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Frequently Asked Questions (FAQ)
- 1.Simply deposit your preferred asset and amount.
- 2.After depositing, you will earn passive income based on the market borrowing demand.
Depositing assets allows you to borrow by using your deposited assets as collateral. Any interest you earn by depositing funds helps offset the interest rate you have accumulated by borrowing.
The CDP module is especially useful for tail assets that do not have much liquidity; The introduction of Carbon’s lending/borrowing market creates a “single-asset staking vault” where token holders can easily stake, or lend out their tokens to earn a yield. This way, it becomes much easier to bootstrap a market where other users can open short positions.
Carbon’s money market can also be used to bootstrap a perpetual market that otherwise would be impossible. Market makers can remain delta neutral by borrowing, and selling each time a trader forces them to take a long position (i.e. going LONG on perps, but SHORT on spot with equal amounts = no change in PnL regardless of price movement of underlying asset).
2) Leverage on existing capital
Users can leverage up by borrowing against their deposited collaterals to free up liquidity to buy other assets, or by shorting (i.e. borrowing and selling) an asset.
Carbon money market enables users to simultaneously hold and go long on an asset while lending out said asset for a more fluid capital flow. Rather than selling an asset that they believe have great upward potential to free up available capital for everyday use, they can put that asset up as collateral and borrow funds in other assets. This way, users do not have to give up ownership of the asset and can continue earning a profit from the asset when the value of the asset goes up in the long-run, while meeting their immediate funding needs in the short-run.
In essence, the Carbon money market enables users to leverage on existing capital, creating dual usage.
$ETH holders believe that Ethereum will grow rapidly over the next two years but are not sure when exactly. Hence, they want to hold $ETH long-term. However, along the way, they might need USD to pay bills. While waiting for the upward price action, their funds remain locked up in their $ETH investments.
To overcome this, the Carbon money market enables $ETH holders to continue holding $ETH; They can simply lend $ETH out while borrowing $USDC for use instead.
3) Interest rate arbitrage
Traders can capitalize on our money market and trade the perpetual funding rate against the borrowing / lending rate to earn a yield.
Selling your assets means closing your position on that particular asset. If you are long on an asset, you would not be entitled to the potential upside value gain. By borrowing, you are able to obtain liquidity (working capital) without selling your assets.
Borrowing tokens (spot) allows you to take short positions (speculate that a token price will go down). By borrowing tokens, you can sell the borrowed tokens on a DEX (e.g. Demex) and buy the token back when its price falls (for less USD). The difference in price less the interest paid will be your profit. You can then return the tokens borrowed and interest accrued accordingly.
The maximum amount you can borrow depends on the value you have deposited and the available liquidity. For example, you can’t borrow an asset if there is not enough liquidity or if your health factor doesn’t allow you to. You can find every collateral available and its specific parameters for borrowing in the protocol safety features section.
The health factor is the numeric representation of the safety of your deposited assets against the borrowed assets and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario. The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds. You can find out more about Health Factor here.