Bitcoin Forum

How does loan collateral work? Let's say I need 1000$ but I have 10,000$ to offer as collateral. Why can't I just use the 10k and not take a 1k loan if I need 1k?

Because you might not want to sell what you are putting forth as collateral.

E.g. You have ETH but need BTC for something. You could sell your ETH for BTC, but since you believe ETH will go up in price, you just use it as collateral for a BTC loan. You'll get your ETH back after you do whatever it is you need to do and you return the BTC to the lender.

In addition to it, I would suggest the OP to read this topic as well for a clear idea about collateral.
https://bitcointalk.org/index.php?topic=577765.0 <=== [EDU] The Rule of "No Collateral, No Loan" - IGNORE AT YOUR OWN RISK!

To have a better understanding of the collateral just think of some a real life examples:

1. You go to a pawn shop and borrow some money and the collateral can be a jewelry (that you don't want to sell).

2. You go to the bank and borrow some money and the collateral can be you house (that you don't want to sell it either).

Here, it's the same thing only that the accepted collateral it's ussually digital goods that the lender can sell to recoup his loss in case of default (most common are stable alt coins). In extreme rare cases are physical goods accepted.

I hope this clarify for you how loan collateral work.

Regards.

Firstly, the rank and the trust level of the person asking for loan usually determine the worth of the collateral but most loan provider usually asking for a collateral which is 110%-120% of the amount you are asking for as loan.

Since usually borrowers offer plenty new coins/tokens, so in practice in most case 110% already is margin call, and collateral should be 130-150%

OP, the best way I can think to say it, is that it allows leverage, and prevents lost opportunity.

As others have said, people may be hodlers, and wish to make a purchase, invest, or gamble, without having to risk losing their tokens that they believe will appreciate in value.

Also, for the most part, the collateral is significantly different from the borrowed funds. Think about real estate. You have a house worth 200,000 USD. You want to borrow 20,000 USD.

You could sell the house, but then you are gambling that the housing market won't spike, etc, etc... So you just get a loan, and provide the house as collateral. Nice and simple. No one thinks a thing of it.


Similarly here. If you have 10,000 in BTC, there isn't a reason to borrow 5,000 in BTC, using the larger amount as collateral. But what if you are holding doge, because you believe it is undervalued? Or --Insert useless token name here--.

Basically, you can keep your existing tokens, and ALSO achieve some degree of liquidity at the same time. :)