Introduction
Drift has an active borrow and lending product that powers the multi-asset cross-collateral capabilities of the perpetuals exchange. All perpetuals trades are settled in USDC on Drift. Whenever assets other than USDC are used as collateral for trades, USDC is automatically borrowed until the trades are closed. On top of that, users are able to lend and borrow assets on Drift for their own specific use cases as they would with any other borrow/lend protocol. Depositors (Lenders) earn yield in return for their assets.
How does it work?
Assets deposited onto Drift are automatically considered part of the lending pools and start to earn yield based on the variable borrow interest rates. In order to borrow, borrowers must first deposit assets onto Drift to act as collateral. The percentage of the value of collateral that they are allowed to borrow varies based on the type of collateral. Assets that are more stable will have a higher asset weight, giving depositors the ability to borrow a higher percentage relative to assets with a lower asset weight.
Where do the yields come from?
Borrowers pay out interest to lenders. The interest rates are dynamic and vary based on the supply and demand of the relevant asset being borrowed/loaned. Yield is paid out periodically and compounds automatically.
Risks
- Smart Contract Risk: The lending pools and borrow/lend mechanisms operate through smart contracts, which may have vulnerabilities or bugs that could be exploited by malicious actors, leading to potential loss of funds. To alleviate this risk, all of Drift's contracts are heavily audited by top firms in the space.
- Bad Debt: The specific characteristics of different types of collateral can affect the stability and security of loans. In highly volatile markets, borrowers being unable to cover their loans may potentially happen. However, Drift’s risk engine has been designed to alleviate this issue and the insurance fund helps backstop losses.
Interest Rate Risk: The variable nature of interest rates means that lenders might receive lower returns than expected during periods of low demand, while borrowers might face higher costs during periods of high demand.
Ready to get started?
You can view all lending APR here: https://app.drift.trade/earn/lend-borrow/deposits
