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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
by 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 agoSurely the DeFi loan should be a "smart contract" that just locks the asset from transfer until either default or repayment.
- lottin 5y agoYes, 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 agoWhat'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.
- lottin 5y agoWell, that's the point, 1) you need 100% collateral, 2) the collateral needs to be in the form of digital tokens and 3) it needs to be kept in custody by a third party (the "smart contract"). Yes, you can still do useful things despite these limitations, but at the same time be aware that 99% of the borrowing/lending activity that goes on in the real world is not possible with this technology.
- Ekaros 5y agoThis really sounds most like gambling. And not a financial instruments that is very supportive for economy. Like let's say company loaning money to purchase equipment.
- lottin 5y agoYes, these loans can't be used to fund investment or consumption in the real economy. The only use-case of crypto-loans, as far as I know, is making leveraged bets on the prices of crypto-currencies.
- thebean11 5y agoWhy not? One can easily borrow USDC or another stablecoin with crypto collateral, withdraw to USD and use it for non-crypto investments..
- lottin 5y agoBecause if I already have $10,000 to put as collateral, to get a $10,000 loan to buy a $10,000 car, it means I didn't have a need for borrowing funds to begin with. I can go straight to buying the car without borrowing money. Whereas if I need to borrow the funds, I won't be able to get the loan because I don't have the 100% collateral required.
- thebean11 5y ago
- colinmhayes 5y agoThe borrower does keep the collateral in that it's only use to them is the gains it provides. Those gains still belong to the borrower.