Simply put
- Coinbase has expanded its lending products to include various altcoins.
- The new additions are XRP, Dogecoin, Cardano, and Litecoin.
- This product experienced significant liquidations earlier this month.
Coinbase announced on Wednesday that its crypto-backed lending service is growing in the United States, now supporting XRP, Dogecoin, Cardano, and Litecoin.
Customers can borrow up to $100,000 in Circle’s USDC stablecoin by using their holdings as collateral on the decentralized finance protocol Morpho. However, the service is not available in New York.
According to Dune, this move is part of Coinbase’s strategy to enhance the product’s appeal, with loan originations nearing $2 billion. The service initially accepted Bitcoin over a year ago and included Ethereum last November.
XRP, Dogecoin, Cardano, and Litecoin together boasted a market capitalization of $117 billion on Wednesday, a figure that’s still less than half of Ethereum’s total value. Yet, these assets have gained popularity among retail investors lately.
Coinbase is pitching this offering as a means for customers to elevate their wealth in unique ways. The emphasis is on how decentralized finance can support Coinbase’s business model, along with highlighting the intrinsic possibilities offered by those digital assets.
Ethereum and Cardano, notably, allow for staking directly on their networks, enabling users to earn rewards through transaction validation. I think it’s an intriguing approach. But, this doesn’t apply to XRP, Dogecoin, and Litecoin. For many, crypto-backed loans have become a viable method to generate liquidity without selling off their assets.
This could be crucial for Coinbase. They reported having $17.2 billion worth of XRP on their platform as of the end of December.
Theoretically, these crypto-backed loans allow investors to tap into liquidity from valuable assets without triggering immediate capital gains taxes. However, it’s important to note that they might still create a tax liability.
On Morpho, liquidation occurs if a user’s collateral value drops excessively compared to the borrowed amount. If certain thresholds are crossed, the loan is deemed unsound, paving the way for third parties to repay the loan and obtain the collateral at a discount.
Additionally, assets used as collateral in Coinbase’s products undergo wrapping, enabling currencies like XRP to function on Ethereum networks, but converting a cryptocurrency to its wrapped version is viewed as a taxable event in the U.S.
Coinbase has mentioned that caution is necessary with crypto-backed loans due to their inherent liquidation risk and they do not offer tax advice.
As for liquidation, a Coinbase representative addressed concerns following a market dip on February 6. They stated, “To reduce liquidation risk, we will enforce an additional buffer when users take out loans,” adding that users would receive notifications every 30 minutes as they near that threshold.
The exchange is actively considering further ways to help users secure their loans. Around the same period, approximately $170 million in crypto-backed loans faced liquidation over just a week.
