Crypto assets sitting in a wallet don’t accrue interest. The underlying value may increase or decrease, but you're not earning anything for holding that particular cryptocurrency. This is where Spartan Lending come in.
Imagine being able to lend your crypto to someone else and earn interest on the loan. That's how banks currently work, but it's a service that few individuals can access. In the world of Spartan Lending, anyone can become a lender.
By loaning your crypto assets to others, you’re able to generate interest on those assets. There are a wide variety of ways to do this, but the main way is through lending pools. These are essentially the loan offices of a traditional bank.
DeFi offers the same products as traditional financial institutions (lending, borrowing, trading, investing, etc.), but uses blockchain to do so with additional benefits:
🎭 DeFi is decentralized and anonymous.
📈 You can generate interest by lending out your crypto assets to others.
💸 The most common way to generate interest on crypto-assets is through lending pools.
🛑 Borrowers typically have to over-collateralize their loan to protect against sudden drops in collateral value, which would result in penalties making it a safer option for lenders.
Using a smart contract in the Spartan Protocol, users are allowed to pool their assets and distribute those assets to borrowers with the rules of the loan written into the contract. These loan pools then collect interest and distribute it out to each investor.
When a borrower goes to get a loan at a bank, they would need collateral for that loan. If you get a car loan, the car itself is the collateral. If you stop paying on the loan, the bank will take your car. That makes sense, right? But given that a decentralized system is A) anonymous and B) doesn’t have physical property that can be used as collateral, another system has to be put in place.
When a borrower wants to take out a loan, they have to offer something more valuable than the amount of the loan. That means they need to deposit, via a smart contract, an amount of currency that is at least of equal value to the amount they'd like to take out. The collateral can be in a wide variety of currencies, so if you want to borrow one BNB, you’d need to deposit the current price for one BNB in SPARTA.
A few months later, you’re finished with the loan and need to pay back your BNB +10% and then you receive your SPARTA back. The borrower is happy because they received their original SPARTA back without having to sell them, and the pool is happy because they can now distribute the 10% interest fee, in BNB, back to the investors.
One small issue that may arise is when dealing with different crypto assets, the prices can swing wildly. We’ve all seen the ups and downs of BNB's price over the last few months. What would happen if the price of the collateral drops below the price of the loan?
For example, to ensure there is always funds left to pay the lender back, Spartan Protocol would have it written in the contract that it requires borrowers to collateralize their loan at a minimum of, for example, 150% of the value of the loan. So, let’s say you want to borrow 100 BNB. That means you would have to collateralize your loan with a minimum of 150 BNB in SPARTA. Therefore, if your collateral drops below the 150 BNB / Sparta value, your loan would then be subject to a liquidation penalty, ensuring that the lenders will always receive their money back.