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The defi thing really gets me confused as someone who works with loans and finance. What I have seen in defi is basically a borrower provides 100% collateral fo

The defi thing really gets me confused as someone who works with loans and finance. What I have seen in defi is basically a borrower provides 100% collateral for the privilege of paying interest on it. That’s something no business would ever touch in the real world, unless they thought their “investment” in the collateral would exceed their interest rate. That works for borrowers as long as token prices keep going up, but not if they go down. That is why anyone would put up 100% collateral for a loan of the same amount.. but the thing is people do this even in stable coin which confuses me even further. Am I missing something important?

vmception 5y ago
Mmm yeah you’re missing a lot. These are just collateralized loans that are automated. Nobody here would touch your businesses “in the real world” because it would take like 90 days to get any liquidity with those processes, compared to 15 seconds (1 block). There is nothing mysterious about a collateralized loan with a conservative loan to value ratio. The first thing you got wrong is that most services have a low LTV not 100%. Usually between 25-55%. Businesses in the real world do touch that. The other thing you’re missing is who what and why. These aren't businesses these are basically self-replicating robot toll booths who are doing what lending businesses also try to do: pool liquidity and in some cases reinvest that greater liquidity. When borrowers deposit collateral they are typically passing through a smart contract that then adds their deposit to a liquidity pool that the market can access. It requires confidence in these smart contracts that the collateral will remain available but that confidence is generally there. The market typically taps these liquidity pools for easier trading with lower spreads at larger amounts or for the repo market (flash loans). Lenders are repaid usually in the asset they lent, as well as a project’s token which amplifies yield. The risk isnt contigent on the projects token existing or going up, which I think you missed. For some platforms that is true but that is usually yield farming, but if you think a market need is unfulfilled just launch another version. Typically earning or otherwise having enough of the project’s token allows people to vote on controlling some parameters, such as the interest rates provided or augmented by how much of the project token or the use of which liquidity pools or eligible assets in the system. Back to the borrowers and lenders, yeah they can get and give personal loans for discretionary spending at market provided interest rates even in stablecoins.
xur17 5y ago
You provide 100% collateral (really > 100% collateral) for the privilege of borrowing a different asset. For example, I could deposit ETH and borrow USDC against it to go buy something, or go make trades with. Or, I could deposit USDC and borrow ETH against it. And people do this in traditional markets - it's known as "asset backed lending" or margin trading. Both things that my investment account allow me to do.
webinvest 5y ago
For most of these providers, you earn interest on your collateral too. Example 1) lend USDC for 25% interest on Venus.io. Borrow DOT at 3-4% interest. Stake DOT for 12% interest and collect the difference. Example 2) Lend USDC for 25% at Venus.io. Borrow BUSD for 12% interest. Trade the BUSD for USDC 1:1. Lend that USDC to borrow more BUSD. Repeat until you max out you reserve ratio. Venus is a fork of Compound and MakerDao.

vmception 5y ago

Mmm yeah you’re missing a lot. These are just collateralized loans that are automated. Nobody here would touch your businesses “in the real world” because it would take like 90 days to get any liquidity with those processes, compared to 15 seconds (1 block). There is nothing mysterious about a collateralized loan with a conservative loan to value ratio. The first thing you got wrong is that most services have a low LTV not 100%. Usually between 25-55%. Businesses in the real world do touch that. The other thing you’re missing is who what and why. These aren't businesses these are basically self-replicating robot toll booths who are doing what lending businesses also try to do: pool liquidity and in some cases reinvest that greater liquidity. When borrowers deposit collateral they are typically passing through a smart contract that then adds their deposit to a liquidity pool that the market can access. It requires confidence in these smart contracts that the collateral will remain available but that confidence is generally there. The market typically taps these liquidity pools for easier trading with lower spreads at larger amounts or for the repo market (flash loans). Lenders are repaid usually in the asset they lent, as well as a project’s token which amplifies yield. The risk isnt contigent on the projects token existing or going up, which I think you missed. For some platforms that is true but that is usually yield farming, but if you think a market need is unfulfilled just launch another version. Typically earning or otherwise having enough of the project’s token allows people to vote on controlling some parameters, such as the interest rates provided or augmented by how much of the project token or the use of which liquidity pools or eligible assets in the system. Back to the borrowers and lenders, yeah they can get and give personal loans for discretionary spending at market provided interest rates even in stablecoins.

xur17 5y ago

You provide 100% collateral (really > 100% collateral) for the privilege of borrowing a different asset. For example, I could deposit ETH and borrow USDC against it to go buy something, or go make trades with. Or, I could deposit USDC and borrow ETH against it. And people do this in traditional markets - it's known as "asset backed lending" or margin trading. Both things that my investment account allow me to do.

webinvest 5y ago

For most of these providers, you earn interest on your collateral too. Example 1) lend USDC for 25% interest on Venus.io. Borrow DOT at 3-4% interest. Stake DOT for 12% interest and collect the difference. Example 2) Lend USDC for 25% at Venus.io. Borrow BUSD for 12% interest. Trade the BUSD for USDC 1:1. Lend that USDC to borrow more BUSD. Repeat until you max out you reserve ratio. Venus is a fork of Compound and MakerDao.