How Is 0% Interest Even Possible? (It's Not That Hard)

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By Connor
Estimated reading: 3mins
Traditional Loan interest

There’s no such thing as 0% interest rates on loans.


They do exist, you just have to think outside of the traditional finance box to conceptualize it. 

Traditional loans have certain barriers which make interest inevitable, when you get rid of these obstacles, zero percent interest loans become possible.

Why Do Traditional Loans Have Interest?

Traditional loans have interest for several reasons:

  • 1. Compensation for Lenders. When you borrow money, you are essentially using someone else's funds. Lenders could be individuals, banks, or other financial institutions. Interest is a way for lenders to be compensated for the use of their money. It's essentially the cost of borrowing.
  • 2. Risk Mitigation. Lending money involves risk. There is a chance that the borrower may not repay the full amount or may default on the loan entirely. Interest helps to compensate lenders for this risk. The higher the risk associated with the borrower or the loan, the higher the interest rate typically is.
  • 3. Opportunity Cost. When lenders provide funds to borrowers, they forgo the opportunity to use that money for other purposes, such as investments or spending. Interest compensates them for this opportunity cost.
  • 4. Administrative Costs. Lending money involves administrative and operational costs for financial institutions, including processing the loan, managing the account, and handling collections if necessary. Interest helps cover these costs.

How Can Liquid Loans Have Zero Percent Interest Loans?

Liquid Loans provides 0% interest lending because the 4 constraints above are completely irrelevant.

  1. Compensation for Lenders. There are no lenders. You lend USDL to yourself by collateralizing your PLS using the Liquid Loans code. Since there is no lender to pay, or no company to enrich, there is no need for interest.
  2. Risk Mitigation. Since there is no lender, there is no risk assumed by the lender. As a result, there is no need for interest. The only risk within the protocol exists with how the user manages their own vault as they approach a risky collateral ratio
  3. Opportunity Cost. Again, since there is no lender, there is no capital being deployed which could be deployed elsewhere. Instead, you lock PLS (and keep price exposure) while minting USDL which you can deploy elsewhere. 
  4. Administrative Costs. The Liquid Loans protocol is simply a piece of code that exists on PulseChain. It is not a bank with a mortgage, property taxes, and a payroll. And it is not a business with a profit motive. Therefore, there is no need to charge interest. 

Why Zero Percent Interest?

Have you been wondering about this too?

Why isn’t there an interest payment which is paid out to the LOAN Stakers?

Afterall, the Loan Staking Pool collects the redemption and borrowing fees of the protocol.

There are no interest payments because Liquid Loans was designed to be more than just a lending service.

When you mint USDL by collateralizing PLS, you are doing two things.

  1. You are removing PLS from hitting the market. Thus, you are supporting the price and longevity of the blockchain.
  2. You are generating a truly-decentralized, overcollateralized, algorithmic stablecoin in USDL.

If the original vision of cryptocurrency is to be achieved, then we need censorship resistant, fully-backed stablecoins which can be used as a risk-off medium of exchange.

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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