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What 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 borrow
by TameAntelope 5y ago
What 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!