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Portfolio diversification is an important part of any portfolio manager's experience. In crypto, traders tend to use bonds or stocks to de-risk their portfolios. But with interest rates and derivative products, creditors on the crypto market will be able to stabilize their revenues and reduce risks, which is possible on platforms like ADALend.
Currently, two types of interest rate derivatives exist on the crypto market: ones that let you inflate user's loans and ones that make raising interest rates possible. Interest rates presented to borrowers and lenders are highly different. The same rule is being applied to the cryptocurrency market.
Utilization ratio
The interest rate that users see is usually exposed to volatile swings in the utilization ratio of the loan in the specific pool. The rate is determined by the total amount of money available in the liquidity pool, which is being denominated in the various tokens on a platform.
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— ADALend (@ADALend_finance) December 12, 2021
The formula is usually as simple as if more people are borrowing than lending, the rate increases; if more people are lending than borrowing, the rate decreases.
The utilization ratio is the difference between the total amount of specific tokens in total circulation and the number of tokens that are, in fact, being utilized by a platform. The ADALend platform always aims to keep the utilization ratio at low levels for non-stable coins. By doing so, the platform is able to keep a greater amount of tokens in circulation at the same time.
Maintaining a higher number of tokens in circulation allows constant support for liquidity mining, which allows receiving rewards for holding tokens. The reward is presented in the way the loan interest is deducted from the borrower. When the borrower decides to close the loan, the lender will pay back the interest.
Idle asset management
The protocol reduces idle assets on the platform by shifting parts of them to stable swap platforms. The protocol developed on ADALend allows utilization of idle assets that are not currently being used anywhere.
The protocol is a sufficient alternative for cold storage token storage that allows for making use of "idle" coins by leasing them out or borrowing to support the ADALend lending protocol. The solution is beneficial for both sides, including the Cardano ecosystem that is constantly being used with funds that could have been sitting in someone's cold wallet.
Alex Dovbnya
