Selling Isn’t the Only Option

Over the past few weeks, the crypto market has bounced continuously, bringing waves of joy and fear. The media has practically run out of stories regarding ETF approval or rejection, and fatigue has set in.

However, this situation illustrates why crypto needs borrowing and lending platforms like Paribus. Those who think crypto loans are unnecessary are missing an important point.

Take the example of owning a Rolex watch but needing money to pay some bills. You know you can sell the watch for a few thousand dollars but want to keep it.

Most people would take it to a pawnbroker, who offers a loan in exchange for the watch. The watch is returned if it’s paid back on time with the required interest. In crypto, the same situation can happen with tokens that people hold.

Say someone has Bitcoin they bought when they caught the dip. Their bills are due, and they are considering selling the tokens to pay them. However, with news of the Bitcoin spot ETF approval being highly likely soon, they want to hold onto them.

In this example, the Rolex is a unique item with sentimental value, whereas Bitcoin is Bitcoin with no sentimental value. Yet, from the point of view of reluctance to sell, both are identical.

Borrowing and lending platforms for crypto operate in much the same way as pawnbrokers. There are no credit checks and no delays in getting funds. The only condition is that the collateral must be higher in value than the loan.

However, a crucial difference is that crypto borrowing and lending platforms charge a much lower interest rate than pawnbrokers. Also, there are no time limits on the term of the loan. It remains active if the loan-to-value ratio remains above the liquidation point.

Additionally, we’re developing a way for users to liquidate part of their collateral, rather than all of it, to withstand significant market fluctuations. On the other hand, a pawnbroker will liquidate a loan in full as soon as they get a chance.

Pawnbroker loans are usually for a 30-day term at an interest rate of around 20%. The interest isn’t worked out annually; it’s on a 30-day basis. So, if the loan were rolled over every 30 days for a year, the annual rate would be 240%.

Although the interest rate on Paribus operates dynamically, fluctuating according to supply and demand, it’s often less than 7% for loans. Crucially, this is the annual rate, so if applied to a 30-day loan, it would be 0.57%.

There’s also a good reason for having many different borrowing and lending platforms in DeFi. As with all markets, when users only have a choice of one or two providers, it’s easy for monopolies to occur. To prevent this from happening, there needs to be a variety of platforms people can choose from.

This competition helps to prevent any platform from grossly inflating its borrowing rates. Furthermore, when systems operate on a decentralized rather than a centralized framework, rate calculations are hard-coded into the platform.

Overall, the best solution for the health of crypto and its supporters is for DeFi to grow and become more established. This helps users keep their funds within crypto, unlocking its liquidity when needed without losing their tokens.