While many people easily understand the benefits of lending cryptocurrencies to earn yield, the concept of borrowing is one that takes a little more thought to understand how it fits into a healthy portfolio.

Cryptocurrency borrowing is a new trend brought about by the advent of decentralized finance (DeFi) platforms such as AAVE, Compound, and coming next Paribus. The main difference between traditional lending platforms and DeFi relates to the trustless nature of smart contracts which removes the need for any middlemen.

Rather than needing to prove your identity, social security number, credit rating, and so forth with DeFi you just need to provide sufficient collateral and agree to the terms. Most people initially question the security of this approach, expecting people to default and never repay their loans giving rise to a 2008 subprime moment in DeFi. They take this view usually because they assume cryptocurrency loans are secured with a small deposit in the same way traditional loans are.

Defaults in the space carry significant slash rates for borrowers due to the fact that they often have to maintain a high level of liquidity. A traditional loan in legacy finance may only require 20% or less as a deposit which leaves 80% or more risk to be carried by the lending institution. With Paribus our initial deposit requirements will be a minimum of 120% of the loan value.

As Simon, our CTO explains, “You will need to have, at the very minimum 120% collateral but the system will recommend keeping it above 150% where possible to stop liquidations in the event of cascading liquidations across the market and Paribus protocol.”

The usual question after grasping this point is why would someone need to borrow less than they already have as collateral? Understanding this aspect of financial instruments gets to the heart of exactly why DeFi technology is so disruptive to the legacy financial markets.

People on median to low incomes are mainly familiar with predatory lending systems and base their understanding on these. High net worth individuals however are far more familiar with financial instruments designed to help them grow their wealth, not their debt.

For example in 2012 Mark Zuckerberg refinanced his $6 million home by taking out a 30-year mortgage with an interest rate of just over 1%. Why would a billionaire take out a mortgage on a property he could easily buy? There are two main reasons. Firstly, when you borrow at less than the inflation rate you are actually making money, not losing it. Secondly, you hold onto your assets rather than selling them and when they increase in value, you make even more money.

For those with little to no financial freedom, borrowing costs money, especially since they usually finance depreciating assets such as cars and household goods at an interest rate far higher than inflation. For those with access to financial instruments reserved for only the wealthiest, borrowing actually earns them money.

In November 2021 Forbes revealed that Elon Musk had to date pledged $94 billion worth of his Tesla shares as collateral for loans. Banks look favorably upon highly liquid assets such as shares and according to current US tax laws Elon wouldn’t have to pay any tax on the loans received or the shares staked.

From 2016 to 2021 the value of Tesla shares rose by 1300%. Had Elon sold his shares to finance his activities he would have lost all of those gains, however by staking them as collateral he has only lost the percentage rate of servicing the loans. Even if that was 100% (which it wasn’t anywhere near to) he would still be left with a 1200% increase in his holdings, all the while enjoying the liquidity he had unlocked.

The secret high net worth individuals know is to increase holdings, not sell them. They just need a way to unlock their liquidity without relinquishing total ownership and that’s where loans against assets come in. Over the same time period that Tesla shares increased by 1300% Bitcoin increased by over 8500%.

Deniz our CEO explains, “Borrowing and lending systems can be thought of as simply another tool to help utilize current crypto assets to their fullest potential. Many investors’ trading strategies involve continually accumulating cryptocurrency. Acquiring a loan can give a trader additional capital to further invest while keeping their current funds untouched.”

The way to understand the magnitude of disruption that DeFi is bringing to financial markets is to see borrowing and lending from the perspective of high-net-worth individuals. It’s unlocking access to financial instruments that have previously only been made available to the wealthiest segments of society.

The Paribus DApp won’t require a credit rating, a lengthy process, or any other restrictive barriers. If you have the collateral you can unlock the liquidity contained within your digital assets as a loan. Once people fully comprehend the huge impact this can have on their ability to grow and develop their portfolios they simply need to expand their horizons to consider how it can be applied to each and every other digital asset.

As Wilson, our COO says, “If any digital asset can be sold it has an intrinsic value locked within it. Our goal is to unlock the liquidity of every type of digital asset imaginable to give people the dual benefit of ownership and utility. These tools should be made available to everyone equally, irrespective of their wealth and location, not reserved for the people who need them the least.”