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ELI5: Lending & Using Leverage
Lending in crypto can be very complex, confusing, and intimidating if you don't fully understand the process first. The last thing we want to see amongst users is angst, so here is a quick end to end walkthrough of the process and value potential for a user:
- Step 1: User with $2000 USD in AVAX wishes to further leverage that AVAX, buy purchasing more temporarily.
- Step 2: User creates a vault on avai.finance and places their $2000 into the vault.
- Step 3: User borrows for their collateral AVAX - an additional $1000, in stablecoin AVAI. This is a relatively safe loan, as it's only a 50% TVL (threshold is 66.67%).
- Step 4: User takes that AVAI and exchanges it on a DEX for $1000 in additional AVAX. User then currently holds the $2000 of AVAX in the vault, plus the $1000 in AVAI-converted AVAX in their wallet, for a total of $3000 in AVAX.
- Step 5: Time passes and a few positive market days go by. AVAX has risen 20%! User's overall AVAX is now $3600: $2400 in the vault, and $1200 in the AVAI-Converted wallet AVAX. AVAI, as the loaned stablecoin, is still $1000.
- Step 6: User converts $1000 of the wallet's AVAX back to AVAI. $200 of AVAX remains in the User's wallet.
- Step 7: User goes back to their avai.finance vault, and deposits that AVAI, deleveraging their collateral.
- Step 8: User withdraws their collateral AVAX back into their wallet. There is a 0.75% withdrawal fee, which works out to $18.00. User receives back $2382.00.​
- If our user had not utilized the leverage feature of the AVAI vaults, they would have had their initial $2000 appreciate 20% to 2400. By utilizing the vault, they now have $2582 total ($2382 from the vault, plus the new $200 remaining from the wallet AVAX).
In summary, here's how the transaction flows from end to end.
Summarized version of above
Keep in mind this only goes over the use of the same asset - AVAX - for simplicity. The possibilities however are boundless in how you would like to use your borrowed funds, the liquidation risk you would like to accept (up to the maximum TVL % for the collateral asset), and the payback timing.
This is as pure of a use case for Decentralized Finance as you will ever find - you are in full control at all times of your assets.
Last modified 8mo ago
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