Spotlight on Poloniex- The killer feature that makes poloniex stand out-Margin Lending.

In the previous post, we talked about some cool features of Poloniex like easy sign-up, low transaction fees, and optimal security, these are very essential features for any exchange and Poloniex delivers. In this post, I will review another feature of the Poloniex exchange and what makes it special. Meanwhile, if you want to read more about Poloniex features I suggest you visit part 1 of this series, I will leave a link at the end of this post.

Lending
Traditional leading usually involves a lender and a borrower, a lender provides required funds while the borrower returns the borrowed amount with interest. That is exactly what happens on the Poloniex lending platform. Poloniex lending is a way to earn passive income on your funds without actively needing to trade. All you have to do is to select the assets you are willing to lend out and how much you will charge the borrowers.

Poloniex assures a secure Peer to peer lending service that connects the borrowers and the lenders, where they delegate funds and receive interest on their borrowed asset. This feature is especially convenient for traders with little or no experience in crypto trading, with Poloniex lending service they can earn returns on their investments(Borrowed assets) without placing a single buy or sell order.

Understanding how the whole lending service of Poloniex is based on two basic concepts that shape the whole program, they are:

• Margin trading and Poloniex lending.
• Shared Risk between lenders by forming a lending pool.

Margin trading
Margin trading simply means trading with borrowed funds tied to a contract to pay a stipulated amount of interest over the course of the loan. Margin traders are usually referred to as borrowers, they borrow funds in a peer to peer fashion on Poloniex from active lenders and agree to pay interest by the end of the transaction. Before a margin trader can borrow from a lender, the borrower is required to have a balance which will be held as collateral, and in a situation, the trade goes south the borrower's collateral will be transferred to the lender.

Soon literally margin trading won't exist without the lenders and the borrowers who trade with borrowed money. Margin trading helps to amplify customers' profits and losses. To illustrate how the whole Maring lending process works let's consider this example:

• A crypto margin trader wants to buy 1,000,000TRX tokens because he believes the price of the asset will increase in price over the next few weeks probably because of huge news on the air, he has only a fraction of BTC which cannot fetch him the amount he wants to purchase.

• Using P2P, he was able to locate a lender who is willing to lend him the bitcoin equivalent of TRX so he could make the purchase with an interest rate of 0.25% over 2 weeks period. This margin trader accepts the bid and stakes his balance as collateral.

• After 2 weeks, this margin trader makes a significant profit over the trade, he returns the borrowed fund+0.25% interest to the lender. This marks the end of the transaction and the traders collateral is returned to him.

Note-If the combined value of the margin traders position and collateral drop too close to the value of their loan, the traders collateral will be liquidated to return principle to the margin lending pool.

Lending pool for shared risk
A lending pool refers to a group of lenders who actively lend their funds out for margin traders who need these funds to open and keep their positions open. A single margin trader could actually borrow funds from different lenders over the course of his preferred position. To understand better let's use the diagram below.

With reference to the diagram, a margin trader Micheal wants to open a long position on TRX/BTC and in need of 100BTC to open this position. Another customer, peace, has 50 BTC that she’s lending at an interest rate of 0.25% over the course of a week. Micheal doesn’t know peace and never will, but his loan demand and her loan offer match, and thus a contract is created.

However, Micheal is still in dire need of an extra 50BTC, he decides to wait the week out, at the expiration of the initial loan, Micheals position is matched up with new loan offers. Poloniex automatically matches loan requests between lenders and borrowers and Michael is able to find another lender who is willing to lend 100BTC at a rate of 0.2% interest over a time limit of 3 weeks. After the expiration of the contract, if Micheal is still interested he could still make contact with other lenders or make a repeat from the previous lender.

Back to the diagram above, we can see this particular trader has ties with different lenders, which means they’re sharing risk. In most instances, lenders will be paid in full because Poloniex requires borrowers to put up collateral. If the market goes the opposite way of a borrower’s margin trade, their position will be force liquidated and their collateral will be transferred to pay the lender

How to lend on Poloniex
You can become a margin lender on Poloniex too, you could follow these easy steps if you wish to learn how to create a loan contract. (Poloniex takes a fee of 15% from the interest you earn, so be sure to consider that when you place your offers. Once a loan has been contracted it cannot be canceled, however, a lender can turn off the auto-renew function to stop the loan from reactivating automatically after the end of the current contract.

Lending page on Poloniex
Steps to lending on Poloniex-

• First select the coin you wish to lend. In the case of the screenshot above, the lending asset is BTC.
• After selecting the asset you select your rate, the rate here refers to the daily interest rate you are offering your funds at.
• After the rates are the next pice is to input the amount of fund or in this case the amount of BTC you are putting up for borrow.
• The duration is the next step, here you specify how many days you wish the contract to stay open.
• If you are interested in making your asset up for borrow at with the same parameter, you check the box.
• The last step is to offer our loan.

If you wish to monitor your active loans, this is the tab for you.

Important Note-Lending to third parties for use in margin trading cryptocurrencies is risky. You may realize significant gains or losses and should be well-prepared before you begin lending. Repayment risks include the inability of borrowers to liquidate positions in volatile markets and owning assets beyond what is held or available as collateral. As a result, you may suffer significant losses if your principal, interest, or both are not paid in full. Please visit our Help Center to learn more about the risks of lending.

All the images used in this post were edited from the Poloniex website and cryptonews.com