Welcome to the third stretch of our four part DeFi journey! If you’ve skipped the past tasks, you can head back to the beginning here. Don’t worry, we’ll wait up for you!
When it comes to putting your money to work, the DeFi ecosystem offers a vast array of options. So far, we have staked some ETH on Lido and lent stETH on Aave. Now, it’s time to use that stETH as collateral to borrow USDC!
Before we get out on the path, let’s make sure you’ve got your gear in order. In order to lend stETH on Aave, you will need:
Last time we used Aave, we were acting as lenders. But now that we have deposited some stETH, we can use it as collateral to borrow another asset. By borrowing against our stETH on Aave, we can acquire another asset without selling, trading, or otherwise losing ownership of our stETH. This is vital, as we are currently earning staking rewards from holding this stETH. If we were to sell our stETH tokens, we would be forfeiting all of those future rewards. Borrowing against our stETH will allow us to continue receiving those rewards while still utilizing these tokens to generate additional yield!
Now that we’re all caught up, let’s move onto some technical stuff.
To ensure the safety of lenders, Aave requires borrowers to take out overcollateralized loans. This means that the value you can borrow will always be less than the value of your collateral. This is expressed through an asset’s maximum loan-to-value ratio (max LTV), which is the maximum percentage of a deposited asset’s value that can be borrowed. For example, stETH’s max LTV is 70%. If you put up $100 worth of stETH as collateral, you could borrow a maximum of $70 worth of another asset.
When borrowing, it’s also important to take note of an asset’s liquidation threshold. This is the percentage at which your position will no longer be considered safely overcollateralized. If the assets you are holding as collateral fall too far in value or if you increase your borrow position by too much, you risk crossing the liquidation threshold. If you cross the liquidation threshold and are unable to either pay down your loan or increase your collateral, you may be liquidated. When liquidation occurs, Aave will sell your collateral to cover your loan. This is affectionately referred to as getting rekt.
Thankfully, Aave aggregates all of these metrics for you and represents them through your health factor. This health factor takes into account the max LTVs, liquidation thresholds, and other info and assigns you a score between 1 and infinity. The higher your score, the healthier your position. As your position becomes riskier, either from your collateral dropping in value or through you taking on too great of a loan, your health factor will decrease. This signals that you are approaching your liquidation threshold and are at risk of liquidation. As mentioned previously, you can bring your health factor back up and avoid liquidation by paying down some of your loan or increasing your collateral. While there is no limit to how long you can borrow an asset, your health factor may decrease the longer you go without paying it back.
You can dive deeper into the risks associated with borrowing and how your health factor is calculated with Aave’s FAQ docs.
Whew! Now that we’ve wrapped our brains around that, let’s borrow some USDC!
To begin, head to aave.com and click Launch app.
Click Connect wallet, select your wallet provider from the options shown, and connect your wallet.
Now in the dashboard view, you will see the stETH you lent in our previous guide in the Your Supplies section. Before we can borrow against this stETH, we need to enable it as collateral. To do this, toggle on the button under Collateral.
This will be an on-chain transaction, so you will need to confirm it in your wallet and pay a small gas fee. This will take a few minutes to be confirmed. Once the button under Collateral turns green you’re good to go!
Let’s check out some of stETH’s info before we move on. Select stETH by clicking its name or the Details button. Here, you will find some important metrics such as stETH’s max LTV (70%) and liquidation threshold (75%) that we talked about earlier.
Now that your stETH is enabled as collateral we can borrow some USDC. Back on your Dashboard, find USDC in the Assets to Borrow section and click Borrow.
USDC is a stablecoin whose value is pegged to the US dollar. Because USDC’s value will only fluctuate very slightly (by a fraction of a percentage), it makes for a safe asset to borrow. The chance of our USDC loan increasing in value enough to put us over our liquidation threshold is minimal.
In the Borrow USDC window you will see your current balance available for borrowing. This balance already takes into consideration the max LTV of your collateral, so it will be 70% of the total value of the stETH you deposited. Here, enter how much USDC you want to borrow.
When you enter an amount, Aave will automatically update your health factor to reflect how risky this loan will be. It’s safest to keep your loan under 33% of your max LTV. This will build in a comfortable cushion to further minimize your chance of being liquidated.
After entering your borrow amount, the last step is to choose a variable or stable APY.
Your APY, or annual percentage yield, is the interest rate you will have to pay on your loan. The variable APY will be lower but subject to fluctuation based on changes in the market. Alternatively, a stable APY will be higher but stay more or less the same over the course of your loan. Choosing a stable APY essentially allows you to pay a premium in order to avoid volatility in your interest rate.
Once you have entered your borrow amount and chosen your APY rate, give everything one last check. Ensure your health factor is above 1, at the very least, and ideally in the green.
If everything looks good, click Borrow USDC. You will be prompted to confirm this transaction in your wallet and pay a gas fee. Click Confirm and you’re all set!
You will also be prompted to add USDC to your wallet. If you have not previously held USDC in your wallet, go ahead and add it now. Adding the token to your wallet is safe and requires no gas!
Once this transaction is confirmed on the blockchain you have successfully borrowed USDC on Aave!
Back on your dashboard you will see your updated position, including your deposited stETH, newly borrowed USDC, and your new health factor. As you continue to loan and deposit other assets, and the value of those assets fluctuates, so too will your health factor. Be sure to keep an eye on this page for the duration of your loans.
Now that we have acquired some USDC, it’s time for the final leg of our DeFi journey. We will be heading to Uniswap and using our USDC, along with some ETH, to provide liquidity to a pool. See you there!