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All loans are overcollateralized, and basically used for leverage: put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins. So the risk is li

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
    - yokem55 5y ago
      To retain the price exposure of the asset worth 200k while avoiding selling or spending it.
    - Qworg 5y ago
      Different tax treatment. Locking up to buy something with the loan doesn't expose you to gains.
    - giantrobot 5y ago
      You gotta pay the upline!
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.

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
  - yokem55 5y ago
    To retain the price exposure of the asset worth 200k while avoiding selling or spending it.
  - Qworg 5y ago
    Different tax treatment. Locking up to buy something with the loan doesn't expose you to gains.
  - giantrobot 5y ago
    You gotta pay the upline!

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.