to work, stETH is difficult for the DeFi market to account for and trade.

wstETH: 

Wrapped Staked Ether (wstETH) is a token that represents an indexed accumulation of 1 stETH since inception day. The stETH staking reward is accrued within wstETH.  Hence 1 wstETH will always be 1 wstETH but will equate to an increasing amount of stETH over time.

Using wstETH as collateral allows borrowers to have the flexibility to trade on DeFi while still benefiting from staking rewards.

Raft vs. Others

Raft is a decentralized lending protocol that stands out from the competition by accepting and using wstETH as collateral.  

To offer users the best user experience, they can easily borrow R even when they deposit ETH or stETH. Raft's contract will automatically convert all ETH and stETH into wstETH.

Raft's innovative design also allows for capital efficiency, allowing users to enjoy staking returns while simultaneously gaining access to DeFi functionalities, such as collateralized borrowings.

This combination of increased functionality and efficiency sets Raft apart from other DeFi lending platforms, making it an attractive option for users seeking a versatile and reliable borrowing solution.

Wrap Up

Collateral plays a vital role in the world of DeFi lending, and the choice of collateral and automated conversion can significantly impact the success and stability of lending platforms and their users. 

Raft's innovative approach to using wstETH as collateral, and offering users the option to deposit all of ETH, stETH, and wstETH, provides borrowers with the increased functionality and efficiency needed to succeed in the dynamic DeFi landscape.

To learn more about Raft and how to borrow R using ETH, stETH, or wstETH, visit our official documentation and join the conversation in our community channels. Find out more about Raft’s One-Step Leverage.

Jump on board the Raft Discord and get involved in the R-evolution of decentralized finance.

Useful Links

• Website: https://www.raft.fi/

• Twitter: https://twitter.com/raft_fi

• Telegram Channel: https://t.me/raft_fi

• Telegram Group: https://t.me/raft