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What is a use-case for a "collateralized loan"? Can you finance anything with it?

by lottin 3y ago

whimsicalism 3y ago
On the 'person supplying crypto for stablecoin' side, my opinion is it is not very useful. It allows you to keep crypto exposure while taking your cash out so you can make leveraged bets on crypto going up. On the person 'supplying trust & owned property and getting a stablecoin loan', the other side of some Dai loans, there is real value being created there as they can use cheaper credit to invest in their business. Most of the value goes to people in places like Argentina & Nigeria facing massive inflation who are now able to hold an asset that is backed to the dollar and overcollaterized by crypto, western bonds, & real properties held in the West, which is a better option than pretty much anything they can get in their home country.
- lottin 3y ago
  Sorry, but something doesn't add up. How is "cheaper credit" created by a collateralized loan exactly?
  - whimsicalism 3y ago
    If you put up your home or property as collateral, you can still own the property will getting lower rates. Similar thing with the Dai loans I am describing there.
    - lottin 3y ago
      Yes, but it's not quite the same, because both the collateral and the asset being borrowed belong in the same asset class. It's as if you're renting a car but you have to put up the same car that you're renting (only in a different colour) as collateral. It seems a little pointless. Usually, people want to rent a car because they don't have a car. Likewise, they want to borrow money, because they don't have money.
      - latchkey 3y ago
        > It's as if you're renting a car but you have to put up the same car that you're renting (only in a different colour) as collateral. Huh? That confused the heck out of me. How would you get the same car that you're renting in a different color?
        lottin 3y ago
        The same model. Or a different model, but one that is worth the same in the market.
      - whimsicalism 3y ago
        Wrong for two reasons: 1. There is no restriction that the asset being borrowed and the collateral are in the same asset class - loans can be extended based on whatever criteria the DAO in charge of the Dai votes on. There are a number of loans backed by real property investments in the US, see [0] under RWA. There are a number of loans also backed by large holdings in US bonds. 2. Dai is pegged to the dollar. It can be instantly exchanged with the dollar at a number of onramps. It is not equivalent to holding volatile crypto like ethereum. [0]: daistats.com
        lottin 3y ago
        Okay, these loans that are backed with real world assets are just traditional finance right? We were discussing loans that are granted automatically to anyone without requiring an approval, remember: > How I can take out a collateralized loan, anywhere in the world, without having to ask for approval?
        whimsicalism 3y ago
        Is it traditional finance if it is a backing loan for dollar-pegged assets that can be held by anyone in the developed world (ie. rather than rely on your rapidly decreasing Naira - buy some Dai from a local dealer and you have a stable store of value backed by a global basket of assets)? And if the entities granting the loans are anonymous decentralized collectives? I agree that the overcollateralized loans backed by crypto are less useful unless you want to be investing crypto, which is what I mentioned at the beginning of my comment. I am not the commentator who said the thing about anywhere in the world without approval.
latchkey 3y ago
A complaint about crypto is that it is too volatile to hold. If you can hold AND put at least some of it (up to your comfortable collateralization ratio) to work through lending it out (and borrowing against it), then that can offset the volatility. What you do with the borrowed funds is up to you and there are an endless stream of possibilities. One example is to re-lend out again for additional interest. Interest arbitrage is a way to make your existing capital, work for you. Lend BTC +1%, Borrow ETH -3%, Stake ETH +5%. 2% profit on the ETH and 1% on the BTC. Of course, you could then sell the profits for say, USDC, which you can then lend out again (~4%) or use to pay your bills or drug habit or whatever... At the end of the day, this is what banks do with your funds. But instead of giving them the vast majority of the interest, why not take the interest yourself? Larger picture, I personally see this as the opposite of credit cards, which are a blight on society [0]. People go into debt that they may or may not be able to pay off in the future. Why not reverse that and teach people to not spend more than they can pay off (collateralized loans)? You're punished with liquidations instead of stupid high interest rates. [0] https://www.cnet.com/personal-finance/credit-cards/americans-owe-nearly-1-trillion-in-credit-card-debt/ https://www.cnet.com/personal-finance/credit-cards/americans...
- lottin 3y ago
  If the amount that you borrow is the same amount that you lend, both amounts cancel out. Your net investment position is zero. As I see it, you can't do anything you the borrowed funds because you haven't borrowed any funds. You have the same funds that you had before taking the "loan".
  - latchkey 3y ago
    No. Here is an example: I have 1 BTC, worth $27,000 today. I lend that 1 BTC. I'm getting 1% on it. This is better than the pet rock that it otherwise is. I can then borrow safely 50% of the value of that BTC, so $13,500 worth of goods. Now, I've magically given myself an additional $13,500, that I didn't have before. The price of BTC would have to drop 50% before I'd be liquidated (some of my BTC would be automatically sold to cove the loan). Certainly, BTC can drop 50% in value... but if you are paying attention, you should have more than enough time to pay back that loan or add more BTC. In practice, BTC drops that much slowly over time (like a month or two), not in one go. It also works the other way, if BTC gains in value, you have less to worry about. Let's say I pick to borrow ETH ($1800). I can now borrow 7.5 ETH at 3%. I can then lend that 7.5 ETH at 5%. I can then take those 5% earnings and sell those or even restake them. Money legos. None of this requires permission or credit reports, just transactions on a blockchain. If you use a chain that has far lower fees (like Polygon, Arbitrium, Avalanche), then the fees are a rounding error in the cost of operations.

