DeFi margin trading is hindered by persistent problems like overcollateralization and risk of liquidation. Some decentralized apps are managing to address these challenges.
Decentralized finance (DeFi) reinvents financial services by relying on decentralized and trustless networks to cut intermediaries and give full control to users. This emerging blockchain sector is a powerful alternative to traditional finance. A popular use case in DeFi is lending, which accounts for about 25% of the total value locked (TVL) in DeFi protocols.
Margin trading in DeFi
One of the reasons why DeFi lending is attractive is because it facilitates on-chain margin trading, enabling crypto holders to seek higher returns by taking more risk. This involves leveraging crypto assets to potentially amplify gains.
Margin trading is an essential feature in centralized finance, but implementing this approach in DeFi is trickier, as the sector has some inherent challenges. To begin with, one of the problems of DeFi loans is overcollateralization. Users often have to lock 150% or more of the loan value before they receive funding. This overcollateralization is the price to pay for taking loans without a credit score or passing through Know-Your-Customer (KYC) procedures.
For example, DeFi platforms like Aave or Maker let users collateralize their Ether (ETH) holdings to borrow stablecoins like USDC without any verification procedure. The borrowed USDC can then be exchanged for more ETH, which can be recollateralized in a cycle, acting as a margin trading strategy. However, this approach has its pitfalls. If the value of ETH or any other volatile collateral declines, users risk liquidation, which is an essential condition to protect lenders. The risk becomes even more evident due to overcollateralization requirements.
Therefore, crypto margin trading in DeFi is a double-edged sword. On the one hand, it offers the potential for amplified profits during bullish markets and is accessible due to collateral. On the other hand, the risks are significant, as market downturns can lead to total liquidations.
How this DeFi lending platform enables safer margin trading
The DeFi space is evolving, and the latest protocols are trying to address the current challenges by introducing new approaches. One example is Nolus, a layer-1 chain built on Cosmos SDK. The main product offered by Nolus is DeFi Lease, a user-friendly application that connects lenders and borrowers on a trustless network. The app fixes some of the major problems in DeFi, including overcollateralization, high risk of liquidations and the lack of genuine asset ownership.
The noncustodial cross-chain solution reshapes margin trading by offering the following features:
- Efficient lending. Nolus’ DeFi Lease system amplifies investments by up to 150%, reducing the collateral requirement by a factor of three.
- Lower liquidation. The protocol has a lower risk of liquidation via its flexible approach. To begin with, it claims to set the liquidation threshold at 40% below the industry average, tolerating a maximum 65% decline in asset price before taking action. On top of that, Nolus introduced the partial liquidation approach, liquidating assets partially rather than entirely when the maximum Loan-to-Value (LTV) is reached. This feature decreases the risk of sudden losses, enabling borrowers to retain more of their assets even during market downturns. Additionally, users benefit from having more time to return their positions to a healthy level.
- Retained ownership. Users gain access to the underlying leveraged assets through whitelisted strategies.
- Cross-chain. Nolus avoids fragmentation by concentrating its liquidity exclusively in stablecoins, allowing seamless access to vast liquidity pools across different blockchain networks.
- Seamless liquidity. With its focus on stablecoin liquidity, Nolus ensures that borrowers can diversify their asset exposure without having to navigate multiple borrowing pools.
Thanks to its unique approach and features, Nolus is transforming DeFi margin trading by improving the balance between risks and potential rewards.
By combining efficient lending practices with novel features like reduced liquidation thresholds and the partial liquidation mechanism, the platform offers a safer and more intuitive experience for crypto traders looking to leverage DeFi opportunities.
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