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> What do they do if it drops by 90%? You'd still be holding their $100k, on only $20k of collateral. I'm not super knowledgeable here, but I expect such proto
by chucksmash 4y ago
> What do they do if it drops by 90%? You'd still be holding their $100k, on only $20k of collateral.
I'm not super knowledgeable here, but I expect such protocols would tend to only take the top few most liquid tokens like Bitcoin or Ethereum as collateral to somewhat mitigate this issue. Very low liquidity tokens held as collateral could be subject to manipulation to trigger loan liquidations as well.
- woodruffw 4y agoThis doesn’t meaningfully eliminate the problem; it only moves the risk proportions around. Someone is still losing incredible amounts of money in the form of worthless debt should a crash happen here, and it’s not clear what their recourses are.
- chucksmash 4y agoAh, I think I see what you mean now. The ability to liquidate collateral is the the stand-in for both creditworthiness and the mechanism for recouping their principal. They would have no recourse to recover their funds if a crash were so drastic that they could not meaningfully liquidate collateral.