One of the great things about DeFi is that it makes it very easy for anyone with a bit of crypto to borrow money.
Likewise, we can use those loans to earn passive income in the form of interest.
In this tutorial, we’re going to learn how to:
- Take out a stablecoin loan from Balanced, the decentralized exchange and DeFi hub of the ICON network
- Deposit that money on OMM, another popular DeFi solution on the ICON network
- Earn interest on the deposit
For this, you’ll need an ICON-compatible wallet such as the Hana wallet. And some ICX, which you can purchase at a number of trusted cryptocurrency exchanges.
1. Borrow bnUSD from Balanced
The first thing you should do is deposit your ICX on Balanced and take out Balanced Dollars, or bnUSD, as a loan.
In fact, what you are actually doing is using your ICX to mint bnUSD, Balanced’s stablecoin, which is pegged to the US dollar (i.e., 1 bnUSD=1 USD). Stable coins essentially protect you from fluctuations in the crypto market, which can be quite volatile.
Balanced currently lets you mint up to 67% of your deposited ICX in USD. Or to put this another way, you can take out 67% of your ICX collateral in bnUSD loans.
DeFi platforms typically overcollateralize loans. There are several reasons for this. One is that unlike traditional banks, DeFi solutions enable anonymous or pseudo-anonymous trading without Know-Your-Customer procedures, let alone credit scores. Collateralizing loans protect the lender — i.e., the DeFi platform — from potential defaults. Overcollateralizing the loans, meanwhile, helps provide a cushion to deal with fluctuations in cryptocurrency values.
There’s a very important aspect to this dynamic — liquidation. But we’ll go into that a bit later.
When you borrow bnUSD, you’ll pay a one-off, 0.75% fee. On the plus side, you can borrow bnUSD for 0% interest. This is key, because it means you can essentially borrow bnUSD for free, deposit it in other DeFi protocols and earn interest on it. Which is exactly what we’re going to do.
Warning: Risk ratio and liquidation
But before you take out the loan, it’s important that you look very closely at your position, which Balanced makes very easy to do with its intuitive interface.
The most important information here is the risk ratio.
As we explained earlier, DeFi solutions collateralize — and typically overcollateralize — their loans. Still, as most seasoned crypto traders will tell you, there’s no underestimating the volatility of the crypto market. If the value of your collateral falls far below the value of your loan, this could leave the platform on the hook.
And if many lenders are in this position, it could sink the entire platform.
DeFi platforms like Balanced stop this from happening through the aforementioned practice of liquidation. If the value of your collateral — in this case, ICX — falls below a certain point, your position gets liquidated, and you lose your collateral.
Balanced’s position screen shows you the liquidation threshold in red, along with the price to which ICX has to fall before your collateral gets liquidated. For reference, the liquidation threshold is set at 118% collateralization.
The best way to protect yourself from getting liquidating is to really overcollateralize your loan — say, 200%. The more collateral you provide, the safer your position. If you’re in the left end of the of the risk ratio bar (i.e., the part that says “Low risk”), you’re probably pretty safe. Still, it’s best to regularly check your position regularly during the period of your loan, just to make sure market conditions haven’t put you in trouble.
2. Deposit your bnUSD on OMM
Now it’s time to head to OMM, the ICON network’s open money market. What OMM allows you to do is supply — i.e., deposit — ICX or ICON-supported assets like bnUSD for variable interest daily.
Sign into OMM using your ICON wallet.
Next, look at the section marked “Markets.” Look for the Balanced Dollars and click it to expand the panel.
Now you’ll see sections to “Supply” and “Borrow.” We want to supply, so hit “Supply.”
You’ll be provided with information such as annual percentage yield (APY), which is basically the annual interest rate on an investment or deposit. OMM typically pays 3 to 4 percent annual interest on bnUSD deposits, though this can change depending on supply and demand.
It also shows you how much you’ll make in daily interest, at least at the current rate. The more bnUSD you supply, the more you make a day. The nice thing about this is that as you accrue daily interest, the more interest you earn.
We’re going to supply the amount of the loan we took out in Balanced.
3. Sit back and earn interest
That’s it, really. The loan we took out from Balanced is now making money for us on OMM. At current interest rates, it should take us about three months to cover the one-off, 0.75% fee you paid to mint the dollars in the first place.
When we are done earning, withdraw your bnUSD from OMM, repay your loan in Balanced, and withdraw your collateral.