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I think the primary reason interest rates are high in crypto lending right now (also on USD stablecoins) is leveraged speculation - people using crypto as colla

I think the primary reason interest rates are high in crypto lending right now (also on USD stablecoins) is leveraged speculation - people using crypto as collateral to leverage their crypto positions higher (and/or yield farm) and are prepared to pay a relatively high interest rate for it (~10% on stablecoins) because the expected gains are a fair bit higher. I don’t expect this will last forever

ArtTimeInvestor 6y ago
You say that one can create leverage by borrowing? How does that work? Is it a contract like "You borrow me 1 ETH and I will pay back 1.1 ETH in a year. Except when X happens, then I will pay back 2 ETH"? If so, what is X?
- runeks 6y ago
  The leverage is speculation using borrowed money. See: https://www.blueleaf.com/articles/how-leverage-works-in-investments/ https://www.blueleaf.com/articles/how-leverage-works-in-inve....
  - ArtTimeInvestor 6y ago
    That does not answer my question: How a smart contract can implement lending in a way that both parties are satisfied: - The lender gets their money back plus interest. - The borrower makes a profit if the price of the borrowed currency goes up.
    - cryptonautics 6y ago
      Majority of the lending platforms to date are centralized and custodial solutions
- dharma1 6y ago
  Check out Aave or Compound. You basically use your crypto as collateral, and do whatever you want with the borrowed money. If you want to take the borrowed money and get even more (leveraged) exposure to crypto, you can. You don’t pay back more than the borrowed capital plus interest. https://docs.aave.com/faq/borrowing https://docs.aave.com/faq/borrowing
orky56 6y ago
Anecdotally many crypto holders prefer to not liquidate their crypto positions but instead take out loans via BlockFi to purchase hard assets like real estate. With cash in hand and now a property, they can get a cash out refi and the crypto loan is not a taxable event since the crypto was just collateral.
- ArtTimeInvestor 6y ago
  Like this? 0: Holder has ETH 1: Holder borrows Tether, provieds ETH as collateral 2: Holder uses Tether to buy a house 3: Holder borrows Dollar, provides house as collateral 4: Holder buys Tether with Dollar 5: Holder pays back Tether, gets back ETH. 6: Holder now has ETH + House + Dollar Dept If so, why couldn't they lend the dollars to buy the house in the first place? The bank which lends the dollars certainly could make a contract that the dollars only can be used to buy the house?
  - kristjansson 6y ago
    Rates are lower on margin loan, and they’re easier to get compared to a proper mortgage (assuming, you know, you have value assets to borrow against)
    - ArtTimeInvestor 6y ago
      You say a bank loans money to someone who owns a certain house, but not to someone who uses the money to buy the exact same house?
    - orky56 6y ago
      Rates might be lower but they're not usually fixed. They're easier to get assuming your liquidity is in equities versus crypto or even a stable income. There's a reason mortgage financing is still more prevalent than margin loans despite what you've stated which are inherent benefits.
  - orky56 6y ago
    Real estate financing is primarily done by lenders with very traditional underwriting practices that don't factor in crypto or avoid it entirely. Even HNI/private banking doesn't consider crypto part of a liquid portfolio. You can go to Interactive Brokers and get a 1.x% rate with 2x (margin) or 5x (portfolio margin) but that's off non-crypto. To get that same leverage with crypto, you can put in a down payment for real estate (20% down) in 5 properties for 5x leverage. BlockFi/Tether etc. make that liquidity possible without liquidation. Feel free to DM me for more conversation on this topic.

ArtTimeInvestor 6y ago

You say that one can create leverage by borrowing? How does that work? Is it a contract like "You borrow me 1 ETH and I will pay back 1.1 ETH in a year. Except when X happens, then I will pay back 2 ETH"? If so, what is X?

runeks 6y ago
The leverage is speculation using borrowed money. See: https://www.blueleaf.com/articles/how-leverage-works-in-investments/ https://www.blueleaf.com/articles/how-leverage-works-in-inve....
- ArtTimeInvestor 6y ago
  That does not answer my question: How a smart contract can implement lending in a way that both parties are satisfied: - The lender gets their money back plus interest. - The borrower makes a profit if the price of the borrowed currency goes up.
  - cryptonautics 6y ago
    Majority of the lending platforms to date are centralized and custodial solutions
dharma1 6y ago
Check out Aave or Compound. You basically use your crypto as collateral, and do whatever you want with the borrowed money. If you want to take the borrowed money and get even more (leveraged) exposure to crypto, you can. You don’t pay back more than the borrowed capital plus interest. https://docs.aave.com/faq/borrowing https://docs.aave.com/faq/borrowing

orky56 6y ago

Anecdotally many crypto holders prefer to not liquidate their crypto positions but instead take out loans via BlockFi to purchase hard assets like real estate. With cash in hand and now a property, they can get a cash out refi and the crypto loan is not a taxable event since the crypto was just collateral.

ArtTimeInvestor 6y ago
Like this? 0: Holder has ETH 1: Holder borrows Tether, provieds ETH as collateral 2: Holder uses Tether to buy a house 3: Holder borrows Dollar, provides house as collateral 4: Holder buys Tether with Dollar 5: Holder pays back Tether, gets back ETH. 6: Holder now has ETH + House + Dollar Dept If so, why couldn't they lend the dollars to buy the house in the first place? The bank which lends the dollars certainly could make a contract that the dollars only can be used to buy the house?
- kristjansson 6y ago
  Rates are lower on margin loan, and they’re easier to get compared to a proper mortgage (assuming, you know, you have value assets to borrow against)
  - ArtTimeInvestor 6y ago
    You say a bank loans money to someone who owns a certain house, but not to someone who uses the money to buy the exact same house?
  - orky56 6y ago
    Rates might be lower but they're not usually fixed. They're easier to get assuming your liquidity is in equities versus crypto or even a stable income. There's a reason mortgage financing is still more prevalent than margin loans despite what you've stated which are inherent benefits.
- orky56 6y ago
  Real estate financing is primarily done by lenders with very traditional underwriting practices that don't factor in crypto or avoid it entirely. Even HNI/private banking doesn't consider crypto part of a liquid portfolio. You can go to Interactive Brokers and get a 1.x% rate with 2x (margin) or 5x (portfolio margin) but that's off non-crypto. To get that same leverage with crypto, you can put in a down payment for real estate (20% down) in 5 properties for 5x leverage. BlockFi/Tether etc. make that liquidity possible without liquidation. Feel free to DM me for more conversation on this topic.