12 ms·

What I dont understand is how they calculate rates for loans. I dont know much about DeFi and just consider it as scammy as NFTs, but for me a lending rate is a

by xwolfi 5y ago

What I dont understand is how they calculate rates for loans. I dont know much about DeFi and just consider it as scammy as NFTs, but for me a lending rate is always function of a default risk: too high, no loan, high, high rate, low, low rates. I've worked in fintech and am in a bank now and we've always had our proprietary mapping table with field studies of default stats and long attribute lists (age, immigration status, salary, number of other loans, number of past default, other assets and so on), and the key was to either religiously stick to these or take strategic decisions to open the valves if needed (say to fit a quota, we let the younger people in for a while). How is DeFi doing lending rates ? Edit: got it, over collateralized with valuable collateral confiscated rather than promised so not fit for the same purposes as normal consumer loan. You wont pay your daughter's sweet 16 mega party in mexico or your son's wedding in Singapore or your first car in France with a DeFi loan :D So it's not exactly decentralized finance, it's more decentralized leverage, I guess. At least you cant default a DeFi loan, which sounds reassuring on paper.

norswap 5y ago
All loans are overcollateralized, and basically used for leverage: put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins. So the risk is limited as long as the loans can be liquidated in time in case of a price crash. The rates are determined the ratio of all stablecoin liquidity provided vs the amount actually borrowed. Liquidity providers can remove liquidity at any time, and so the smaller the remaining liquidity buffer gets, the higher the fees gets. Most of the rates are dynamic: i.e. the interest rate on your existing loan can increase drastically if there is a liquidity crunch. In practice your interest is charged as though it was extra borrowing and so lowers your liquidiation threshold. On the flip side, the dynamic rate also means that as the liquidity gets thinner, the interest rate paid to liquidity provider gets higher, meaning it incentivizes liquidity deposits when they are most needed.
- bluedevil2k 5y ago
  > put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins Nothing could possibly go wrong with this, right? Tether is found to not have the reserves they claim and it plunges, and the artificial demand for bitcoin disappears and it plunges as well.
  - Osiris 5y ago
    DeFi loans are over-collatoralized usually by 1.5-2x. If you want to borrow $100k, you put up $200k in collateral.
    - anonymousDan 5y ago
      Sorry I don't get it. Why would you lock up 200k in order to borrow 100k? Why not just use part of the 200k you already have?!
      - colinmhayes 5y ago
        To lever gains. Now you can "own" 300k worth of bitcoin gains with only 200k worth of bitcoins. Of course the downside is that loses are levered too.
      - hrhrhrhrhr 5y ago
        If you believe that the value of Bitcoin is going to go up, it makes sense to lock is as a collateral and spend the borrowed fiat instead of selling the Bitcoins.
        majormajor 5y ago
        Is there a part of the system that keeps working even if the value of bitcoin stops (being believed to keep) going up all the time? If ETH or some other new token takes more and more mindshare from btc isn’t that a big inflationary pressure on the crypto ecosystem as a whole? More tokens = less valuable tokens. At some point buy the dip will turn into cash out.
        hrhrhrhrhr 5y ago
        If the value of Bitcoin stops going up, sooner or later your debt grows larger than the amount you were allowed to borrow and your collateral gets liquidated by someone who implemented the fastest liquidator bot. https://docs.aave.com/developers/guides/liquidations https://docs.aave.com/developers/guides/liquidations
- deleted 5y ago
  [deleted]
- beefield 5y ago
  > So the risk is limited as long as the loans can be liquidated in time in case of a price crash. If I may guess, it seems unlikely there are too many folks in DeFi circles who have ever heard acronym LTCM. (TL;DR: A bunch of actual Nobel laureates (no kidding, or at least as much as Nobel price in economics is an actual Nobel) founded a huge and famous hedge fund with a trading strategy assuming they can liquidate their position at market prices. At this point you may guess that it ended tits up and was kind of a mess. Time will tell if DeFi folks were smarter than that.)
  - Ekaros 5y ago
    It really sounds like fun and games until it all comes crashing down... Then again if it's all crypto and everything goes down at once, I suppose there isn't too big issue. Apart from losing some fiat, but they who cares about that in cryptoworld...
  - xur17 5y ago
    Collateral is sold off automatically once they breach some threshold (varies, but it's always > 100%), and there are bots that compete to do this as quickly as possible. This is in no means perfect, but it is quite responsive, and did survive crypto's March 2020 price crash.
    - yokem55 5y ago
