In decentralized finance, borrowing usually means using a single type of token as collateral. In cross-collateral lending protocols on the other hand, let users use multiple assets at the same time to secure a single loan.
This makes it possible to combine different types of tokens, making borrowing more easy, efficient and flexible.
Let’s look into it!
Cross-collateral lending protocols are platforms that allow users to use a mix of different tokens as collateral for a single loan. Instead of locking only one asset, users can deposit a bundle of tokens for increased borrowing power and reduced risk of liquidation.
- First, users deposit multiple assets into the protocol.
- After this, the protocol will add up the value and risk of all tokens deposited.
- Based on these, it sets a borrowing limit based on a blended loan-to-value (LTV) ratio.
- If a loan is issued, it will be backed by all the tokens deposited as collateral.
- If the total collateral value drops too low, the protocol can sell off just enough assets to cover the risk.
- Better Capital Efficiency: You can borrow more with the same assets by pooling them together.
- Reduced Liquidation Risk: One asset dropping in value is less risky when others are still strong.
- Flexible Collateral Choices: You can use different types of tokens – volatile coins, stablecoins, even yield-earning assets.
- Easier To Manage: You can handle one loan backed by multiple assets instead of managing several separate ones.