This is a complete guide that will give you all the information you need to start using lending protocols and begin to earn interest on your USD, or crypto. This guide covers lending protocol language and a step by step guide on how you can begin to use them yourself.
Lending Protocols are a huge innovation in the blockchain space. The majority of these protocols are built on top of Ethereum. Lending protocols are a blanket term for some type of decentralized debt marketplace. They are called protocols because they exist at a level where anyone can plug and play with this decentralized piece of software that lives on a blockchain.
For those of you without knowledge of the Ethereum blockchain this is what we mean. This is the Compound.Finance smart contract. It lives on Ethereum. This smart contract is what runs compound.finances business. Smart contracts all tokens and assets on Ethereum to move in programmatic ways.
You will understand the basis of lending protocols, how to use them and the technology that enables Outlet to work within this article.
The easiest way to get started earning interest on stable coins using a lending protocol would be to use the Outlet mobile app. You don't need anything else to get started that way.
Lending Protocols are a genre of decentralized apps, business, or DAO (Decentralized Autonomous Organization). All of these phrases would be correct to say. They are a business built around the concept of building a decentralized debt marketplace.
Supplier/Lender: The people who back loans within the debt marketplace in some capacity.
Borrower: These are the people who take on the debt and enable suppliers to earn a return on their funds.
Blockchain: A blockchain will show you where, how, and when loans and money is introduced to these protocols. Most protocols will have some type of a smart contract. These smart contracts will enable people to see what is going on with a particular lending protocol or their account(wallet) itself.
There is not necessarily a right answer on how to use a lending protocol. There is however a much better and clear way than most people use. Outlet provides people with a one step and easy way to pull together everything you would need to actually use a lending protocol.
The most popular way to start earning interest on your stable coins would be as follows.
Obtain your dai or stable coin asset you would like to use to gain interest on, or take a loan out on. If you are a newcomer to crypto I would suggest you just download Outlet and get your dai that way or you find a way to obtain it via other means. This can be done through almost any exchange. Dai in particular is the preferred method to interact with these protocols.
Send dai to a web 3.0 wallet The industry norm is to use metasmask at this point. Metamask is the most popular Ethereum wallet and is safe and secure. It does require you to store keys which can be a pain for some people, but an essential feature to others. It is important that if you are using metamask to interact with lending protocols to save your key and safely store it. The best way would be to write them down and keep them in a safe physical location.
Once you have your dai in a web 3 connected wallet you should be able to interact with these new decentralized applications. This is the most tricky step, as each lending protocol will have a different UI and will be slightly different to interact with and begin using. Most of them are very simple and you should be able to figure it out.
Authorize their application within your wallet. You will be asked by metamask if this application is warranted to have access to your wallet. This is what allows you to actually interact with a lending protocol. At this point the protocol can see how much is in your wallet that are eligible to be supplied or borrowed. Once you select your amount by selecting supply or borrow the lending protocol will carry out that function as you selected.
Getting the best return when you are lending to a protocol is a very hard thing to do manually. If you wanted to do this right now you would have to do a lot of manual trading and watch your supplied assets religiously. It is not practical to manage the returns you earn using lending protocols.
The easiest way to maximize your return using lending protocols would be Outlet. Outlet has a planned feature of maximizing the returns for users and supplying dai to the highest yielding lending protocol.
Lending protocols are super safe loans to back because they are overcollateralized. Meaning that the borrower will put up more assets than they are borrowing. Although the loans themselves are safe from a financial standpoint. There are other outstanding risks involved in using a lending protocol.
Using a lending protocol carries another layer of risk. This risk is called smart contract risk. The risk is that it is possible to hack a smart contract and have a hostile takeover. There have been several smart contract hacks that have taken place to companies outside of the DeFi space and is a possibility to happen to these protocols as well.
There is a small risk called smart contract risk. If the developer of the smart contract creates a smart contract with security flaws there is a chance that contract itself can be hacked.
DeFi protocols have fortunes locked in them at this point and are trusted by thousands of people. The larger lending protocols have some of the best smart contract security on the market and thus far no one has come close to hacking one of these protocols.
Lending protocols are made up of a two sided product. One side of the product supplies the money to fulfil loans and the other side takes out these loans.There are a few reasons why people are taking out so many loans against their cryptocurrency. There are a few problems with using cryptocurrency in everyday life that don't make it as viable as your countries traditional fiat currency.
The following are some of the reasons why people take out loans against their cryptocurrency:
To over expose themselves to crypto: This is when someone who holds assets is looking to essentially double dip and buy more crypto with the crypto they own as well.
To have a right to buy it back at a certain rate: people will often take out a loan against their crypto holdings if they are looking to extract cash from their portfolio. The loans themselves provide users with a way to buy it back at a specific price and is a common route for people with large portfolios to do.
Margin trading cryptocurrency: Margin trading is a method of trading assets using funds provided by a third party the third party can be one of these lending protocols.
If you have any further questions a great place to go would be our Discord server. We will be happy to answer anything.