This Liquidity Hack Isn’t Just for the Rich Anymore
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| By Marija Matic |
We’ve all found ourselves in need of some extra cash.
Maybe it’s for a down payment on a rental property. Maybe the end-of-year bills were higher than you thought.
Or maybe you’re just trying to get through this correction without needing to resort to an instant noodle diet.
You look at your crypto portfolio and see your high conviction holds, the coins you are sure will soar on the next rally.
You don’t want to sell … but you need liquidity now. What choice do you have?
Well, a few actually.
They all fall under the umbrella of Collateralized Debt. And it’s how the wealthy have operated for decades.
See, the rich don't sell their stocks or real estate when they need capital — they borrow against them.
Thanks to DeFi, you can now do the same with your crypto, “permissionlessly,” in about 45 seconds.
The 3 Top Borrowing Strategies
Borrowing isn't just for degens anymore. If the risk is managed appropriately, borrowing can be a solid part of portfolio management.
The key is to have a clear use case for the borrowed funds.
For example …
1. Real World Liquidity: Rather than sell crypto for cash, you can borrow against your coins. This means you can buy a car/house without triggering a taxable sale and you stay in the game for future capital gains.
Not only that, but this approach helps you avoid the taxes you’d have to pay if you sold your crypto. And you’re still in the game when your crypto starts to run again.
In fact, that’s part of this strategy’s strength: If the value of your collateral increases, your loan also becomes “cheaper.”
2. Yield Arbitrage: You can borrow stablecoins at a lower borrow rate, then deposit them in a yield farm with a higher APY, then pocket the difference.
This approach is riskier in a bull market, especially if you borrow near the market top. In a bear market, you can generally find cheaper borrow rates.
3. Strategic Accumulation: Also called a “loop” strategy, this is a solid approach for HODLers. You deposit a crypto you believe will rise over the long term, then borrow stablecoins against it.
Then, you use those stablecoins to buy more of your underlying asset, deposit it then borrow more stablecoins. Repeat this process for a few “loops.”
Why? Because each loop leverages your position further. It means if the value of your underlying asset goes up, your gains are multiplied.
That said, there is a much higher risk with this strategy: If prices drop, you get liquidated much faster.
The "Where": Reliable Networks & Protocols
Not all protocols are created equal. When your collateral is at stake, you want a proven track record, high liquidity and security.
If you’re looking on the Ethereum (ETH, “B+”) ecosystem …
Aave V3 is the reigning king. It’s the gold standard. Battle-tested with multichain capability and huge liquidity.
It’s best for ETH, wrapped BTC and LINK collateral.
If you’re looking for improved APY efficiency, Morpho is a newer layer that optimizes rates on top of Aave/Compound.
But if you’re looking for opportunities on the Solana (SOL, “B-”) network …
Kamino Finance is the powerhouse. It’s the leading lending venue on Solana with great analytics and automation features. It’s best for SOL, JitoSOL and mSOL collateral.
You may also want to consider the newcomer, Jupiter Lend. It boasts deepening liquidity and user friendliness.
Your Due Diligence Checklist
Before you click "Borrow," check these four metrics. If you ignore them, you’re more likely to lose your money.
1. LTV (Loan-To-Value) & Max LTV
This is how much you can borrow. If Max LTV is 80%, you can borrow $80 for every $100 of collateral.
Rule of Thumb: Never max this out. If you borrow 80%, a small drop in price could liquidate you. If borrowing against volatile cryptocurrency, like Bitcoin, I would go below 50%.
2. The Health Factor
Aave and others use a "Health Factor" score.
- < 1.0: You are liquidated (your collateral is sold to pay your debt).
- 1.0 — 1.5: Danger Zone. One bad wick and you're toast.
- > 2.0: Safe(ish). You can sleep at night.
- > 3.0: Conservative.
3. Borrow APY (Variable versus Stable)
Most DeFi rates are variable. You might borrow at 3.8%, but the following week it could see a short-term spike to 15% if the market gets hot. That means you’ll need to monitor this weekly.
4. Liquidation Penalty
If you get liquidated, the protocol charges a liquidation fee (usually 2-10%) on top of selling some of your assets. Some protocols make it expensive to fail, others do not.
The Risks
We cannot talk about rewards without talking about the risks.
Smart-Contract Risk: Protocols can get hacked. Best way to lower this risk is to stick to battle-tested protocols like Aave.
Avoid new ones with high yields, whose code has been untested.
Liquidation Cascades: In a flash crash, the price of ETH/SOL can drop 15% in minutes. The Ethereum network can get congested, which means you might not be able to add collateral in time to save your position.
So, keep your LTV low.
Oracle Failure: If the price feed (Oracle) malfunctions and reports the price of ETH as $0, you get liquidated instantly.
To reduce this risk, I suggest protocols that use Chainlink or have robust Oracle redundancy.
Moreover: Never borrow just to have "dry powder" sitting in a wallet. You are paying interest for nothing. As I said earlier, borrowing is best when you have a clear use for that liquidity.
The Bottom Line
Borrowing against your assets is a superpower. It allows you to unlock the value of your wealth without disposing of the asset itself.
Here’s how you can get started on your own:
- Go to DefiLlama, then click on the Lend tab.
- Filter by your preferred chain (e.g., Arbitrum or Solana).
- Look for the largest protocols (High TVL).
- Check their rates.
You can also use tools to check or simulate a loan, such as DeFiLama’s borrow and advanced borrow tools.
The most advanced simulator used by professional DeFi users is DeFi Saver (find “Recipe Creator” on the left-side menu -> scroll down to “Start a simulation”).
Best,
Marija Matić
