Bitcoin Forum

Let's say i have 1000 USDC

Step 1 i deposit it ( gas fee is taken + approve fee i think )
Step 2 i set it as collateral ( gas fee is taken )
Step 3 now i want to borrow 700 DAI ( APY 12.82% ),i click on it
Step 4 approve ( gas fee is taken )
Step 5 Around 650 DAI is sent to my address ... 50 usd lost in fees

What's the catch ? I just lost money... How can you make money from taking this type of loan ?

Realistically, you can't. It's why the rate for borrowing usd derivatives is so high.

If I use 10eth to take out a loan of $8000 then I can go on to use that eth as I wish or use the money and know that I only need to pay back the $8000+onterest once the eth grows in value. So you might end up with eth at $2400 for example and you'd pay maybe $10000 to get $24000.

That does not make sense ...

Scenario 1
==========
1.10 eth 12288 usd initial (1228 usd )
                                                                                        ----> If eth grows to        2400 usd ---> my eth is worth 24000 usd +10000 usd as i got to repay loan ( 10000 usd ) = left with 24000 usd - 2000 usd = 22000 -12288 = + 9712 usd
2.set 10 eth as collateral i get 8000 usd at 11.37% APY
                                                                                        ----> if eth goes down to 500 usd  ----> my eth is worth 5000 usd ,no repayment in this case but i lose 4288 do to fact i could have sold it at 12288 usd  = left with 8000 usd

Scenario 2
==========                                            ----> if eth grows to        2400 ---> + 11712 usd
I hold it today value 12288 usd

                                                                 ----> if eth goes down to 500 ----> - 7288 usd

Ahhh hedging :)

But if eth goes to 0 so will all tokens ...

Are you expecting free money?

If the value drops by 1/3 from your crypto to collateral asset, your collateral is sold on a dex afaik too.

Earn .... from ... loans ...
Once again
 Earn .... from ... borrowing money
You get it? No where in the world you will be able to earn on borrowing money from other person. Its the person you get a loan is earning on you ... No matter what you loan and when and how the value of this asset is changing. You always have to pay what you borrowed + fees. Whats the point of collateralized loans than? Just like in real world. Its all the usages you can have form loan. You need a car? You loan money from bank with your hose as a collateral. You earned on this? No, but you have a car that you can use. You borrowed USDT using ETH as collateral? You have now USDT that you can use to buy other crypto (leverage your portfolio) You borrowed BNB using ETH? You can now use it for lauchpools, lauchpads etc. You want to use product of company that requires you to own a token for premium account but you don't want to be exposed on currency risks? You borrow it for USDC.

So what's the point of collateral loan then ? If i can't use it for hedging ...

No, there's no money earned. Only money burned.

What is the point in having an amount of stable coin used as collateral for taking a smaller amount of loan instead of just converting it to fiat or whatever token? I don't understand the wisdom behind it, if there's any.

I understand when people would use Bitcoin or certain altcoins as collateral to take loans in fiat. Perhaps they do not want to convert their crypto holdings into fiat and spend it because their cryptos' prices might rise soon. So instead of converting and spending them, they'd rather use it as collateral for a loan. But a stable coin?

That's the cost of borrowing money and there's no way for you to make money through that way so spend the money you'll borrow very well. Collateralized Loans will be use for their protection I guess, look for other great offers I'm sure there's a few where you can save a lot from the fees.

You are right. It makes no sense if you are just trying to make money by using some sort of "loan facility". The collateralized loans are being used quite a lot on major DeFi platforms. The traders who have significant crypto holdings, tend to hold several of these coins. For them a few hundred thousand worth of crypto in a coin which is trading sideways is lost opportunity cost.

So they will take a collateralized loan, borrowing a stablecoin which can then be used for riskier investments and hopefully earn back better returns compared to what they pay as interest. The ETH fee costs that you quote don't remain such a big issue when you are moving around 100K. That is why, I keep repeating that DeFi in its current form is really not for the small guy, no matter what is being said.

