How to Borrow Crypto Safely in DeFi

Borrowing in DeFi allows users to access cryptoassets by depositing collateral into lending protocols. These platforms operate without traditional banks, offering users the ability to borrow directly from a pool of lenders. In return, lenders earn interest on their contributions. Borrowers must ensure their loans remain properly collateralized to avoid the risk of liquidation, which happens if the value of the collateral drops below a certain threshold.

To borrow, users need three key components: a self-custodial digital wallet, cryptocurrency for fees and transactions, and a reliable lending platform like Aave. Self-custodial wallets, such as the Bitcoin.com Wallet, provide users full control over their assets without relying on third parties. These wallets also enable access to decentralized applications (DApps) and protocols via WalletConnect.

Borrowing has several use cases in DeFi. One common strategy is to increase market exposure by using one cryptoasset as collateral to borrow another, allowing the user to hold both simultaneously. Another approach is leveraging, where users borrow funds to buy more of the same asset, amplifying their position. Advanced users may also take advantage of temporary high yields on lending platforms, earning profits from both lending and borrowing incentives.

The Loan-To-Value (LTV) ratio is a crucial concept in borrowing. It represents the maximum amount of assets that can be borrowed against a given collateral. For instance, if the LTV is set at 75%, depositing $1,000 worth of collateral allows borrowing up to $750. However, it’s advisable to borrow less than the maximum to minimize liquidation risks, particularly for volatile assets. Stablecoins, due to their reduced price volatility, are often preferred as collateral.

Aave, a leading DeFi lending protocol, operates across multiple blockchains, including Ethereum and Avalanche. Users can connect their wallets to Aave using WalletConnect, deposit collateral, and browse a list of available assets to borrow. Each asset has specific interest rates, which are transparently displayed within the platform. Borrowers are encouraged to borrow conservatively and monitor their "health factor," a metric that indicates the safety of their loans relative to collateral.

To start borrowing on Aave, users must first deposit cryptoassets as collateral. After connecting their wallet to the DApp, they can navigate to the borrowing section and choose the desired asset and amount. It’s essential to monitor the market and collateral value to avoid liquidation risks.

DeFi borrowing offers flexibility and control for users seeking liquidity or investment opportunities, but it requires understanding key concepts like LTV, health factor, and collateral management. With platforms like Aave and tools like the Bitcoin.com Wallet, accessing decentralized lending has become more straightforward and secure, empowering users to take full control of their finances. For more guidance, refer to step-by-step instructions provided by the respective platforms.