Cross-Collateral Lending Protocols
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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.