There are teams that are working to find a solution to this pretty hard problem. Its an evolving scenario for the time being.

OP is asking about the point of putting your crypto as a collateral and getting a crypto loan,not about earning from crypto loans.
It's way easier to just sell your coins,instead of putting them as a collateral and applying for a loan that you will have to repay.
The only point of collateral loans is something I call "financial leverage".You just get loans to buy more crypto and if the crypto prices go up,you get bigger profits.
Financial leverage has little to do with hedging I guess.
 

This type of loan is only profitable for companies that give you this loan, thats simple

I agree that in essence it is. No company wants to lose out on lending money back without interest and not making a deduction. This becomes an obligation in the economic lending management system.

I think its only profitable as a business loan. I'll try to give an example of a common way someone might use this.

• $650 DAI is used to purchase a lawn mower.
• Lawns are mowed on weekends at a cost of $35
• 2 lawns mowed per week, times 52 weeks in a year equals 104 mowings
• 104 mowings times $35 per lawn equals $3640

It can work as start up capital to start a business that earns more money.

...

Here is another example which might be more relatable.

• $650 DAI used to purchase a twitch capable gaming rig
• Stream on twitch a few days a week to try and make back the loan $$ with profit

But its collateralized loans man. Its not like you dont have money so you take a loan. Its like you have money but you need different type of money that you don't want to take currency risk from owning one (or not owning collateralized one).


Sure about it?

You're completely right, but this is why most collateralised loans aren't worth it unless they are

a) Very long term with a sizable amount of interest to the lender and
b) Beneficial to the borrower in the sense that it allows them to trade on margin/derive tax benefits.

For instance, a person why speculates on BTC going up might use their BTC as collateral in a USD-denominated loan. He can then use the USD loan to purchase more BTCs - and if his bet pays off, i.e., BTC prices indeed rally, then the loan size will actually shrink in terms of BTC and thus turning a profit.

Or, consider scenario two where the individual may need short term financial relief but don't want to give up their BTC long/pay CGT on realised profits. Taking out a collateralized loan doesn't incur CGT the same way disposal of assets do in most jurisdictions, which means that people may prefer this venue even if interest/fees are relatively high.

It only makes sense for speculation, namely crypto vs. USD speculation.

Let's say you're bullish on ETH, and want exposure to its upside. But you also need to raise capital. You could solve both problems by using your ETH as collateral for a USD-pegged loan. After ETH rises in value, the margin requirements on the loan will be lowered. Then you can sell your gains and pay the loan off.

It's essentially a form of margin trading. If you're wrong and the market moves against you, your collateral could be liquidated.

Loans normally require collateral. Proof of income, co-signer, etc.

The $1,000 collateral is returned at the end, when the loan is paid off?

Its not a straight trade $1,000 for $600.

Its more like staking $1,000 to earn $1,600 long term. (Albeit with low efficiency and high fees)

Might that be a fair description?   :)

Completly wrong.

"Loans normally require collateral. Proof of income, co-signer, etc."

Loans normally require collateral .. true ... but in real world no one is taking a $$$ loan giving euro as collateral. People are giving hard to cash out things that they still need to use like houses as collateral and use $$$ to buy something else. Here we are talking about cash loan for cash collateral.

"Its more like staking $1,000 to earn $1,600 long term. (Albeit with low efficiency and high fees)"

??


This type of loans are being taken only in 2 reasons. When you need token xxx (to use it on platform or to buy something else) and you don't want to be exposed to currency risk of this token or you don't want to be exposed on currency risk resulting from not having token that you used as collateral or to leverage your holdings (and for some reason you are scared of leveraged tokens, margin trading, futures).

I think the main point here is to provide security for the lender. The question would also be if you would be able to get a loan if there was no collateral behind it. Also we need to take into consideration what the same transaction would cost with a bank. A bank will never give out a loan as collateral. So if you would take out the money from a bank, there would likely be some form security the bank asks for.

