The process of borrowing tokens on Oolong Lending

Borrowing is the act of taking a loan from any of the lending networks. Contrary to lending which has users supplying tokens to a pool of assets, borrowing is the act of taking tokens out of the pool of assets.

How do I borrow tokens?

In order to borrow tokens, a user must first supply tokens as collateral (ie. become a lender). This is because Oolong's Lending Networks rely on over-collateralized loans. (However, It's important to mention that a user can still lend tokens and earn interest without borrowing tokens.)

After depositing your tokens and enabling them as collateral (click the button labeled "Collateral" next to your token in Oolong Lending), you can borrow any of the available tokens from Oolong Lending. You can even borrow the same token you deposited as collateral!

Note: Any interest you earn from depositing funds helps offset the interest you accumulate by borrowing.

Over Collateral:

Oolong's lending networks rely on a mechanism known as over-collateralized lending.

An over-collateralized loan means that in order to take a loan (borrow), one must deposit tokens of higher value (it can be the same token that users are trying to borrow). Not only that, but the borrower must make sure they maintain a proper amount of collateral for the entire lifespan of the loan.

Over-collateralized loans are the dominant paradigm for DeFi lending because users generally interact with smart contracts pseudonymously. This means that in the context of lending, there is no room for identity-based enforcement of loan repayment (compared to how it works in traditional lending).

Steps to borrow tokens:

1) Make sure you've lended at least one type of token per the instructions above. If you need help with lending, go back to the How to Lend page.

2) Go to Oolong Lending and select the Markets tab.

3) Enabling at least one lended token as collateral by clicking the button labeled Collateral next to the applicable token on the Supply Markets list on the left side of the app.

4) Select one of the available Borrow Markets on the right side of the app by clicking on the token name/logo. You can borrow any of the available tokens. You can even borrow the same token you deposited as collateral!

5) On the Borrow tab, enter the number of tokens you wish to borrow, or use the button to pre-fill your borrowing limit.

6) Click Borrow at the bottom of the popup.

How much can I borrow?

The max amount that a user can borrow depends on the amount of collateral deposited and the token's Collateral Factor. The Collateral Factor - expressed as a percentage - is a multiplier used against your supplied assets.

Let's say you supply $1000 WBTC as collateral, and WBTC has a collateral factor of 70%. This means that you can borrow up to $700 of any token ($1000 x 70%). Each token in a lending network (WBTC, ETH, etc.) will have its own collateral factor.

Note: The amount you can borrow is based on the Collateral Factor of the asset (or assets) you are supplying. In the example above, it doesn't matter what asset a user borrows - they supplied WBTC and it had a Collateral Factor of 70%.

Paying Interest

Just like in traditional finance, borrowers are required to pay interest on their loans. This interest goes directly to the lenders/suppliers of that token, minus the Reserve Factor.

The interest that borrowers pay is determined by the APY listed for the token(s) they are borrowing. It is important to note that APYs are floating and not fixed. Rates get updated on a per-block basis and can fluctuate significantly within relatively short time spans.

The interest that accrues each block is added to a user's borrow position, meaning their borrow position slowly grows over time in proportion to the APY. To pay back this accrued interest, a user simply pays back a portion of their loan.

Why would I want to borrow tokens?

Unlike traditional finance, because of the over-collateral nature of DeFi, the main and most simple reason for borrowing is that it allows people to access the value of their assets while still holding on to them. For example, assume you have some ETH but need USD to pay for a car. Instead of selling that ETH, you could use it as collateral and borrow USD against it. Then, if ETH goes up in value, you can sell the ETH for more and repay the loan, pocketing the difference. Of course, there are other use cases, please refer to the Intro to Oolong Lending for the use cases and benefits of borrowing.

Risks of Borrowing

After borrowing tokens from a lending network, it's important to continuously monitor your position to ensure you have enough collateral to support your loan. As prices of tokens fluctuate, your position can be in danger of liquidation if not properly managed.

In the next section, we are going to take an in-depth look at liquidations and what that means for you as a borrower. In addition, we will go over safe borrowing practices and how you can avoid being liquidated.

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