Beginner’s Guide to Crypto Lending
Benefits of the ADALend Protocol
Decentralized financing is an emerging industry that offers financial instruments and services built on blockchain ecosystems that will power the coming digital age.
Understanding DeFi is simple when breaking it down to manageable information.
Wallets are the equivalent of a bank account; they come in two forms, Custodial and Non-Custodial wallets. In the case of DeFi, wallets are custodial, meaning the funds held in the wallet are accessible by the protocol that governs the wallet to offer the user additional products or services.
Users deposit funds into their wallets mainly for three primary reasons:
- To HODL, a term used by traders that means to maintain ownership of said assets until the time that those assets reach a specific value that they would consider acceptable to sell.
- To Stake, in this case, PoS based blockchains offer an incentive to keep your assets; PoS based assets offer periodic rewards for the asset owner as a form of “Interest”. This process is called Staking.
- To use as Collateral. Users who wish to take crypto loans would deposit their assets into the wallet and use it as Collateral, granting them a loan relative to their deposited amount and the governing protocol rules. This loan is automatically managed via the protocol and the smart contract initiated without human interference.
Principles of DeFi Lending
- Users deposit their crypto assets via a custodial wallet or by engaging with the protocol directly using a non-custodial wallet by initiating a smart contract via the website.
- Depending on which assets are deposited by a user, e.g., Ethereum (ETH) or Cardano(ADA), they would be initiating the protocol rules of this type of assets; these protocol rules include:
a. Interest (APY)
b. Period (30,60,90 days, or more)
c. Amount (That the protocol will lock for the duration of this contract)
3. Locked amounts are at this stage are the constituents of the lending pool liquidity. They would become what will finance the crypto loans required by the borrowers.
4. The borrowing process is granted by analyzing the user’s held assets’ value, factoring in asset volatility and other factors that the protocol will determine to issue a coefficient called Loan-To-Value (LTV). This LTV is determined by the protocol for each of the (accepted) assets, giving each asset its own LTV.
5. When a borrower initiated a loan smart contract, the protocol will determine his credit line (allowed amount to be borrowed) depending on the amount the user is placing as collateral, the LTV is calculated for that user and is issued the loan in the currency of his choice.
Benefits of using ADALends’ Lending Protocol
- Permissionless Lending on Any Pairing ensuring that the best offers are available and that only the safest oracles are used.
- Liquidity is predicated on having enough assets in each pool to facilitate lending. ADALend addresses this requirement by incentivizing users to deposit assets and provide liquidity.
- Community Governance allowing token holders can establish consensus by voting on governance proposals or introducing new proposals for a vote.
- Ecosystem Foundation Layer that gives the project the ability to attract assets and build incentives that can empower an ecosystem of financial products.
Visit ADALend to find out more.