Spotlight on Poloniex: How Margin Lending and Borrowing Function on Poloniex.
Poloniex.com provide peer-to-peer (P2P) margin lending and borrowing system for their users.
In this post, I will explore the details of how Margin Lending and Borrowing functions on the Poloniex and how you can use this.
What is Lending?
Lending is an action of allowing a person to use a sum of money under a specific agreement to pay it back later. These activities we can see normally done by Banks.
When a person requires money for any personal urgency, to buy a new car, to buy a home then he ask Banks for money, after some verification process Banks provide him a loan/money under a specific agreement which is accepted by a person.
When a person returns money to the bank he will also give interest for using that money for a period. This interest is a profit for the bank for providing money as a loan to a person.
The banks use their money in landing and earn money by charging fees from a person as an interest.
Poloniex.com provide a Lending feature to earn passive income on your funds(Crypto coins) without actively needing to trade.
With this feature, you just need to select coins you have and want to lend to others, select the duration for how long you’re willing to lend your funds, and select the % interest that how much you will charge the borrowers.
How to use the Lending feature and earn Interest on Poloniex.com
| If you are worried about the losses to trade your crypto and still want to earn from your stored cryptos, instead of trading with them, you can lend them to other users and interest from them. |
Click on the Lending tab at the top of the page, then select the coin you wish to offer in the "My Balances" box on the right. You will need to transfer funds to your lending account to offer them, which you can do from the "Quick Transfer" link in the offering box, or by visiting the Transfer Balances page, like below.
Do following to lending your Crypto.
- Click on Lending.
- Select the coin you want to lend from Balances.
- Rate: The daily interest rate you are offering your funds at.
- Amount: The number of cryptos you are offering.
- Duration: The maximum number of days your funds will be held in a loan.
- Auto-renew: Check this box if you want your funds to automatically be offered again at the same rate after the loan they are used in closes.
Using this P2P lending, customers can earn interest on their crypto by lending it to other customers.
Lending & Margin Trading Are Linked
Margin trading allows you to trade with borrowed funds. When you place a margin order, all of the money you are using is borrowed from other customers offering their funds as peer-to-peer loans. The funds in your margin account are used only as collateral for these loans and to settle debts to lenders.
Without lenders, there are no borrowers, and margin trading isn’t possible. Margin trading helps investors amplify their potential returns or we can say losses. Like suppose, user A might only have 1 BTC worth of XRP but wants to buy more because he believes the market is going to rally. They’re faced with a few choices: Don’t buy any more XRP, deposit additional funds that will allow them to purchase more XRP, or borrow funds from other customers.
If user A chooses to borrow funds, they’ll have to pay interest to the lender and set aside funds as collateral. Collateral helps ensure they can repay the loan even if the market swings the opposite of what they predicted.
Risk Is Pooled OR Shared Within All Lenders
Let's understand this with an example of my self.
A user named Stream4u wants to take advantage of a market rally. Stream4u believes that the price of ETH is going to rise relative to BTC over the next 12 months but doesn’t have enough funds to buy more ETH directly so he needs to borrow funds. He’d like to buy 1,000 ETH.
He wants to borrow BTC so he can purchase more ETH. (Let’s assume that 1 ETH = 0.031 BTC.)
So Stream4u needs to borrow 31 BTC to purchase 1,000 ETH
Stream4u decides to open a margin position to buy the ETH. When he opens his position, this opens up a new loan demand for 31 BTC. Another customer, Akshay, has 10 BTC that he lending at an interest rate of 0.25% over the course of a week. Stream4u doesn’t know Akshay and never will, but his loan demand and her loan offer match.
Stream4u borrows 10 BTC and knows that, once the week is up, he’ll owe 10 BTC + 0.25% interest — again, he won’t know who Akshay is at all during this process. Despite the healthy amount of BTC Akshay is lending, he doesn’t have enough to satisfy Stream4u’s needs. He needs another 21 BTC, which matches with many other open loan offers created by many other lenders.
As these initial loans expire, Stream4u’s position is matched up with new loan offers. Poloniex simply matches borrowers and lenders and takes a small fee. Because Stream4u’s strategy is to invest in ETH over the course of a year and many of the loans he entered into expiring after a few days, he’ll likely interface with hundreds of lenders over the course of the year.
In the diagram above shows, there’s virtually always a web of lenders involved with any one borrower. That means they’re sharing risk. In most instances, lenders will be paid in full because Poloniex requires borrowers to put up collateral. If the market goes the opposite way of a borrower’s margin trade, their position will be forced liquidated and their collateral will be transferred to pay the lenders.
Last to say on this.
As per Poloniex.com itself, a lender should be aware that the ability of the borrower to repay their loan is not guaranteed: market volatility, liquidity conditions, and order book activity may lead to borrowing accounts not having enough collateral to pay back their loan. While the system is designed to protect lenders, there is still a risk of loss.
Poloniex.com margin and the lending platform are designed to protect both borrowers and lenders. However, while they have fail-safes and procedures in place to protect lenders, there are always risks involved when exchange trading, margin trading, or lending cryptocurrencies. Source
Information Source: Lending
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@stream4u
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While margin trading involves high risk, lending is a passive way to earn more, and interestingly margin trading enables this opportunity for those whose coins are sitting idle, or who don't want to take the risk, prefer to HODL. I can say the crypto domain is slowly building its legacy ecosystem. In the future, it is going to be more fluid. Poloniex as an exchange platform makes it simple and user-friendly for the traders.
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