Metaverse Information Bureau | Article Introduction: Can you borrow cryptocurrency without selling it? Explaining the safe #DeFi loans made possible by Gelato and Morpho! #DeFi #cryptocurrencyloan #non-custodial
Video explanation
[For beginners] The bank of the future? What is a cryptocurrency secured loan? A thorough explanation of the non-cash and gasless system!
Hello! I'm John, a veteran blogger who gives you easy-to-understand updates on the metaverse. Recently, have you heard that you can borrow money using virtual currency (cryptocurrency)? However, I'm sure there are many people who feel that it's difficult or that it's scary to deposit their own virtual currency. Today, I'd like to talk about a revolutionary new form of finance that can alleviate such concerns, especiallyProjects Gelato and Morpho have announced "embedded crypto-backed loans"We will thoroughly explain this so that anyone can understand. If you know this, you will be able to see a future where your Bitcoin (BTC) and Ethereum (ETH) will not just be something you hold, but will be active as an "asset" that creates new value!
Basic Information: What is a cryptocurrency secured loan?
Let’s start with the basics. As the name suggests, a cryptocurrency secured loan isBorrowing another virtual currency (usually a stable coin that is pegged to the value of money) by using the virtual currency you own as collateral.To give a familiar example, think of it as a virtual currency version of a "mortgage" where you borrow money using your house as collateral.
What problem does it solve?
"I don't want to sell the bitcoins I have. But I need Japanese yen or dollars right now..." What would you do in this situation? Until now, you had no choice but to sell your precious bitcoins. However, with this loan,Instead of selling your Bitcoin, you can use it as collateral to borrow USDC (a virtual currency roughly equivalent in value to the US dollar).Then, if you use the borrowed money and repay it later, the Bitcoin you used as collateral will come back to you. The biggest advantage is that you can meet temporary capital needs without giving up the virtual currency that you expect to rise in price in the future.
"Unique Features" Realized by Gelato and Morpho
The crux of this news is that crypto-backed loans have never been easier or more secure. The partnership between Gelato and Morpho brings three major features:
- Completely Non-Custodial: This is the most important thing. "Custody" means the management and storage of assets. Non-custodial means that you do not need to entrust your cryptocurrency to a third party such as an exchange. Since you always manage your private key (like the key to a safe) yourself, there is no risk of losing your assets due to the exchange being hacked or going bankrupt. Only you can control your assets on the blockchain.
- Gasless: When making a transaction on the blockchain, a fee called "gas fee" is charged. This is a point that beginners tend to have trouble with, but with this new system, Gelato's "relayer" technology will cover this fee in the background. This allows users toYou can operate it just like a normal web service without having to worry about gas fees.
- Embedded: This loan function can be integrated into your wallet or financial app like a "part". This means that you can take out a loan seamlessly within the app you are familiar with, without having to go to a difficult DeFi (decentralized finance) site.
Involved assets: What cryptocurrencies are involved?
This mechanism is not a specific "coin" project, but rather a "service" that links various virtual currencies. Here, we will explain the assets that are mainly involved.
Collateral assets: BTC, ETH, etc.
It is an asset that is deposited as collateral to take out a loan.Bitcoin (BTC) and Ethereum (ETH)The service will use major cryptocurrencies that are widely recognized in the market and have stable values, such as Yahoo! Auctions, Yahoo! BTC, Yahoo! Yahoo! Cash ... Cash, Yahoo! Cash. Anyone who holds these assets may be eligible for this service.
Borrowed assets: stable coins such as USDC
The assets that are used as collateral for borrowing are mainlyUSDC (USD Coin)Stable coins are virtual currencies designed to have a 1:1 value pegged to fiat currencies such as the US dollar. Since price fluctuations are very small, there is little risk of the value plummeting after borrowing, making them easy to use as stable "money."
Why is this combination important?
The key is to use BTC, which is subject to large price fluctuations, as collateral to borrow USDC, which has a stable price. Hold on to BTC, which may rise in value in the future, and satisfy your current needs with USDC, which has a stable value. This prevents opportunity losses in asset management while ensuring liquidity. This is a smart way to use assets, killing two birds with one stone.
Technical details: a look behind the magic
"Non-custodial" and "gas-less." How is such a dream come true? It's a bit technical, but don't worry, I'll explain it in simple terms.
A banker where smart contracts control everything
At the heart of this mechanism is"Smart contracts (programs that automatically execute predetermined rules)"This is like a contract that is recorded on the blockchain and cannot be tampered with.
For example, all of the rules are programmed in, such as "If user A deposits 1 BTC, USDC equivalent to 50% of the current price will be automatically lent out," and "If the price of BTC falls and the collateral value falls below a certain level, the collateral will be automatically liquidated to prevent loan defaults."
With no human bankers or middlemen,Transactions are executed instantly, fairly and for everyone, 24 hours a day, 365 days a year.And this contract is "non-custodial". Your assets are locked in a transparent safe called a smart contract, but you hold the key to that safe (private key), so even the developers cannot move your assets without your permission.
"Gelato Relay" achieves gas-free operation
Normally, gas fees are required to run smart contracts. However, Gelato’s"Relay"This mechanism solves this problem.
When a user performs an operation to "borrow," the instruction is sent to the Gelato network. Then, Gelato's bot (automated program) pays the gas fee on the user's behalf and records the transaction on the blockchain. This business model is such that this cost is borne by the service provider (such as an app that incorporates a loan function), so the user does not need to be aware of the fees. This makes the experience of Web3 (the next generation of decentralized Internet) as easy and intuitive as a traditional Web2 app.
