Category: Lending & Borrowing
Recommended Capital: $1,000+
Takes About: 15 mins
Earn Rewards: COMP Token
- This is the Compound app's native token.
- You get rewarded COMP tokens even when you take out a loan due to Compound's Liquidity Incentive reward.
- Token can be used to vote on future proposals to update the Compound app.
Putting Up Collateral
Think of Compound like a crypto pawn shop. You can take out loans, only if you give up an asset you own that is currently worth more than what you want to borrow.
Example: Want to borrow $100 of USDC? No problem, just deposit $200+ worth of ETH, and that is your collateral.
Risks / Things To Note:
- Borrowing is risky because non-stable crypto assets can drop/rise suddenly, leaving your position under-collateralized.
- You must manage your collateral-to-borrow ratio.
- If you become undercollateralized due to your collateral dropping in value, or your borrowed asset sharply rising in value, your collateral can get liquidated.
- The yearly interest rate that you have to pay is variable, and shifts based on supply / demand.
Perks of Borrowing on Compound:
- Both depositing AND borrowing funds on this platform earns you COMP tokens as an incentive reward.
- If you play it right, your net COMP rewards can make your loan free of charge, or even better, net profitable!
- Permissionless loans enable you to make use of crypto assets you don't want to sell any time soon and use them to get you instant $$$.
- Your deposited funds will be earning interest while they are being used as collateral for your loan!
Step 1: Deposit Your Collateral Asset.
If you haven't already, check out my guide titled "Earn Interest On Compound"& deposit some collateral of your choice. (I suggest stable coins at first to practice loan management)
Step 2: Toggle The "Collateral" Switch.
Doing this gives the platform permission to use your deposit(s) as collateral, and sell these funds in the case of a liquidation where you are under-collateralized. You can't take a loan out unless this is turned on.
Unforunately, each toggle for each asset will charge a transaction fee, nothing too crazy.
Step 3: Choose & Analyze Your Loan
So let's say we deposited $5,000 of ETH.
And we want to borrow some DAI.
- This is your borrow limit threshold. 80% of our $5,000 deposit is $4,000. BUT since our deposit is a non-stable coin, this becomes very risky. You usually want to only borrow 10-30% of your collateral. (In case ETH suddenly drops, we have time and room to either add more ETH as collateral, or repay some of our DAI loan.
- This is the annual variable interest rate for your loan. Say we borrow $500 in DAI and went to pay it back 1 year later... we would need to pay back $500 + $25.50 in interest. This number changes with supply and demand of loans.
- This is your REWARDS! Here, you will get COMP tokens accruing at 3.12% of your loan annually! So if we borrow $500, we would get $15.60 worth of COMP in 1 year! The cool thing is, is COMP triples in price over the next 1-2 years, then we really are making 6-9% interest because the COMP we get (and hold) is now worth more!
Step 4: Click, Click, Loan!
Once the math adds up and makes sense, get that loan! (Another transaction fee needed here)
Now, we will get the crypto asset we loaned sent DIRECTLY to our wallet, where we can do whatever we want with.
Just make sure to manage your loan and keep that collateral ratio high!