DeFi on Eth is completely broken now. As you said you will lose lots of money in fees only to get your loan. If you are not someone who can make money via those sketchy flash loans there's no point using lending/borrowing via eth platforms right now.
Also, as others have written here, collateralized loans during these heavy market weather conditions are simply crazy.

On the surface, I don't see a massive difference between home owners taking out loans, using their house as collateral. And using cash or crypto as collateral. Liquidity is the main difference, obviously. There is collateral with typical fiat loans, its only structured differently.

Another idea for how this could work.

Crypto used as collateral in a loan may not be as taxable an asset, as crypto held in typical capital gains scenarios. Your $1,000 in collateral could become free from taxation?

I would guess there is a loophole or angle somewhere that could make this worthwhile from a financial perspective. The only question is where.

The main difference is an underwater mortgage won't, by itself, cause foreclosure. As long as you make your payments on time, you can retain your equity position. Defi loans are much tougher on borrowers. If they can't add more collateral out of pocket during market declines, they risk liquidation.

Both examples expose you to market risk, but Defi loans are closer to margin trading, both in terms of equity volatility and liquidation risk.


Yes, good point. That is assuming your collateral isn't liquidated, and that you're repaid with your original collateral and not another token:

https://i.imgur.com/nlSXESB.png

https://tokentax.co/guides/defi-crypto-tax/

usdc is stable coin same as usdt ? so thats 1k dollars , why not convert it to fiat instead of depositing it as colateral to borrow money ? in short , dont borrow money when you still have money because that just doesnt make sense in my own honest opinion .

i only borrow money when i dont have anything in me and as a borrower i will agree on any terms that a lender require but if i dont like the first few offers i saw , i will look for more better offers . in which platform was that op ? that looks like an abuse of fee , thats too much

I think that there is no material benefit from loans, I mean that you borrow when you do not have enough money to buy something but you have the guarantee. The guarantee may be a real estate, a car, or a friend’s guarantee. In the end, you buy what you want and then after that you have to return the loan + fees, this can be a single payment or in installments.
This is similar to loans in real life, so you cannot profit from the loan, all you can gain is speed up getting something that you cannot buy with the capital that you have, but in the end you are a loser because you will pay the loan + fees.

Taking out loans which have crazy LTVs as we speak it's not a good idea.
https://www.investopedia.com/terms/l/loantovalue.asp
Bitcoin and other cryptocurrencies have wild price oscillations and I would probably never rely on a collateralized loan that stands on these shaky foundations. There are some market conditions in which you could be lucky but then it's like gambling out money.
If you would have taken a loan in March 2020 with 1 btc that would have repaid what you have asked and more; while if you opened it at $42000, today you might have a big problem.

The only benefit you can get for getting loan is it will relieve your worries for  short period of time, remember taking loan is quite relief to us especially when we need an emergency money for certain use. If we talk about getting benefit on it in terms of profit well no if you spend it on nonsense thing, but if we take a loan for something good like using it for good profitable business and other things well maybe even if you collateralized your car,house or any valuable asset still this is a good choice to be made since those can be called as healthy loan.

With the collateralized loans we're providing security with some form of collateral. Loans are always high risk involved, when it comes to cryptocurrency the risk is even high. This is all because of the high Volatility. Whenever you get loans in cryptocurrency you'll receive in terms of USDT or against any of the stablecoin.

You get a loan of $2000 when the price of an ethereum is $1000 and now what you have is high. Same if the price of ethereum has gone down, you're supposed to pay more than what you've got. Apart from this you need to pay the interest. In such a way loans in terms of cryptocurrency is profiting as well as have high risk.