      There were some denial of service issues that on Ethereum during the March 2020 crash that caused Maker DAO to have some Zero bid liquidations and the protocol had to mint and sell off some of Maker's token to keep all the issued DAI properly backed. This did not happen again in the crash in May, which was nearly as steep, but the protocols all kept functioning as expected.
makotobestgirl 5y ago
Loans are overcollateralized, so you need to put in the same or more amount of capital that you're loaning out. That may not seem useful at first, but it allows you to have exposure to multiple assets. For example, you may want to use ETH temporarily, but you only have BTC. But you want to keep your BTC investment for the long term. So you're putting up BTC to borrow ETH. You keep your exposure to BTC, but you have liquid ETH. It's the same concept as putting up your house as collateral. You don't want to sell your house just because you need some liquid cash temporarily.
- lottin 5y ago
  > It's the same concept as putting up your house as collateral. The crucial difference is in a mortgage loan the borrower keeps the collateral and gets to use of it, e.g. live in it, while they pay off the loan, whereas in a DeFi "loan" the lender has to keep the collateral the whole time.
  - DarylZero 5y ago
    Surely the DeFi loan should be a "smart contract" that just locks the asset from transfer until either default or repayment.
    - lottin 5y ago
      Yes, the "smart contract" keeps it. The point is the borrower doesn't get to keep the collateral. This makes DeFi loans unsuitable for a large number of purposes.
      - thebean11 5y ago
        What's an example of something you'd want to "do" with your crypto asset while using it as collateral? Obviously you can't spend it, give it away, use it as collateral for another loan etc as that would conflict with the first loan. But you can do other stuff. For example you could covert ETH to one of the many tokens that represent staked ETH (rocketpool rETH for example) and use that as collateral. Now you are have collateral and staking revenue with the same funds.
vmception 5y ago
CeDeFi (Centralized Decentralized Finance, websites like Coinbase, Nexo, Blockfi, Celsius. Registered companies with licenses that will often advertise as being the same as onchain DeFi services) offer fixed rates to customers, while they earn much greater variable rates in DeFi platforms, they pocket the difference. Just like TradFi (traditional finance) lenders we are all familiar with, the spreads are just much bigger right now, as expected in growing economies. DeFi platforms are offering variable rates based on how many farmers and how much value is deposited that is trying to earn the same fixed amount of tokens, and those tokens current exchange rate. They are using present/historical data, as well as current exchange rates. These are not projections. Also do notice that APY, and APR are used interchangeably and inaccurately and not in any uniform way across platforms. Platform developers typically just choose whichever number shows the greater percentage. Some DeFi platforms are just diluting their own token for some time, or indefinitely, and people earn that and hope the exchange rate support the greater supply long enough to convert out. Some DeFi platforms are successful at building a demand model and utility to offset the supply. Other DeFi platforms are doing something monetarily productive that earns the platform money which is distributed to stakers or farmers. Hope that helps. There is no one way to evaluate or dismiss all defi products with a yield, but there are some patterns to look for and to understand why they attract so much capital on deposit so quickly. Much of the capital comes from CeDeFi looking for yield that won't cause them to loose all the customer money.
- edvinbesic 5y ago
  Small nitpick but CeDeFi is a term coined by Binance to make them appear more palatable and competitive. Binance is a centralized network so it's a CeFi foundation with all the controls that come with that, but with a DeFi coat of paint. Coinbase is a centralized exchange (Cex, not a Dex) so it has little to do with DeFi in general.
  - vmception 5y ago
    a) who cares who coined it, it is a classification used by many and quickly conveys the shared concept that matches that classification, which is the overall point of language b) Coinbase is many products. Coinbase Staking is the one that matches what was described above. Don't conflate the front facing CEX for everything they offer. No different than Amazon not being a bookstore, nor just an ecommerce platform. It is many products. The context was solidified amongst several other products with similar offerings. Coinbase's various CEX products have nothing to do with their Staking product (or the Lending one they were going to try, of Vault or several others)
yao420 5y ago
I recommend reading Compounds white paper. They are a big player and have a decentralized protocol which establishes money markets with algorithmically set interest rates based on supply and demand. https://compound.finance/documents/Compound.Whitepaper.pdf https://compound.finance/documents/Compound.Whitepaper.pdf
idiotsecant 5y ago
Borrowing money in exchange for a promise to pay it back isn't really a thing in defi (and I'm not sure it ever could be?) All DeFi i'm aware of is based on borrowing less than the value of some asset you stake to assure your repayment. It's definitely a different thing than most people think of when they think 'loan'

