4 ms·
Yeah, but the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral. Othe
by lottin 5y ago
Yeah, but the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral. Otherwise, there's no financing going on. It's simply a bet on the relative value of the principal vs the collateral. Calling this "a loan" is misleading.
- pdonis 5y ago> the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral Um, what? If I take out a mortgage to buy a house, the loan amount is not going to be larger than the value of the collateral (the house). If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car). What kind of loan are you thinking of?
- throwawaygh 5y ago> If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car). Pray tell of these new cars whose value does not plummet the moment they are driven off the lot.
- pdonis 5y agoWhich is why car loan providers usually require a substantial down payment so the loan is not underwater. (And why home mortgage providers usually require a LTV well under 100 percent--and make you pay mortgage insurance even then unless the LTV is even lower.)
- throwawaygh 5y agoWhat the hell are you taking about? I have never made a down payment for a car and have never paid interest on a car loan. Ever. And I’ve purchased many cars. E: woah! .06 seconds to the first downvote to a Dow thread comment on a two day old post! I’m out.
- plorkyeran 5y agoCurrently several year-old cars are selling for nearly as much as brand-new cars. Even before the current car shortage, repossessed zero-money-down cars were commonly resold at basically the same price as the first sale.
- throwawaygh 5y agoCurrently. Which is mostly notable because it is not normal.
- lottin 5y agoA car or a house being used as collateral are kept by the borrower at their disposal. This means the borrower can benefit from the collateral asset, e.g. by using it or living in it, while the debt still hasn't been paid off. In these cases a fully colletarelised loan can make sense. But this is not the kind of collateral that we're talking about here. We're talking about collateral that is held by the lender in a margin account, or "locked" (in defi parlance), until the debt is paid off, which is the only kind of collateral that can be used in "decentralised finance", because the other type requires a contract (not a smart contract, an actual, legal contract) and the ability to litigate.
- TameAntelope 5y agoWhat happens is someone takes a loan out with their BTC as collateral, the BTC grows, they earn more than the interest on the loan with the money they've borrowed, and make a lot of money chaining these together over and over again. Vastly oversimplified (and possibly wrong), but if you want to know more, do some searching for "yield farming". The point is that they want to keep their BTC because they think it's going to go up, so they take out a loan with their BTC as collateral rather than directly spend their BTC.
- lottin 5y agoIf you take a loan in BTC and post the same amount of BTC as collateral, the payoff from such a "loan" is the return on BTC during the holding period minus the rate of interest charged times the principal (or collateral, since it's the same amount). In finance, this called a "swap", and in a swap the principal is not actually exchanged because it's inconsequential, it's only used to calculate the amounts due. In short, what you describe is not loan, but a swap, which is a different kind of financial product.
- TameAntelope 5y agoIf you know all that, I think you'll probably understand how yield farming works better than I!