Not everyone is born equal, you won’t take the loan, but there is desperate enough people who would fall for that, you know time is very bad, people would need money to buy food, some people are dealing with buy food or save money everyday, whether they die from poverty or they buy food with loan, you see this is how credit card flourish and charging extreme rates. Go on to Twitter, you see plenty of desperate people taking loans.

On the investment side of things you are right, if you are going to make an investment there is absolutely nothing different at all, it is basically the same thing. However if you want to buy a house, you can't get a crypto loan because .. well you have to pay a collateral and get money which will not get you to a house.

In real world you have a salary, and you show your salary as a proof that you will pay it back, and you get let's say 100k loan and buy a house and pay your mortgage with your income without paying anything at all, you are out of zero amount from the start, you just pay it monthly, you can't do that in the crypto world with a crypto collateral.

However if you want to invest, this is about the same in fact I have seen multiple business loans the same way, there was a constructor who wanted to built a home, he put 3 million dollars into bank account, took out 9 million dollars loan, spent that 9 million dollars without touching his 3, built those big buildings and paid the loan back. Same stuff here as well.

The point of collateral is for hedging, that's why money lenders required to have a strategy to avoid losses, from assessing a guarantee, a time limit, to the risks that may arise.
A stable coin such as USDC may be one of adequate collateral for the lender due to the value relatively stable compared to bitcoin and altcoins. Then, what is the problem? collateral is a must as a legal bond between both parties.
Nevertheless, take a loan probably not a good idea, why not exchange usdc into bitcoin or eth directly without having to burn the money for paying fees?
if the value of eth or btc increases, no need to pay the interest as well, you can take 100% profit, or vice versa.

There is no doubt the gas  fee is making innovations for Ethereum Dapps o stall, but you say all these because of the amount involved in the transaction, assuming you are well capitalised this won't be an issue for you, I have paid $20 for $100 transaction before that was when I believe Ethereum will likely self destruct if it can't solve it scaling issue this year because we now have some promising L1 with better transaction speed

In most cases better transaction speed = lower decentrealization. Its impossible to cheat math.

I think that when it will become a real deal devs will impement second, semi-centralized layer that will offload main network immedialty. You will have an option to go on main chain for 10$ or on side-chain for 0.1$. With 100$ transaction you will chose semi-centralized option with 10 000$ you will go with main, more secured, decenteralized chain.

The only reason it's not making sense now, at least personally, is because of the ridiculous gas fees of Ethereum. It sometimes even outweighs the price of what you're cashing out. In paper, collateralized loans work well, you take a loan, you use the loaned money for trading or to gain profit basically, you pay the capital and keep your profits. Until gas fees came.

It is actually useless when you have stable coins as collateral, I kind of agree on that. But when you have a coin which you believe will see a hike in the prices soon and hence you don't want to sell them that is where these loans help a lot. I will try and explain with an example.

- You have 10k TRX and you need a loan of $100.
- Now you have a feeling that TRX might jump from 3 cents to 10 cents in the next couple of weeks.
- You can just put your TRX as collateral and ask for loan
- Once you repay the loan you get back your coins in TRX so if the value increases you gained profit while still having your loan request completed.

You can do the same on Binance too if I am not mistaken as they allow you to borrow money, not exactly how sure how it works but I read somewhere about it.

Collateral is an item of value used to secure a loan. Collateral minimizes the risk for lenders. If a borrower defaults on the loan, the lender can seize the collateral and sell it to recoup its losses. Other personal assets, such as a savings or investment account, can be used to secure a collateralized personal loan.

Unfortunately that has been a thing for years, people always asked "if I am giving 120 dollars worth of ethereum to get 100 dollars worth of litecoin, what is the point of this?".

Back in the day that was for double down on the price, because you did with crypto prices and not fiat prices, which means if you pay 120 dollars worth of ethereum and get 100 dollars worth of litecoin, and if all those coins increase 50% that means you now have 240 dollars worth of ethereum and 200 dollars worth of litecoin but pay back once again 100 dollars worth of litecoin anyway, so you end up with 100 dollars extra income. That was the reason people took out loans in crypto form with collateral.

