Chainlink-Backed Loans — How to Borrow Cash Using Chainlink Tokens

Ann Smith | Updated: 23-09-2021 10:32 IST | Created: 23-09-2021 10:32 IST
Chainlink-Backed Loans — How to Borrow Cash Using Chainlink Tokens
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The cryptocurrency industry is evolving rapidly, giving individuals and incorporations new opportunities to profit from digital coins. If you need cash quickly but would not like to sell your Chainlink tokens, there is a special type of loan for you. It is available on an increasing number of lending platforms and lets you borrow quickly.

How It Works

Discover a new type of secured crypto loans. Borrowers pledge their Chainlink (LINK) tokens as collateral to borrow assets from a wide array — the options range from fiat currency to stable coins. No credit check is required. Speed is another advantage of a Chainlink loan as the processing times are short — just a few hours.

The maximum amount you can borrow depends on the number of tokens you have and the LTV ratio, or the Loan-to-Value (LTV) requirement. It shows the share of borrowed capital which determines the size of the collateral. For example, 50% means you need to pledge half of the amount you borrow in the form of tokens. Here are the key terms to know.

1. The Initial Loan-to-Value (LTV)

Here, "loan" value includes the amount you borrow plus interest accumulated over the term of the loan. The "value" is your chain link tokens pledged as collateral. As cryptocurrencies are highly volatile, the LTV value is also changeable. It fluctuates along with the price of the tokens.

2. Margin Call LTV

The platforms constantly monitor LTV on all loans to ensure that the market value of the collateral is sufficient to cover for the debts. When a critical level is reached (for example, 70%), the borrower must provide more collateral. There are two options (Margin Call and Liquidation), both of which are automatic.

The Margin Call LTV is the LTV level that triggers warnings about possible liquidation. It is set between the Initial LTV and the Liquidation LTV. Unless the borrower provides more tokens as collateral or does partial repayments, their tokens will be sold off.

3. Liquidation LTV

This is the level at which the collateral will be sold by the platform to cover partial loan repayments. Portions of the pledge tokens are sold off until the LTV goes back to the acceptable level.

4. Interest Payments

The cost of borrowing depends on the platform, the lender, the amount, and the term of the loan. The longer the repayment, the higher the cost — just like with a bank loan.

To Conclude

Loans backed by Chainlink tokens let users borrow fiat money and cryptocurrencies by pledging their LINK assets as collateral. The interest rate and other conditions vary. The initial LTV and the Margin Call LTV define the acceptable size of collateral throughout the term of the loan.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)

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