01.12.2023Read Time: 8 minutes

A Guide to Lending and Borrowing With Tokenized Gold

Delve into the benefits of crypto lending compared to traditional finance, and how gold — a real-world asset and symbol of stability — is emerging in the DeFi landscape as a particularly compelling option.

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A Guide to Lending and Borrowing & tGOLD As Collateral

In straightforward terms, lending and borrowing in decentralized finance (DeFi) refer to a system that enables individuals to put their cryptocurrencies and tokens, such as Bitcoin or USDC, to work. They can do this by either lending them to others and earning interest or borrowing additional cryptocurrencies while using their assets as collateral. Let's break it down:

  • Lending: If you have some cryptocurrency that you're not using actively, you can lend it to other users on a DeFi platform. By doing so, you allow others to borrow and use your crypto assets. In return, you earn interest on the amount you've lent out. This interest comes from a small fee paid by the borrowers as compensation for using your funds.
  • Borrowing: If you need to access additional cryptocurrency but don't want to sell your existing assets, you can borrow it from a DeFi platform by providing collateral. For example, you can lock up some of your tGOLD as collateral, and in exchange, you receive the borrowed USDC.

So far, it may sound a bit like a traditional loan system, but there are some noteworthy distinctions:

Advantages of Crypto Lending Over Traditional Finance

As we have suggested, the primary distinction lies at the heart of the term 'DeFi' itself: decentralization. In contrast to traditional financial systems, DeFi operates within a decentralized framework. But there is more to it — here are some compelling advantages of crypto lending:

  • Accessibility and Inclusivity: Unlike traditional banks and financial institutions that often have stringent criteria for borrowers, DeFi platforms are more inclusive. They typically don't require a credit check or extensive paperwork, making financial services accessible to a broader audience, including those without access to traditional banking.
  • Global Reach: DeFi operates on blockchain technology, which is borderless. This means that anyone with an internet connection can participate, transcending geographical limitations. In contrast, traditional finance can be hindered by international regulations and restrictions.
  • 24/7 Availability: DeFi platforms are operational 24/7, allowing users to lend and borrow cryptocurrencies at any time. Traditional financial institutions have operating hours and may not be as readily available for urgent financial needs.
  • Transparency and Security: Blockchain technology ensures transparency and immutability of transactions. Every lending and borrowing action is recorded on the blockchain, reducing the risk of fraud and manipulation compared to traditional financial systems.
  • Decentralization or No Middle Man: DeFi eliminates intermediaries like banks, reducing fees and speeding up transactions. Borrowers and lenders interact directly with smart contracts, which execute predefined rules automatically.
  • Competitive Interest Rates: DeFi platforms often offer competitive interest rates for lenders and more favorable borrowing rates compared to traditional financial institutions. This can be particularly attractive for both savers and borrowers.
  • Ownership and Control: When you lend or borrow on DeFi platforms, you retain ownership and control of your assets. In traditional finance, when you deposit money in a bank, the bank gains control over your funds.
  • Diversification: Crypto lending allows users to diversify their portfolios by earning interest on idle assets. Traditional savings accounts may offer lower returns, limiting opportunities for diversification.


Tokenized Gold as Collateral in DeFi

Now that we've delved into the fundamentals of lending and borrowing and have highlighted its advantages compared to traditional finance, let’s explore how Aurus and Defactor are joining forces to push the boundaries of this financial ecosystem by bringing gold into the scene. Together, these companies are pioneering Lending and Borrowing opportunities by leveraging precious metals within DeFi, starting with tGOLD (TXAU).

The initial phase of this collaboration introduces a beta launch version that allows anyone holding tGOLD to access loans by using it as collateral on the Defactor platform. In essence, this means you can deposit your tokenized gold and, in return, borrow USDC against its value.

Looking ahead, the roadmap includes plans to also enable users to lend USDC, allowing them to earn interest on their assets. This interest will be generated from the fees paid by the borrowers (who will have deposited tGOLD as collateral). However, for now, only the borrowing functionality will be launched.

The Benefits of Borrowing Against tGOLD

Now, you might be wondering why borrowing against gold, or specifically, tGOLD, is a particularly attractive option. Borrowing with tokenized gold holds several compelling advantages that make it a prudent choice in the world of lending and borrowing. Here are some reasons why:

  • Stability: Gold and tGOLD are renowned for their stability and reliability as assets. Their prices tend to change gradually, making them less susceptible to sudden and extreme fluctuations. This stability reduces the risk of unexpected losses for borrowers and helps maintain the value of collateral.
  • Lower Volatility: Unlike assets like Bitcoin, which can experience rapid and unpredictable price movements, gold and tGOLD exhibit lower volatility. This characteristic provides a sense of security for both lenders and borrowers, as they can anticipate smaller price swings over time.
  • Historical Value Preservation: Gold has a long history of preserving its value over time. It has been used as a store of wealth for centuries, making it a trusted asset for collateral. Borrowers can be confident that the value of their collateral is less likely to erode.
  • Reduced Liquidation Risk: Borrowers who use gold or tGOLD as collateral are less likely to face liquidation events. With a more stable and less volatile asset, the margin for error is larger. This means borrowers can weather price fluctuations without their collateral being at immediate risk.
  • Diversification Opportunities: Borrowing against gold or tGOLD allows individuals to diversify their portfolios. It provides an opportunity to access liquidity without having to sell their precious metal holdings. This diversification can be a valuable risk management strategy.
  • Global Acceptance: Gold is universally recognized and accepted as a valuable asset. Its use as collateral transcends geographical boundaries, making it a versatile choice for borrowers worldwide.
  • Inflation Hedge: Gold has historically served as an effective hedge against inflation. Borrowers can benefit from this feature, as their debt burden remains relatively stable in real terms, even in inflationary environments.
  • Long-Term Value Preservation: For borrowers with a long-term perspective, using gold or tGOLD as collateral aligns with their goals of preserving wealth and securing access to capital when needed.

tGOLD Brings Value and Stability to DeFi

Exploring the dynamic world of DeFi lending and borrowing, the collaboration between Aurus and Defactor to integrate tGOLD highlights the potential of leveraging real-world assets. In sum, this partnership not only enhances accessibility and financial inclusivity but also provides a secure and stable alternative within the DeFi ecosystem. Borrowing against tokenized gold emerges as a compelling choice, driven by its stability, historical value preservation, and global acceptance. It's a smart move for those seeking a reliable and secure collateral option in DeFi lending and borrowing, with the added benefit of diversification and inflation hedging.

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