However these days there are so many things going on with the world that I can't even say what is with these new tokens that deal with lending, they are doing all kinds of new things I can't catch up.

The example in the OP doesn't make sense, borrowing a stablecoin with another stablecoin as collateral.

The idea behind a collateralized loan is to keep your collateral because you think it will gain in value long term, so let's say bitcoin. And you borrow dollars that you need right now. It's not a way to make money, it's a way to get dollars from your bitcoin, without having to sell any bitcoin.

Now I know that people advertise using borrowed funds to "invest" in high yield defi projects, even doing this in a cascade, but to me it looks like Ponzi schemes, and thus very risky.

Even the initial loan is risky, because all these DeFi companies are fairly new, and might not last that long...

Not really, getting loans by using crypto as collateral can actually benefit the borrower in tremendous ways. A few days ago, Dogecoin was at 0.01$ I guess? Let's say I had 10000 dogecoins, which is equal to 100$ that time. If I use doge as collateral and got myself a $80 loan in USDT or fiat, and let's say I have to repay $100 after one month. But in this mean time, Dogecoin pumped up to 0.07$ (7 times!). After a month I return the $100, and get back my dogecoin worth $700 now!

You need to go to wikipedia and read the definition of "profit". The loan did not benefit the borrower in this situation. Exposure to currency risk of the token you hodl and used as collateral gives you profit, not laon. You borrowed 10 000 doge and get 10 000 doge -fee, where you see profit here?

The "idea" (which I agree is stupid but there are so many that does it) is the fact that you could potentially do it twicefold if you can actually find a legit place for it. Basically it means that you have 10k doge, and you get 10k doge more with it, and if you can somehow get it in fiat terms, that means you paid for 10k doge price at that point, let's say it is 760 dollars you paid for, and you have to pay back 800 dollars with interest, or even 900 dollars doesn't really matter for this example.

The idea is that if you paid 760 bucks for 10k doge and bought that, and also showed that as collateral and got another 10k doge for 760 dollars or all your doge will be gone, that means if you lose money, it will be paid from your own dogecoins, however if you earn money, let's say doge goes up and now 10k doge worths 1000 dollars, you will be paying 760 of that back, plus interest, whatever is left is your profit on top of that 10k you already owned. Of course this rarely happens anywhere, they are all weird type of loans.

Well... iamsheikhadil needs to learn the definition of "profit" and You need to learn how loans work and ... the definition of "profit". No one is borrowing 8k doge using 10k doge as collateral. This does not make sense. And even if you will do it, you will not earn more thanks to that even if doge will pump. You will give back 8k doge, get back your 10k doge and where is your profit here? You had 10k doge before loan, you have 10k doge now.

You could get USDT loan using doge as collateral and buy more doge with this usdt and earn on pomp but again... You are not earning on loan here. You earn thanks to your decision to invest USDT into DOGE. You earn because you exposed your money to currency risk and not by borrowing money.

There is no way to earn on getting loans. You can earn using borrowed money well.

You mention all the costs and inputs that occur on the loan, it will happen.

Back to the question point, "income" depends, what you borrowed for.
Loans are divided into many categories.
• personal needs loans.
• investment loans etc.

Well, here are two options that can be answered, loans, if you use that money to buy Bitcoin at a low price of 1-2 months, because you sell Bitcoin when the price rises, the loan is returned, otherwise your risk.
the profit you get, you can use it again to invest, that's how to make a loan.
One more thing, if you use it for personal needs, you automatically have to look to cover the loan, without income.

Agreed you can't always make an income when loaning. First of all, when loaning crypto or any money, you are guaranteed to have a negative balance on you no matter if you have a collateral provided.
Just as Yoshie explained, you can make an income if you loan for investment reason which have a guaranteed return because if not, then you're just like gambling with no way of knowing if you lose and broke or win and multiply your earnings.
Collaterals are there for safe keeping for the borrower to make sure their money is safe in case any default has happened.

