A newsletter meant to onboard and educate people to the world of decentralized finance (DeFi) and various decentralized applications (dAPPs).
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A newsletter meant to onboard and educate people to the world of decentralized finance (DeFi) and various decentralized applications (dAPPs).
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Earlier this year I needed some capital to replace the roof on my home. It was going to cost somewhere in the neighborhood of $20,000 so I looked into ways that I was going to fund the project. The three options that came to mind were:
Traditional Loans
Dip into Savings
Sell Crypto
As it turned out, each of these options had some aspects that weren't desirable. Traditional loans currently have incredibly high interest rates especially on multi-year terms. Dipping into savings would have potentially set back my current goals and selling my crypto would have incurred a capital gains tax liability. I would also miss out on any potential upside if crypto continues to moon.
Money markets such as @aave and @MorphoLabs are often used to unlock some capital from crypto without selling and owing taxes. For most markets you can borrow up to 80% of your deposited collateral making it a very powerful tool. Interest rates are dynamic and much more attractive compared to traditional loans with no time limit to repay your loan.
Let's return back to my example. I needed money for my roof and didn't want to sell my crypto to pay for it. So what I did was deposit 0.4 cbBTC into AAVE as collateral and borrowed 20,000 USDC to cover my roof.
At the time of origination, my loan to value (LTV) was 50% (money borrowed was 50% of the value of my collateral). As long as my LTV doesn't exceed 78% then my collateral is safe from liquidation. LTV is dynamic and therefore requires careful monitoring of the position.
Market price of Collateral
So in my example if cbBTC tanks to 65K, then my LTV will approach 78% and inch closer to the liquidation threshold. If cbBTC moons, my borrow power increases and LTV decreases.
Market price of Asset Borrowed
I borrowed USDC so as long as it doesn't depeg above $1 then Im safe from liquidation, if it depegs below 1 dollar I can repay my loan for cheap. If I had borrowed a volatile asset like ETH I would need to carefully monitor LTV as it could violently swing if ETH moves significantly higher vs cbBTC.
Interest Accrued
You are typically charged interest to borrow an asset in money markets such as AAVE. The interest is accrued into your borrowed amount and thus increasing your LTV. Deposits into money markets are sometimes incentivized/earn yield. Any yield earned on your collateral is typically compounded into your collateral and thus reducing your LTV.
After borrowing the USDC from @aave, I withdrew to fiat and used it to pay for my roof. My net interest on the loan is 2.74%, which is a far cry from the 10%+ percent that the financing companies are charging. As long as I manage my LTV, I can keep the loan open for as long as I desire.
Another option that has since become available are crypto debit cards such as EtherFi Cash and @BrahmaFi's swype.fun. Crypto debit cards leverage Money Markets to allow you to spend money without selling your crypto. Each card has unique offerings and features such as cash back or my personal favorite, AI agents that can use your crypto to pay for subscriptions.
You can sign up to EtherFi cash and deposit before July 31st to earn a share of 300K ETHFI tokens as part of a promotion. What's neat about etherfi cash is that your collateral can be in a high yielding vault so you can technically earn enough yield to pay for the loans against your collateral. To get started feel free to use my referral link
Thank you for reading and I hope you learned something from my article. Please share and repost if you enjoyed the content, and I am happy to answer any questions in the comments below.
Get in touch:
Casts by Aibra (@aibra.eth) on Farcaster
Earlier this year I needed some capital to replace the roof on my home. It was going to cost somewhere in the neighborhood of $20,000 so I looked into ways that I was going to fund the project. The three options that came to mind were:
Traditional Loans
Dip into Savings
Sell Crypto
As it turned out, each of these options had some aspects that weren't desirable. Traditional loans currently have incredibly high interest rates especially on multi-year terms. Dipping into savings would have potentially set back my current goals and selling my crypto would have incurred a capital gains tax liability. I would also miss out on any potential upside if crypto continues to moon.
Money markets such as @aave and @MorphoLabs are often used to unlock some capital from crypto without selling and owing taxes. For most markets you can borrow up to 80% of your deposited collateral making it a very powerful tool. Interest rates are dynamic and much more attractive compared to traditional loans with no time limit to repay your loan.
Let's return back to my example. I needed money for my roof and didn't want to sell my crypto to pay for it. So what I did was deposit 0.4 cbBTC into AAVE as collateral and borrowed 20,000 USDC to cover my roof.
At the time of origination, my loan to value (LTV) was 50% (money borrowed was 50% of the value of my collateral). As long as my LTV doesn't exceed 78% then my collateral is safe from liquidation. LTV is dynamic and therefore requires careful monitoring of the position.
Market price of Collateral
So in my example if cbBTC tanks to 65K, then my LTV will approach 78% and inch closer to the liquidation threshold. If cbBTC moons, my borrow power increases and LTV decreases.
Market price of Asset Borrowed
I borrowed USDC so as long as it doesn't depeg above $1 then Im safe from liquidation, if it depegs below 1 dollar I can repay my loan for cheap. If I had borrowed a volatile asset like ETH I would need to carefully monitor LTV as it could violently swing if ETH moves significantly higher vs cbBTC.
Interest Accrued
You are typically charged interest to borrow an asset in money markets such as AAVE. The interest is accrued into your borrowed amount and thus increasing your LTV. Deposits into money markets are sometimes incentivized/earn yield. Any yield earned on your collateral is typically compounded into your collateral and thus reducing your LTV.
After borrowing the USDC from @aave, I withdrew to fiat and used it to pay for my roof. My net interest on the loan is 2.74%, which is a far cry from the 10%+ percent that the financing companies are charging. As long as I manage my LTV, I can keep the loan open for as long as I desire.
Another option that has since become available are crypto debit cards such as EtherFi Cash and @BrahmaFi's swype.fun. Crypto debit cards leverage Money Markets to allow you to spend money without selling your crypto. Each card has unique offerings and features such as cash back or my personal favorite, AI agents that can use your crypto to pay for subscriptions.
You can sign up to EtherFi cash and deposit before July 31st to earn a share of 300K ETHFI tokens as part of a promotion. What's neat about etherfi cash is that your collateral can be in a high yielding vault so you can technically earn enough yield to pay for the loans against your collateral. To get started feel free to use my referral link
Thank you for reading and I hope you learned something from my article. Please share and repost if you enjoyed the content, and I am happy to answer any questions in the comments below.
Get in touch:
Casts by Aibra (@aibra.eth) on Farcaster
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