How is DeFi margin trading getting safer with this cross-chain protocol?
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.
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
Read more on cointelegraph.com
