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I've been in crypto since 2014 and was here for 2017 when all ICOs that did absolutely nothing were being pumped and dumped, so I wrote off ether for a few year

I've been in crypto since 2014 and was here for 2017 when all ICOs that did absolutely nothing were being pumped and dumped, so I wrote off ether for a few years until defi kept creeping up in my news couple times. I think there's still lots of scams out there, but the big projects like Maker, uniswap, compound, etc, have made me change my mind.

bhupy 6y ago
I'm trying to wrap my head around it and I have a genuine question: I see on these DeFi platforms coins that have APY's well in excess of 10%. Who's borrowing at these rates, and why?
- hanniabu 6y ago
  I know many people that are, because if you're savvy you can earn much more than that with the amount you're being loaned.
  - bhupy 6y ago
    But why wouldn't they instead borrow USD? Interest rates are the lowest they've ever been. In other words, if you're really savvy, you can earn even more than "much more than that" by borrowing USD at low interest rates (or Euro at negative interest rates), and then buying crypto and doing whatever you would have done after directly borrowing crypto at the much higher interest rates. Who is choosing to forsake borrowing fiat currency at lower interest rates and then converting to crypto to do profitable things in favor of borrowing crypto directly at (much) higher interest rates, and why?
    - splix 6y ago
      Traditional finance has higher friction. I.e., higher cost to take credit, to operate, in many cases slower, and in general, has much higher entry barrier. With defi you can get a loan for millions of dollars just immediately, maybe for a couple of seconds or milliseconds. Without filling any form asking why you need it. Without even creating any account anywhere except your own machine. It's new "in internet nobody knows you are a dog".
      - bhupy 6y ago
        That makes sense. Then the next logical question is: what if I never get my money back? What if I lend it to a "dog" who then buys highly leveraged calls on GME, only to be unable to pay me back. Do I, the lender, just write it off as a loss? As you suggest, if you can get a loan for millions of dollars just immediately without filling any form asking why you need it or without even creating any account anywhere, then what's stopping me from just taking a bunch of loans in excess of the collateral and just never paying them back? After all, as a borrower, I don't have to worry about any sort of credit rating or rate limiting. As a lender, how do I know that the borrower on the other end isn't running such a scam?
        hanniabu 6y ago
        Then you receive the collateral, which would cover the loan amount.
        bhupy 6y ago
        But the collateral almost never covers the full loan amount...otherwise the borrower wouldn't need to borrow money in first place; they already have it in the form of the collateral. For borrowers that ostensibly need liquidity, it would be impossible for them to put down collateral equivalent to the loan amount, else they wouldn't need liquidity. If you do have access to collateral, why take a loan in the first place? It's just extra steps (and interest) to end up with the same amount of money that you already have. Is the collateral some lower amount? If so, a bad actor could always put down a lower collateral amount than the original loan amount and then never pay back, resulting in the lender losing {original loan amount - collateral} worth of money. How is this fraud prevented? Is the interest rate baked into the collateral? If I'm borrowing on this platform, do I need to put down more money than what I seek to borrow in collateral? Who would ever want to do that? How many lenders actually receive, on the net, 10-20% APY successfully? At least with high yield junk bonds, there are some safeguards built into the system in the form of credit ratings, KYC, and institutional friction (which functions as a rate limiter). How does any of this work in the DeFi world?
    - hanniabu 6y ago
      > But why wouldn't they instead borrow USD? In addition to the sister comment, where else can I find these type of returns in traditional finance? There's tons of places you can find 50%+ interest, even up to 300%.
- rawtxapp 6y ago
  If you find opportunities for arbitrage that return you well above 10%, then it's a drop in the bucket.
  - bhupy 6y ago
    Makes sense in the short run. In the long run, these arbitrage opportunities would naturally fade away as the market settles on yield/interest equilibrium.

bhupy 6y ago

I'm trying to wrap my head around it and I have a genuine question: I see on these DeFi platforms coins that have APY's well in excess of 10%. Who's borrowing at these rates, and why?

hanniabu 6y ago
I know many people that are, because if you're savvy you can earn much more than that with the amount you're being loaned.
- bhupy 6y ago
  But why wouldn't they instead borrow USD? Interest rates are the lowest they've ever been. In other words, if you're really savvy, you can earn even more than "much more than that" by borrowing USD at low interest rates (or Euro at negative interest rates), and then buying crypto and doing whatever you would have done after directly borrowing crypto at the much higher interest rates. Who is choosing to forsake borrowing fiat currency at lower interest rates and then converting to crypto to do profitable things in favor of borrowing crypto directly at (much) higher interest rates, and why?
  - splix 6y ago
    Traditional finance has higher friction. I.e., higher cost to take credit, to operate, in many cases slower, and in general, has much higher entry barrier. With defi you can get a loan for millions of dollars just immediately, maybe for a couple of seconds or milliseconds. Without filling any form asking why you need it. Without even creating any account anywhere except your own machine. It's new "in internet nobody knows you are a dog".
    - bhupy 6y ago
      That makes sense. Then the next logical question is: what if I never get my money back? What if I lend it to a "dog" who then buys highly leveraged calls on GME, only to be unable to pay me back. Do I, the lender, just write it off as a loss? As you suggest, if you can get a loan for millions of dollars just immediately without filling any form asking why you need it or without even creating any account anywhere, then what's stopping me from just taking a bunch of loans in excess of the collateral and just never paying them back? After all, as a borrower, I don't have to worry about any sort of credit rating or rate limiting. As a lender, how do I know that the borrower on the other end isn't running such a scam?
      - hanniabu 6y ago
        Then you receive the collateral, which would cover the loan amount.
        bhupy 6y ago
        But the collateral almost never covers the full loan amount...otherwise the borrower wouldn't need to borrow money in first place; they already have it in the form of the collateral. For borrowers that ostensibly need liquidity, it would be impossible for them to put down collateral equivalent to the loan amount, else they wouldn't need liquidity. If you do have access to collateral, why take a loan in the first place? It's just extra steps (and interest) to end up with the same amount of money that you already have. Is the collateral some lower amount? If so, a bad actor could always put down a lower collateral amount than the original loan amount and then never pay back, resulting in the lender losing {original loan amount - collateral} worth of money. How is this fraud prevented? Is the interest rate baked into the collateral? If I'm borrowing on this platform, do I need to put down more money than what I seek to borrow in collateral? Who would ever want to do that? How many lenders actually receive, on the net, 10-20% APY successfully? At least with high yield junk bonds, there are some safeguards built into the system in the form of credit ratings, KYC, and institutional friction (which functions as a rate limiter). How does any of this work in the DeFi world?
  - hanniabu 6y ago
    > But why wouldn't they instead borrow USD? In addition to the sister comment, where else can I find these type of returns in traditional finance? There's tons of places you can find 50%+ interest, even up to 300%.
rawtxapp 6y ago
If you find opportunities for arbitrage that return you well above 10%, then it's a drop in the bucket.
- bhupy 6y ago
  Makes sense in the short run. In the long run, these arbitrage opportunities would naturally fade away as the market settles on yield/interest equilibrium.