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Consider three types of traders:
  • An investor who believes that the price of a specific digital asset will rise, but who is in need of liquidity to pay short-term obligations
  • A market maker who is facilitating a long position (must deliver an asset in 2 weeks) - unwilling to sell, but also unhappy with the capital being locked up
  • A trader with an EURC-denominated balance sheet, who wants to trade in USDC but wants to be shielded against currency fluctuations
In all three cases, these parties would benefit from easily borrowing against their assets. For them and many more use cases, over-collateralised lending is an easy, efficient solution - and one they are willing to pay for. By depositing these tokens as collateral, they can borrow stablecoins against them to quickly find liquidity, trade to earn additional yield, or manage working capital. And on the other side of the deal, because of the fact that these loans are over-collateralised, lenders face minimal credit risk. In simple terms:
  • Borrowers lock up more value than they take out.
  • Lenders earn interest because borrowers are willing to pay for this liquidity and flexibility.
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