by xwolfi 5y ago

norswap 5y ago

All loans are overcollateralized, and basically used for leverage: put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins. So the risk is limited as long as the loans can be liquidated in time in case of a price crash. The rates are determined the ratio of all stablecoin liquidity provided vs the amount actually borrowed. Liquidity providers can remove liquidity at any time, and so the smaller the remaining liquidity buffer gets, the higher the fees gets. Most of the rates are dynamic: i.e. the interest rate on your existing loan can increase drastically if there is a liquidity crunch. In practice your interest is charged as though it was extra borrowing and so lowers your liquidiation threshold. On the flip side, the dynamic rate also means that as the liquidity gets thinner, the interest rate paid to liquidity provider gets higher, meaning it incentivizes liquidity deposits when they are most needed.

bluedevil2k 5y ago
> put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins Nothing could possibly go wrong with this, right? Tether is found to not have the reserves they claim and it plunges, and the artificial demand for bitcoin disappears and it plunges as well.
- Osiris 5y ago
  DeFi loans are over-collatoralized usually by 1.5-2x. If you want to borrow $100k, you put up $200k in collateral.
  - anonymousDan 5y ago
    Sorry I don't get it. Why would you lock up 200k in order to borrow 100k? Why not just use part of the 200k you already have?!
    - colinmhayes 5y ago
      To lever gains. Now you can "own" 300k worth of bitcoin gains with only 200k worth of bitcoins. Of course the downside is that loses are levered too.
    - hrhrhrhrhr 5y ago
      If you believe that the value of Bitcoin is going to go up, it makes sense to lock is as a collateral and spend the borrowed fiat instead of selling the Bitcoins.
      - majormajor 5y ago
        Is there a part of the system that keeps working even if the value of bitcoin stops (being believed to keep) going up all the time? If ETH or some other new token takes more and more mindshare from btc isn’t that a big inflationary pressure on the crypto ecosystem as a whole? More tokens = less valuable tokens. At some point buy the dip will turn into cash out.
        hrhrhrhrhr 5y ago
        If the value of Bitcoin stops going up, sooner or later your debt grows larger than the amount you were allowed to borrow and your collateral gets liquidated by someone who implemented the fastest liquidator bot. https://docs.aave.com/developers/guides/liquidations https://docs.aave.com/developers/guides/liquidations
deleted 5y ago
[deleted]
beefield 5y ago
> So the risk is limited as long as the loans can be liquidated in time in case of a price crash. If I may guess, it seems unlikely there are too many folks in DeFi circles who have ever heard acronym LTCM. (TL;DR: A bunch of actual Nobel laureates (no kidding, or at least as much as Nobel price in economics is an actual Nobel) founded a huge and famous hedge fund with a trading strategy assuming they can liquidate their position at market prices. At this point you may guess that it ended tits up and was kind of a mess. Time will tell if DeFi folks were smarter than that.)
- Ekaros 5y ago
  It really sounds like fun and games until it all comes crashing down... Then again if it's all crypto and everything goes down at once, I suppose there isn't too big issue. Apart from losing some fiat, but they who cares about that in cryptoworld...
- xur17 5y ago
  Collateral is sold off automatically once they breach some threshold (varies, but it's always > 100%), and there are bots that compete to do this as quickly as possible. This is in no means perfect, but it is quite responsive, and did survive crypto's March 2020 price crash.
  - yokem55 5y ago
    There were some denial of service issues that on Ethereum during the March 2020 crash that caused Maker DAO to have some Zero bid liquidations and the protocol had to mint and sell off some of Maker's token to keep all the issued DAI properly backed. This did not happen again in the crash in May, which was nearly as steep, but the protocols all kept functioning as expected.

