4 ms·

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.
  - lottin 5y ago
    Well, 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 ago
      This 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 ago
        Yes, 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 ago
        Why not? One can easily borrow USDC or another stablecoin with crypto collateral, withdraw to USD and use it for non-crypto investments..
        lottin 5y ago
        Because 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
        Using the BTC as collateral lets you stay long BTC and get the car. You also avoid paying capital gains since you aren’t selling. The positions are fundamentally different. If you take the loan you are long BTC and short dollars. If you sell BTC for the car you have zero of both.
        lottin 5y ago
        Yes, we had already established that. The point is that requiring 100% collateral does not allow the borrower to trade future consumption for present consumption, which is the whole point of borrowing as far as consumer and businesses are concerned. This is why DeFi loans are unsuitable when it comes to funding consumption or productive investment.
        5y ago

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.
- lottin 5y ago
  Well, 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 ago
    This 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 ago
      Yes, 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 ago
        Why not? One can easily borrow USDC or another stablecoin with crypto collateral, withdraw to USD and use it for non-crypto investments..
        lottin 5y ago
        Because 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
        Using the BTC as collateral lets you stay long BTC and get the car. You also avoid paying capital gains since you aren’t selling. The positions are fundamentally different. If you take the loan you are long BTC and short dollars. If you sell BTC for the car you have zero of both.
        lottin 5y ago
        Yes, we had already established that. The point is that requiring 100% collateral does not allow the borrower to trade future consumption for present consumption, which is the whole point of borrowing as far as consumer and businesses are concerned. This is why DeFi loans are unsuitable when it comes to funding consumption or productive investment.
        5y ago