Lombard Credit in DeFi – Borrowing Without Selling

Contents

• Introduction
• The DeFi Version of Lombard Credit
• Full Flow Example (Monthly Cycle)
  • Building a Virtuous Cycle
• Understanding Health Factor (Risk Buffer)
• The Tax Advantage
• Flowchart : The Process
• Simplified Diagrams
• Advanced: The Looping Effect — Leveraged Exposure Without Selling
• Conclusion

Introduction

Lombard credit is a classic concept from traditional finance: you pledge valuable assets (like stocks or bonds) to a bank and borrow cash against them. This lets you access liquidity without selling your investments. In the world of decentralized finance (DeFi), the same principle is now possible—except you remain in full control of your assets, no bank required, and the process is non-custodial, transparent, and global.

DeFi protocols allow you to use your crypto assets as collateral to borrow stablecoins, mirroring the Lombard credit model but with greater flexibility and fewer intermediaries.

The DeFi Version of Lombard Credit

In DeFi, you can use tokens like WBTC (Wrapped Bitcoin) or ETH as collateral to borrow stablecoins such as USDC. This process happens without selling your crypto—meaning you retain exposure to your assets and avoid triggering taxable events that would occur if you sold them.

Here’s how it works:

• Collateralize: Deposit your crypto (e.g., WBTC or ETH) into a lending protocol like AAVE.
• Borrow: Take out a loan in a stablecoin (e.g., USDC or other stablecoin) against your collateral.
• Use Funds: Spend or invest the borrowed stablecoins as you wish.

Because you’re not selling your crypto, but only locking it up as collateral, you don’t realize capital gains. This is a powerful way to access liquidity while staying invested.

Full Flow Example (Monthly Cycle)

Let’s walk through a practical, monthly workflow that enables a fully crypto-native lifestyle using this Lombard cycle:

1. Salary → You receive your salary in fiat (e.g., EUR) to your regular bank account.
2. On-Ramp via Monerium → Use Monerium to mint EURe (a Euro stablecoin) directly into your hot wallet.
3. Swap via Jumper Exchange → Swap EURe for WBTC using Jumper Exchange, and transfer the WBTC to your cold wallet for safekeeping.
4. Supply WBTC on AAVE → Deposit your WBTC as collateral on AAVE, a decentralized lending protocol.
5. Borrow against collateral → Borrow USDC (or other stablecoin) against your WBTC collateral.
6. Top-up Crypto Cards → Use the borrowed stablecoins to top up crypto debit cards like 1inch Card, Gnosis Pay, SolCard, or Cypher Card for everyday spending.
7. Monthly repayment → When your next salary arrives, use it to repay the AAVE loan, freeing up your collateral. Then, repeat the cycle.

By maintaining a healthy collateral buffer (e.g., 200% of your monthly income), you can run this cycle indefinitely with minimal liquidation risk. This enables you to live entirely within the crypto ecosystem, leveraging your assets for liquidity without ever needing to sell.

Building a Virtuous Cycle

Over time, the key to long-term sustainability is maintaining a collateral buffer of at least 200% of your monthly borrowing amount. Your borrowed amount should always remain lower than your monthly on-ramp (salary) — this creates a self-reinforcing loop where every month:

💎 Your collateral grows faster than your debt.

Each new salary injection increases your net position, making your borrowing progressively safer and expanding your overall credit capacity. It’s a form of continuous, natural DCA — you’re not just maintaining your position, you’re strengthening it month after month, without ever selling a single satoshi.

Understanding Health Factor (Risk Buffer)

On AAVE, the Health Factor (HF) measures how safe your position is. A higher HF means more safety; liquidation occurs around HF = 1.0.

A simplified way to reason about it is: HF ≈ (Collateral Value × threshold) / Debt
(We use 70% as an illustration threshold for BTC to keep math simple.)

Example (numbers rounded):

• Collateral: $5,000 in BTC
• Target HF now: 2.0
• Then your debt is roughly: E = (5000 × 0.70) / 2.0 ≈ 1,750 $

If BTC falls, your collateral value drops while the debt stays the same. The HF at different drops looks like:

This table is illustrative (thresholds vary by asset/market). The takeaway: looping or higher borrow lowers your safety buffer, making the HF drop faster when price declines.

The Tax Advantage

One of the major benefits of this approach is tax efficiency. Since you’re borrowing against your crypto rather than selling it, you generally avoid triggering capital gains taxes (check your local regulations for specifics). The key is that your crypto remains collateralized, and as long as you manage repayments and maintain over-collateralization, you can sustainably repeat this cycle.

This makes the Lombard cycle in DeFi not only practical but also highly advantageous for long-term crypto holders who want to spend without incurring unnecessary tax liabilities.

Flowchart : The Process

Simplified Diagrams

On-Ramp Path:

Off-Ramp Path:

Advanced: The Looping Effect — Leveraged Exposure Without Selling

💥 The Looping Effect on Aave, Explained Simply

Imagine you deposit $5,000 of BTC on AAVE.

1️⃣ You borrow $1,500 in USDC against your BTC collateral.
2️⃣ You swap those $1,500 USDC into BTC.
3️⃣ You deposit that new BTC back into AAVE as additional collateral.

You’ve now created a moderate leverage on your BTC position.
You hold about $6,500 worth of BTC in total, but you owe $1,500 in USDC.

⚙️ If BTC goes up

• Your BTC collateral increases in value.
• Your debt stays fixed at $1,500 (in USDC).

👉 You can repay your loan by selling a small portion of your BTC collateral,
and you’ll keep the remaining BTC, representing the profit generated by the price increase — including the part financed by the borrowed funds.

📈 Example:

• You had $6,500 worth of BTC (including $1,500 “borrowed”).
• BTC rises +20%, so your collateral is now worth $7,800.
• You repay your $1,500 debt, leaving you with $6,300 in BTC.

You started with $5,000, and you end up with $6,300 — a +26% gain,
while BTC itself only moved +20%.
That’s the leverage effect in action: your gains are amplified.

⚠️ If BTC goes down The opposite happens:

• Your collateral loses value,
• but your debt stays constant in USDC → your Health Factor drops faster.
  Too much decline = liquidation risk.

💡 In summary Looping means:

• Borrowing against your collateral,
• Reinvesting the borrowed amount into the same asset,
• Creating a self-financed leverage without adding new fiat.

➡️ If the market rises, you earn more than the BTC price increase.
➡️ If it falls, you lose faster and risk liquidation.

It’s a controlled and self-funded leverage, ideal for bullish markets —
as long as you actively monitor your Health Factor.

Conclusion

The DeFi Lombard credit cycle is a real-world, compliant strategy to live entirely on crypto—leveraging your digital assets for liquidity, staying tax-efficient, and maintaining absolute control over your capital. By using protocols like Monerium, AAVE, and crypto cards, you can create a seamless, repeatable flow that avoids unnecessary selling and keeps you fully in the decentralized ecosystem.

As always, responsible collateral management is essential. Maintain a generous over-collateralization buffer to avoid liquidation risks, and keep your repayments on schedule. With sound risk management, this approach offers a powerful, crypto-native way to manage your finances in the modern world.