Purpose of giving a collateral to get a lon is quite simple and logic and works the same way in crytpo or real life provider : lets say you have something valuable you worked hard for and don't want to sell ; when you need some money for real life needs, businesses deals or whatever the needs might be you can borrow them from other poeple/banks/providers or cryptoservices ( like smartcredit.io am currenlty advertising in my signature).
Your collateral protect the lender from the risk you deafalt on your loan and you will have it back when you repay your loan because you value it more that its monetary value.

Profiting from borrowing? You can do that in case yuo have a businesses opportunity that gives you a return higher than the interest you have to pay on your loan.

For this type of loan for investment purpose, in my opinion it will only increase the risk of bad loan. The main thing that concern me is price fluctuation, which can make it difficult for borrowers to pay off overdue loan. It is not advisable to borrow a certain amount of fund just to invest in crypto, if it were me then I would never have done it. Even though there is an opportunity to make a profit, I think borrowers often have problem repaying loan.

Loan for personal need are only more realistic to do even though we have to pay a certain amount of interest when paying it off. Even though I have to get some money out of my pocket when I pay, at least I can still avoid bad loan.

There's none. It's literally made for people desperate enough to let themselves in the hellish trap that is collateralized loans. Imagine getting less than what you want to borrow and then still having to pay the whole amount as if they just didn't took a fee out of the blue. So never ever take collateralized loans unless you want to play life in hard mode.

I am not a fan of such platforms also. Instead of making your life easy, it will give you headache instead. If you have the money in the first place, I think the better thing to do is just be contented for what you have and just make use of it. Instead of borrowing and giving it as a collateral loan. You may end up losing all your money, if you can't pay them on time. There will be more problems that may arise if you forgot your responsibilities as a borrower. As you implied, they will make your life difficult instead of alleviating your financial problem.

Haha you are right and if they do, the lender should ask, are you okay? LoL ;D.

Borrowing the same coin after putting the coin in collateral is like you ask someone to please hold his water bottle and then ask for a sip of water from the same bottle.

I will try and simplify for people who are still confused. Let's consider an example:

You had 10k doges and you took a loan of $400 (considering the market price was 5 cent per doge and usually 20% additional value of collateral is put to get loans, so you put $500 worth of collateral and took $400).

Now you get $400 from which you bought another 8k doges and the value of doge coin reaches from 5 cent to 8 cents, imagine. You sell the 8k doges and you get $640 if my maths is working fine.

Now you pay back your loan and you earned ($240 - interest) profit. That's how it goes.

I think the main point behind collateralized loans is too make them cheaper. The interest rate is much lower if there a collateral behind the loan than if there isn't one. The borrowers incentive to default on a loan is much lower if he loses the collateral than otherwise. To be honest it is very hard to get a loan without collertal. Because even your monthly salary will be viewed as collateral by the lender.

At least everyone knows that a secured loan can be obtained without any problems, and in this situation, not only the lender, but also the borrower gets an advantage.
But I would like to point out the fact that banking institutions, without any particular fear, issue loans to people who can offer something valuable on collateral or provide a solvent guarantor.

The borrower and the lender always get advantages but the op doesn't understand the advantage of collateral loan aside the profit making it also give the borrower the chance to keep his precious holding while he borrows another particular he needed to trade or making an optimistic investment.

Disclaimer: "Not financial advice, just an opinion"

The voice of wisdom often falls upon deaf ears, but here goes nothing! Collateralized loans are good, simply because it provides the less fortunate who would otherwise be turned away, to acquire an easy low interest loan, at any given time, with no bank or centralized authority to cancel you out.
   On top of that, some loan platforms provide governance tokens (cryptocurrency), all you would have to do is put 2 + 2 together and profit.