Team and Community: Who is making it?
What kind of people are behind such an innovative service? Having a trustworthy team is crucial in determining the future prospects of a project.
- Gelato: A group of Web3 automation and infrastructure specialists. Their technology is also called the "AWS (Amazon Web Services) of Web3" and supports many DeFi projects and dApps (decentralized applications). Relay technology, which enables a gasless experience, is their core strength.
- Morpho: A protocol that aims to make the DeFi lending market more efficient. By leveraging the liquidity of existing lending pools (such as Aave and Compound) and optimizing P2P (person-to-person) matching, it has succeeded in providing better interest rates to both lenders and borrowers.
このInfrastructure giant Gelato and lending efficiency genius Morpho team upThat is why we were able to create such a seamless and user-friendly service. Both teams are highly regarded and have a proven track record in the Web3 industry, so you could say they are very reliable.
Use cases and future prospects: How will it change our lives?
This technology has the potential to dramatically change how we interact with finance.
- Embedding in financial servicesWallet and fintech apps will be able to easily implement this feature, allowing users to borrow money against their cryptocurrency directly from the app, just like they would with a bank account, without any credit checks or complicated procedures.
- Useful for traders and investors: Traders who don't want to miss out on market opportunities can instantly raise additional funds for new investments without selling their holdings.
- Creating a new economic sphere: In the future, it may be possible to use digital assets other than cryptocurrencies, such as in-game items or digital art (NFTs), as collateral. This could lead to even more economic activity in the metaverse.
In the future, such decentralized, highly transparent systems may take over some of the roles of banks."Your smartphone becomes your bank.", that future is just around the corner.
Comparison with the competition: What makes us different?
There are other services that allow you to lend and borrow virtual currency. What makes this system different from those?
| Types | Features | Typical example |
|---|---|---|
| Gelato & Morpho type (this time) | Non-custodial, gas-less, and easy to install.The user experience is very smooth. | - |
| Traditional DeFi Lending | Although it is non-custodial, the operation is complicated and gas fees are required for every transaction. | Aave, Compound |
| CeFi Lending (Centralized) | The operation is simple,Custodial (entrusting assets to a company)This means there is a risk of companies going bankrupt or being hacked. | Nexo, BlockFi (bankruptcy) |
In this comparison, the Gelato and Morpho models are:The convenience of CeFi and the security (non-custodial) of DeFi: the best of both worldsThis is a big step forward for DeFi to move to the next stage.
Risks and Cautions
Although it is a very attractive technology, there are also risks to be aware of when using it.
- Liquidation Risk: This is the risk you should be most careful of. If the price of the cryptocurrency (e.g. BTC) you are using as collateral falls sharply, the value of the collateral will fall below the amount borrowed. Before that happens, the system will forcibly sell (liquidate) your collateral to prevent default. In order to avoid losing your valuable assets, it is important not to borrow too much (keep your LTV: loan-to-value ratio low).
- Risks of Smart Contracts: Because programs are created by humans, there is no guarantee that they will be bug-free. There is a non-zero chance that malicious hackers will exploit program vulnerabilities and steal assets. It is important to choose a reliable, audited protocol.
- Regulatory risks: Legal regulations regarding DeFi and virtual currencies are still being developed around the world. It is necessary to consider the possibility that new regulations will be introduced in the future, which may affect the use of services.
Summary: Experience the future of finance
This time, we explained the “embedded, non-custodial, gasless” cryptocurrency-backed loans that Gelato and Morpho have realized. Let’s recap the main points.
- Rent instead of sell: You can raise temporary funds without having to give up your valuable virtual currency.
- Manage your assets yourself: Because it is non-custodial, there is no risk of your assets being stolen by a third party.
- Don't worry about fees: Since it is gas-free, even beginners can use it without stress.
- With the usual app: Since it is built-in, you can use it seamlessly without having to go to a special site.
This is not just a new service, but a great example of how blockchain technology can make our finance more open, efficient, and user-centric. Just as the Internet changed the way information is handled, DeFi will fundamentally change the way finance works. Why not get involved in this big wave of change?
Disclaimer: This article is for informational purposes only and is not investment advice. Investing in cryptocurrencies and using DeFi services involves risks. Please act at your own discretion and responsibility after conducting sufficient research (DYOR – Do Your Own Research).
Frequently Asked Questions (FAQ)
- Q1: What happens if the price of the Bitcoin I'm using as collateral drops?
- A1: If the collateral value falls below the liquidation line, the smart contract will automatically sell the collateral and repay the loan. To avoid this, it is important to set the loan amount low (for example, 50% or less) compared to the collateral value.
- Q2: Are there really no fees (gasless)?
- A2: There are no blockchain fees (gas fees) that users pay directly. This is because Gelato's Relay technology covers this in the background. However, a small amount of interest is charged for using the loan service itself.
- Q3: Can I use any wallet?
- A3: This "embedded" loan functionality will be available in integrated wallets and apps. We expect many major wallets (e.g. MetaMask, Phantom, etc.) and fintech apps to adopt this technology in the future.
- Q4: Is "non-custodial" absolutely safe?
- A4: There is no centralized risk (counterparty risk) such as corporate bankruptcy or fraud. However, there is a risk of losing assets if you neglect to manage your own private key, and there are risks associated with the smart contract mentioned above. Self-responsibility is the basis.