Borrowing

In DeFi, borrowing refers to the process of acquiring a loan from lending networks, where users withdraw tokens from the pool of assets rather than supplying them as in lending.

How-to borrow tokens

In order to engage in borrowing tokens, a user must first supply tokens as collateral to the USDFI's Money Markets, as the system relies on loans that are over-collateralized. It should be noted that a user has the option to lend tokens and earn interest without borrowing any tokens. Once a user deposits tokens and designates them as collateral, they can borrow any of the available tokens from the Money Market, even the same token that was deposited as collateral.

Any interest earned from depositing funds can help counterbalance the interest accrued from borrowing.

Borrowing limits

A user's borrowing limit on a lending network is determined by the amount of collateral they deposit and the Collateral Factor associated with the token they deposited. The Collateral Factor is expressed as a percentage and acts as a multiplier on the user's deposited assets.

For instance, if a user deposits $1000 worth of WBTC as collateral and the collateral factor for WBTC is 70%, they can borrow up to $700 of any token ($1000 x 70%). Each token in USDFI Money Market has a unique Collateral Factor set by the USDFI DAO. The amount that a user can borrow is calculated based on the Collateral Factor associated with the asset they deposited, regardless of which token they choose to borrow.

Interest payments

In line with traditional financial practices, borrowers in USDFI's Money Markets are required to pay interest on their loans. This interest is paid directly to the lenders or suppliers of the token, with the Reserve Factor deducted. The interest rate for borrowers is determined by the Annual Percentage Yield (APY) of the token(s) they are borrowing.

It is noteworthy that APYs in USDFI's Money Markets are not fixed, but are floating and can be updated on a per-block basis. Therefore, interest rates can fluctuate significantly over relatively short periods of time. The accrued interest for each block is added to a user's borrow position, which increases over time in proportion to the APY. To settle this accrued interest, a borrower pays back a portion of their loan.

Using borrowed tokens

Borrowing enables users to access the value of their assets while retaining ownership of them. For instance, if someone owns ETH but needs USD for a car payment, they can use the ETH as collateral to borrow USD. If the value of ETH increases, they can sell it and repay the loan while keeping the difference. This is just one example of borrowing, which is typically used for financial purposes. Other applications of borrowing include taking a short position on a token, leveraging a long position on a token, or borrowing a token to participate in a profitable liquidity mining opportunity while minimizing exposure to the token.

Risk of borrowing tokens

It is crucial to regularly keep track of your borrowing position in a lending network to ensure that you have sufficient collateral to support your loan. Due to the volatility of token prices, your position may be at risk of liquidation if not monitored closely.