Crypto borrowing involves obtaining a loan in digital assets, typically by pledging other cryptocurrencies as collateral. This financial activity within decentralized finance platforms allows users to acquire liquid digital assets without selling their existing holdings, using their crypto as security for the loan. Borrowers pay interest on the loan, which is often algorithmically determined by supply and demand within the lending protocol. The process is usually permissionless and executed through smart contracts, ensuring transparency and automated liquidation if collateral value falls below a set threshold.
Context
Crypto borrowing has expanded access to credit within the digital asset economy, enabling various strategies such as leverage trading, yield farming, or simply gaining liquidity without incurring taxable events from selling assets. However, the volatility of collateral assets introduces liquidation risks, a frequent subject in market analysis and news. Regulatory bodies worldwide are examining crypto lending models to establish appropriate consumer protections and systemic risk management frameworks.
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