What is a use-case for a "collateralized loan"? Can you finance anything with it?

by lottin 3y ago

What is a use-case for a "collateralized loan"? Can you finance anything with it?

On the 'person supplying crypto for stablecoin' side, my opinion is it is not very useful. It allows you to keep crypto exposure while taking your cash out so you can make leveraged bets on crypto going up. On the person 'supplying trust & owned property and getting a stablecoin loan', the other side of some Dai loans, there is real value being created there as they can use cheaper credit to invest in their business. Most of the value goes to people in places like Argentina & Nigeria facing massive inflation who are now able to hold an asset that is backed to the dollar and overcollaterized by crypto, western bonds, & real properties held in the West, which is a better option than pretty much anything they can get in their home country.

lottin 3y ago
Sorry, but something doesn't add up. How is "cheaper credit" created by a collateralized loan exactly?
- whimsicalism 3y ago
  If you put up your home or property as collateral, you can still own the property will getting lower rates. Similar thing with the Dai loans I am describing there.
  - lottin 3y ago
    Yes, but it's not quite the same, because both the collateral and the asset being borrowed belong in the same asset class. It's as if you're renting a car but you have to put up the same car that you're renting (only in a different colour) as collateral. It seems a little pointless. Usually, people want to rent a car because they don't have a car. Likewise, they want to borrow money, because they don't have money.
    - latchkey 3y ago
      > It's as if you're renting a car but you have to put up the same car that you're renting (only in a different colour) as collateral. Huh? That confused the heck out of me. How would you get the same car that you're renting in a different color?
      - lottin 3y ago
        The same model. Or a different model, but one that is worth the same in the market.
    - whimsicalism 3y ago
      Wrong for two reasons: 1. There is no restriction that the asset being borrowed and the collateral are in the same asset class - loans can be extended based on whatever criteria the DAO in charge of the Dai votes on. There are a number of loans backed by real property investments in the US, see [0] under RWA. There are a number of loans also backed by large holdings in US bonds. 2. Dai is pegged to the dollar. It can be instantly exchanged with the dollar at a number of onramps. It is not equivalent to holding volatile crypto like ethereum. [0]: daistats.com
      - lottin 3y ago
        Okay, these loans that are backed with real world assets are just traditional finance right? We were discussing loans that are granted automatically to anyone without requiring an approval, remember: > How I can take out a collateralized loan, anywhere in the world, without having to ask for approval?
        whimsicalism 3y ago
        Is it traditional finance if it is a backing loan for dollar-pegged assets that can be held by anyone in the developed world (ie. rather than rely on your rapidly decreasing Naira - buy some Dai from a local dealer and you have a stable store of value backed by a global basket of assets)? And if the entities granting the loans are anonymous decentralized collectives? I agree that the overcollateralized loans backed by crypto are less useful unless you want to be investing crypto, which is what I mentioned at the beginning of my comment. I am not the commentator who said the thing about anywhere in the world without approval.

latchkey 3y ago

A complaint about crypto is that it is too volatile to hold. If you can hold AND put at least some of it (up to your comfortable collateralization ratio) to work through lending it out (and borrowing against it), then that can offset the volatility. What you do with the borrowed funds is up to you and there are an endless stream of possibilities. One example is to re-lend out again for additional interest. Interest arbitrage is a way to make your existing capital, work for you. Lend BTC +1%, Borrow ETH -3%, Stake ETH +5%. 2% profit on the ETH and 1% on the BTC. Of course, you could then sell the profits for say, USDC, which you can then lend out again (~4%) or use to pay your bills or drug habit or whatever... At the end of the day, this is what banks do with your funds. But instead of giving them the vast majority of the interest, why not take the interest yourself? Larger picture, I personally see this as the opposite of credit cards, which are a blight on society [0]. People go into debt that they may or may not be able to pay off in the future. Why not reverse that and teach people to not spend more than they can pay off (collateralized loans)? You're punished with liquidations instead of stupid high interest rates. [0] https://www.cnet.com/personal-finance/credit-cards/americans-owe-nearly-1-trillion-in-credit-card-debt/ https://www.cnet.com/personal-finance/credit-cards/americans...

lottin 3y ago
If the amount that you borrow is the same amount that you lend, both amounts cancel out. Your net investment position is zero. As I see it, you can't do anything you the borrowed funds because you haven't borrowed any funds. You have the same funds that you had before taking the "loan".
- latchkey 3y ago
  No. Here is an example: I have 1 BTC, worth $27,000 today. I lend that 1 BTC. I'm getting 1% on it. This is better than the pet rock that it otherwise is. I can then borrow safely 50% of the value of that BTC, so $13,500 worth of goods. Now, I've magically given myself an additional $13,500, that I didn't have before. The price of BTC would have to drop 50% before I'd be liquidated (some of my BTC would be automatically sold to cove the loan). Certainly, BTC can drop 50% in value... but if you are paying attention, you should have more than enough time to pay back that loan or add more BTC. In practice, BTC drops that much slowly over time (like a month or two), not in one go. It also works the other way, if BTC gains in value, you have less to worry about. Let's say I pick to borrow ETH ($1800). I can now borrow 7.5 ETH at 3%. I can then lend that 7.5 ETH at 5%. I can then take those 5% earnings and sell those or even restake them. Money legos. None of this requires permission or credit reports, just transactions on a blockchain. If you use a chain that has far lower fees (like Polygon, Arbitrium, Avalanche), then the fees are a rounding error in the cost of operations.