Decentralized money markets such as Kava Lend allow you to lend assets or borrow assets from other users. As borrowers repay the suppliers interest, users who supply collateral earn interest. Additionally, suppliers receive $KAVA and $HARD rewards.
The great thing about this is users only need to supply a single asset compared to a pair of assets, like on a typical decentralized exchange (DEX).
The following article covers how lending assets to earn interest and rewards works in Kava Lend and how to borrow assets and manage a position. The article then unpacks the Borrow Limit Ratio, liquidation mechanics, and some basic strategies for earning with Lend.
Lending Assets to Earn Interest and Rewards
Supplying to Kava Lend is primarily incentivized with the protocol’s governance token, HARD.
Certain assets like USDX and ATOM also receive KAVA rewards. Suppliers also receive a portion of interest collected from borrowers.
Simply supplying assets to Lend is one of the easiest and safest ways to earn with crypto, as you’re not at risk of impermanent loss, and there’s no need to provide an asset pair, compared to DEXs like Pancake Swap, Osmosis, and Kava Swap.
Borrowing Assets and Managing Your Position
To borrow on Kava Lend, users must first supply assets as collateral.
All collateral assets have a loan-to-value ratio of 50% except for USDX, which has a loan-to-value ratio of 25%.
That means if you supply $100 in value, you can borrow up to $50 in value of any supported asset. For example, when supplying $100 of USDX, you can borrow $25.
Collateral on Lend is managed as a single lump sum position, so supplying multiple collateral assets can help stabilize your leverage should you choose to borrow against your supplied collateral. With a diverse set of collateral assets, the other assets can help maintain your overall collateral value if one asset price falls.
Once the collateral is supplied, users can borrow any supported asset up to their borrow limit. Borrowers pay interest on their loans which accumulates directly on the borrowed amount for each block.
As borrowers repay their loans, interest fees are also repaid to reclaim their collateral. As with collateral, debt is also regarded as a single borrow amount.
Borrow Limit Ratio and Liquidation Mechanics
While borrowing assets against your collateral on Lend, be sure to monitor the borrow limit ratio.
Based on your collateral, the borrow limit ratio will display the maximum amount you can borrow and compare that to the amount you are currently borrowing.
Both sides of this ratio can change based on the price of your collateral and the price of your assets borrowed.
For example, if you supply $500 worth of BTC, the maximum amount you can borrow is $250 worth of another asset, but if the price of BTC drops and your collateral supplied is only worth $400, now the most you can borrow is $200.
As your collateral value drops, if the amount borrowed exceeds that new borrow limit of $200, your assets are at risk of liquidation.
On the other side of this borrow limit ratio is the value borrowed. Imagine you supply $500 worth of a stablecoin such as BUSD, then borrow $100 worth of a variable coin like BTC. If the price of BTC were to moon and the value of the amount borrowed grew to exceed the $250 borrow limit, that could trigger a liquidation.
When borrowing assets on Lend, it’s recommended to over-collateralize your loan, meaning you maintain a borrow limit ratio of 50% or less.
When liquidated, a portion of your supplied assets is sold off at auction to reclaim the difference in the value of borrowed vs. collateral assets plus a 7.5% liquidation penalty.
Auctions typically take between 8 and 24 hours, and users can expect 1/3 of their collateral returned to them, but this is not guaranteed. To learn more about liquidation on Kava Mint and Lend, click here.
Basic Earning Strategies with Lend
Now let’s explore some of the easiest ways to earn with Kava Lend.
The risk level when supplying to Kava Lend is very low. Users are not subject to any impermanent loss and maintain 100% ownership of their assets.
By supplying, users earn more of the asset they supply based on interest fees paid by borrowers and earn HARD token rewards.
USDX and ATOM receive extra KAVA incentives, which is great because you can stake them immediately upon claiming to earn an extra 30%+ APY on your KAVA rewards!
The risk Level for leveraging assets in Kava Lend is moderate depending on the amount borrowed compared to the collateral supplied.
A solid strategy for Kava Lend is to supply multiple blue-chip assets such as ATOM, BTCB, and BNB, then borrow Kava’s stablecoin, USDX.
After borrowing USDX, you can re-supply it as collateral to earn more Kava rewards. The risk with re-supplying is unwinding the position requires removing collateral before repaying your loan, which can be dangerous if the borrow limit ratio is already nearing 100%.
The interest rate on USDX is also greater than the supply APY, meaning there will be a small amount of USDX debt accumulated in the process.
Alternatively, you can swap half the borrowed USDX for BUSD on Kava Swap and then supply the pair to a liquidity pool. Since both assets in the pair are relatively stable, there’s minimal risk of impermanent loss. Typically, the pool APY earned for supplying outweighs the interest of borrowing USDX on Lend, so users can easily repay any accumulated USDX debt with the pool APY earnings.
Shorting an Asset
The risk level with shorting assets on Kava Lend is high since you’re leveraging your assets to try and time the market.
When shorting an asset, you’re betting that the price of an asset will decline.
To profit from that decline, you simply need to borrow the asset you think will decline, then immediately swap it for a stablecoin like USDX or BUSD.
After the price of that asset has declined, you swap your stablecoin back for the original asset, then repay the original amount borrowed plus any accrued interest.
Since you sold that asset at a higher price than is required to buy back enough of the asset to repay the loan, you profit by keeping the remaining stablecoin amount left over.
The risk is that if the price of the asset goes up instead of down, it’ll cost more to swap back for your borrowed asset and as the price of that borrowed asset raises, it can push the borrowed amount side of the borrow limit ratio. Using a declining asset as collateral while borrowing a raising asset creates the greatest liquidation risk.
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