Coinbase Expands Crypto-Backed Loans, But Risks Loom for Altcoin Investors
American cryptocurrency exchange Coinbase has broadened the scope of its crypto-collateralized loan service, now accepting altcoins as collateral. This move comes amid heightened scrutiny following a recent $170 million collateral liquidation event during a Bitcoin price drop, highlighting the potential risks for investors.
Altcoin Inclusion: A New Era for Coinbase Lending
According to a report by Hanwha Investment Securities analyst Choi Yoon-young, Coinbase now allows users to borrow against Ripple (XRP), Dogecoin (DOGE), Cardano (ADA), and Litecoin (LTC). This expansion aims to attract retail investors and tap into the growing demand for DeFi-style lending products. The service, utilizing the Morpho protocol, allows users to borrow up to $100,000 in the stablecoin USDC against their crypto collateral, available across the US excluding New York State due to stricter regulations.
How Coinbase’s ‘Codamdae’ Works
Coinbase’s lending product, known as ‘Codamdae,’ operates on-chain through the Morpho protocol. So collateral management and liquidations are handled by smart contracts. As of February 21st, there were 18,608 wallets actively using the service, with a cumulative loan volume nearing $1.87 billion (approximately 2.71 trillion Korean Won). The expansion to include altcoins represents a shift from a Bitcoin and Ethereum-centric model.
The Risk of Automated Liquidations
While offering potential profit opportunities, the service carries inherent risks, particularly the threat of automated liquidations. Digital asset-backed loans are overcollateralized, but if the value of the collateral falls below a certain threshold, the position is automatically liquidated. In February, a Bitcoin and Ethereum price crash triggered $170 million in collateral liquidations on Coinbase’s Morpho-linked loans, impacting over 3,300 users.
Coinbase has implemented safety measures, including a buffer to protect against volatility and notifications when collateral nears liquidation thresholds. While, rapid price declines can still lead to forced sales. The newly included altcoins are generally more volatile than Bitcoin or Ethereum, increasing the risk of liquidation.
Coinbase’s Ripple Holdings and Potential Growth
Coinbase currently holds $17.2 billion worth of Ripple on its platform, suggesting significant potential for loan demand based on this asset alone. The move to include altcoins is seen as an effort to expand Coinbase’s revenue model and tap into a broader market.
Navigating the Risks: What Investors Need to Understand
The expansion of Coinbase’s lending service presents both opportunities and challenges. Investors should be aware of the risks associated with automated liquidations, especially when using volatile altcoins as collateral. Understanding the mechanics of overcollateralization and monitoring collateral ratios are crucial for managing risk.
Pro Tip:
Always maintain a comfortable collateralization ratio and be prepared to add more collateral or repay the loan quickly if the market moves against you.
FAQ
Q: What is ‘Codamdae’?
A: ‘Codamdae’ is Coinbase’s crypto-collateralized loan service.
Q: Which altcoins are now accepted as collateral?
A: Ripple (XRP), Dogecoin (DOGE), Cardano (ADA), and Litecoin (LTC).
Q: What is automated liquidation?
A: It’s the automatic sale of your collateral if its value falls below a certain level, triggered by smart contracts.
Q: Is this service available in New York?
A: No, it is not available in New York State due to regulatory requirements.
Q: What is the maximum loan amount?
A: Up to $100,000 in USDC.
Did you know? The DeFi protocol Morpho handles the on-chain operations for Coinbase’s lending service, ensuring transparency and automation.
Stay informed about the latest developments in the crypto lending space. Explore our other articles on DeFi and risk management to make informed investment decisions.