makotobestgirl 5y ago

Loans are overcollateralized, so you need to put in the same or more amount of capital that you're loaning out. That may not seem useful at first, but it allows you to have exposure to multiple assets. For example, you may want to use ETH temporarily, but you only have BTC. But you want to keep your BTC investment for the long term. So you're putting up BTC to borrow ETH. You keep your exposure to BTC, but you have liquid ETH. It's the same concept as putting up your house as collateral. You don't want to sell your house just because you need some liquid cash temporarily.

lottin 5y ago
> It's the same concept as putting up your house as collateral. The crucial difference is in a mortgage loan the borrower keeps the collateral and gets to use of it, e.g. live in it, while they pay off the loan, whereas in a DeFi "loan" the lender has to keep the collateral the whole time.
- DarylZero 5y ago
  Surely the DeFi loan should be a "smart contract" that just locks the asset from transfer until either default or repayment.
  - lottin 5y ago
    Yes, the "smart contract" keeps it. The point is the borrower doesn't get to keep the collateral. This makes DeFi loans unsuitable for a large number of purposes.
    - thebean11 5y ago
      What's an example of something you'd want to "do" with your crypto asset while using it as collateral? Obviously you can't spend it, give it away, use it as collateral for another loan etc as that would conflict with the first loan. But you can do other stuff. For example you could covert ETH to one of the many tokens that represent staked ETH (rocketpool rETH for example) and use that as collateral. Now you are have collateral and staking revenue with the same funds.

vmception 5y ago

CeDeFi (Centralized Decentralized Finance, websites like Coinbase, Nexo, Blockfi, Celsius. Registered companies with licenses that will often advertise as being the same as onchain DeFi services) offer fixed rates to customers, while they earn much greater variable rates in DeFi platforms, they pocket the difference. Just like TradFi (traditional finance) lenders we are all familiar with, the spreads are just much bigger right now, as expected in growing economies. DeFi platforms are offering variable rates based on how many farmers and how much value is deposited that is trying to earn the same fixed amount of tokens, and those tokens current exchange rate. They are using present/historical data, as well as current exchange rates. These are not projections. Also do notice that APY, and APR are used interchangeably and inaccurately and not in any uniform way across platforms. Platform developers typically just choose whichever number shows the greater percentage. Some DeFi platforms are just diluting their own token for some time, or indefinitely, and people earn that and hope the exchange rate support the greater supply long enough to convert out. Some DeFi platforms are successful at building a demand model and utility to offset the supply. Other DeFi platforms are doing something monetarily productive that earns the platform money which is distributed to stakers or farmers. Hope that helps. There is no one way to evaluate or dismiss all defi products with a yield, but there are some patterns to look for and to understand why they attract so much capital on deposit so quickly. Much of the capital comes from CeDeFi looking for yield that won't cause them to loose all the customer money.

edvinbesic 5y ago
Small nitpick but CeDeFi is a term coined by Binance to make them appear more palatable and competitive. Binance is a centralized network so it's a CeFi foundation with all the controls that come with that, but with a DeFi coat of paint. Coinbase is a centralized exchange (Cex, not a Dex) so it has little to do with DeFi in general.
- vmception 5y ago
  a) who cares who coined it, it is a classification used by many and quickly conveys the shared concept that matches that classification, which is the overall point of language b) Coinbase is many products. Coinbase Staking is the one that matches what was described above. Don't conflate the front facing CEX for everything they offer. No different than Amazon not being a bookstore, nor just an ecommerce platform. It is many products. The context was solidified amongst several other products with similar offerings. Coinbase's various CEX products have nothing to do with their Staking product (or the Lending one they were going to try, of Vault or several others)

yao420 5y ago

I recommend reading Compounds white paper. They are a big player and have a decentralized protocol which establishes money markets with algorithmically set interest rates based on supply and demand. https://compound.finance/documents/Compound.Whitepaper.pdf https://compound.finance/documents/Compound.Whitepaper.pdf

idiotsecant 5y ago

Borrowing money in exchange for a promise to pay it back isn't really a thing in defi (and I'm not sure it ever could be?) All DeFi i'm aware of is based on borrowing less than the value of some asset you stake to assure your repayment. It's definitely a different thing than most people think of when they think 'loan'