Spotlight on Poloniex: The Legendary Crypto Asset Exchange (Part 3)

Challenge entry: Crypto Lending on Poloniex

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Hello everyone! I'm here again with another part of the short series - 'Spotlight on Poloniex'. This is the third part of the series and it is all about crypto lending on Poloniex. In the second part, I talked about margin trading on Poloniex. Margin trading makes it possible for a user to borrow funds to trade with using the funds in their margin account as collateral. Now, where is this funds borrowed from? Who's doing the lending? Is there any connection between margin trading and crypto lending? In the second part, I also mentioned that borrowing in margin trading is done automatically. So now, how is lending done?

Let's see.

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Where is the funds used for margin trading borrowed from?

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Lending in crypto is a kind of investment where investors offer up their crypto assets for peer-to-peer loans in return for interests which will be paid by the borrower. In margin trading, all the funds used are borrowed. The funds in the margin account is used as collateral for loans. Since funds have to be borrowed for trade in margin trading, lending has to be done to provide funds that can be borrowed. So, to answer the first question,

Where is the funds used for margin trading borrowed from?
The funds borrowed for margin trading is gotten from lenders who are offering part or all of their crypto assets as peer-to-peer loans

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Who's doing the lending?

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Lending is a means of earning passive income on Poloniex. Anyone who has crypto assets on the exchange and is unable or unwilling to trade can simply opt for lending and earn passive income from their crypto asset rather than storing it for nothing other than a speculative increase in value of the crypto asset. So to answer the second question,

Who's doing the lending?
Anyone who holds a crypto asset on Poloniex can choose to lend or provide loans in return for interest rather than just storing it for a speculative increase in value. Cool right?

Well, while you might be wary of the risks involved, especially since there's a possibility of a borrower defaulting on his loans, there's also a risk involved in storing your crypto assets for a speculative increase in price as the price might continue to drop and not increase for a rather long time. So if I opt for crypto lending rather than storing...

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Are margin trading and crypto lending connected?

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In the second part of this series, I hinted that margin trading allows you to trade with funds higher than you have. When you place a buy order in margin trading, the funds you're using to make that order is all borrowed from other users who are offering their funds as peer-to-peer loans. The money in your margin account is not used. It is there for collateral. Without these other users offering their funds as peer-to-peer loans, there is no borrowing and thus, no margin trading. Those who trade margins are called borrowers while those who offer their funds as peer-to-peer loans are called lenders. In return for borrowing money, the borrower pays an interest which is paid to the lender. The lender pays 15% of the interest earned as a fee to poloniex.

^{Crypto lending is linked with margin trading}

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This answers the third question

Are margin trading and crypto lending connected?
Yes. Without crypto lenders, there is no funds to borrow and margin trading can not happen.

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How is lending done?

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If you want to lend on Poloniex, you're going to have to do it manually unlike margin trading. First, you'll have to log in to your account on Poloniex. Once logged in, click on the lending tab at the top of the home page.

In the lending page, select the coins you want to offer in the 'My Balances' section on the right (never mind mine). You must have this coins transferred to your lending account to be able to offer it as loan. In the picture below, I can't cause I don't have any funds in my account.

However, this account can, as it has DOGE in it's lending account.

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Next is to fill out the fields in the offer section. You enter the amount you want to offer, the interest you want on the loan, the duration you're offering your coins as loan and lastly you check the box if you want the loan to auto renew at the same rate you're using after the loan closes. When you're done, you can click on offer loan to place your offer.

The instance below tries to offer 998 DOGE for two days at a daily interest rate of 0.0028%

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Once you place an offer, the asset you offered becomes available for borrowing by margin traders or borrowers.

It won't be nice if I don't tell you that it can be tricky getting your offer accepted. In the second part of this series, I hinted that loan requests are received based on the highest rate. For loan offers, they are accepted based on the lowest rates. So you might want to check on the 'Loan Offers' section below the 'Offer' section for the latest rates.

Also be informed that if a borrower borrows a loan for a certain period and within the duration of that loan, another loan with a lower rate becomes available, at the expiration of the active loan, it is automatically transferred to the new loan with a lower rate.

Therefore, it is advised you offer competitive rates to increase the chance of your offer being accepted and your auto-renewal if set to not be over-ridden.

After creating a loan offer, it is moved to the 'My Open Loan Offers' section. Here, it can be cancelled before it is accepted as you can see below.

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Once the offer is accepted, it moves to the 'My Active Loans' section. Although you can't cancel an active loan, you can disable 'Auto-renew' so your funds return to you immediately the duration expires as can be seen below.

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Conclusion

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Crypto lending is a way of earning passive income on your crypto assets without having to trade them. Poloniex offers this passive income generating feature and also ensures that both the borrower and the lender is protected. Usually, lenders are paid in full because Poloniex requires that the borrower provides collateral. If while trading, the market goes south for the borrower, their position is forcefully liquidated and the collateral is transferred to the lender. The risk of the borrower not having enough collateral to repay the lender is there and this is why Poloniex in their wisdom always inform new lenders of this risk so no one thinks it's a bed of roses.

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References

1. Support.poloniex.com
2. Medium.com