Here is what I don’t understand about DEFI?

[DrBitcoin]

How can you loan money without trust? Background checks, credit history. I understand if someone uploads collateral like Bitcoin or Ethereum, But then why not just spend the bitcoin or Ethereum? Why take out a loan?

Is it simply to avoid paying capital gains?

Can someone please explain to me how DEFI could ever lend someone money for a mortgage?

[zasad@]

There are many similar services on the Internet, but they are centralized. They offer cash or stablecoins for 50-70% of the amount you deposit in cryptocurrency. But you may be deceived, you may not receive money.

Defi offers a secure option that is based on a smart contract. You can lock your cryptocurrency and get from 10 to 75% of its value in stablecoins.
The lower the percentage of the amount you take, the less risk.
It even allows you to hedge against downside risks:
Let's say the price of Ethereum is $ 500, you send Ethereum to a smart contract and receive $ 375 in stablecoins. Ethereum drops to $ 300, your smart contract is canceled, but you still have $ 375.
You get the opportunity to buy more Ethereum
You can hold Ethereum and use stablecoins to trade.

For example, I'm a bank. You want to buy an apartment for $ 100,000. I buy an apartment and say that I will sell it to you for 160,000, provided that you pay $ 10,000 straight away and $ 834 every month for 15 years. We tokenize your apartment and create a smart contract for $ 160,000. As soon as you pay $ 160,000 to this smart contract, the contract will be closed and the documents of ownership will be sent to you by means of an electronic digital signature. A copy of the documents will be sent to the state registration authority.

There are many questions, but they arise due to the lack of legislation in this area.

[CryptopreneurBrainboss]

How can you loan money without trust?

You can if there's a valid collateral higher than the intended loaning amount. The blockchain technology make trusting a little bit easier since all transaction can be verified openly. DeFi makes it easier to get this loan that would cost you more using centralized service like the user above mentioned. Exchanges like Binance offers collateral loans but since it's not advisable to trust centralized platform with your funds the need for a decentralized platform came into the picture which resulted to DeFi platforms.

I understand if someone uploads collateral like Bitcoin or Ethereum, But then why not just spend the bitcoin or Ethereum? Why take out a loan?

It's simple the borrower doesn't want to miss out on future gains of the collateralized cryptocurrency but need cash urgently. For example, Ethereum looks very promising as a result of the upgrade launching later this year. Now I have ethereum and in need of cash but can't risked selling my bags and miss future profit, I take out a loan and use my ETH as collateral. In a scenario where the price of ethereum increase it becomes a win-win situation for me as I'll still be entitled to my Collateral coin the moment I payback my loan.

[SquirrelJulietGarden]

Before the DeFi becomes hot like it is now, LEND / AAVE used to be a very good platform. Ridiculously, you know in 2019 and early of 2020, very little people believed in LEND and don't think it can get success and rally like it has accomplished. To get acceptance for a loan, you need to have collateral. No one, no service, no bank allows you to loan without collateral.

LEND on coinmarketcap. It rose from $0.02 to $0.47. So technology is not a matter, DeFi is not a matter. LEND is LEND, and do you think it rose because of DeFi, not like this.

[semobo]

There are many similar services on the Internet, but they are centralized. They offer cash or stablecoins for 50-70% of the amount you deposit in cryptocurrency. But you may be deceived, you may not receive money.

Defi offers a secure option that is based on a smart contract. You can lock your cryptocurrency and get from 10 to 75% of its value in stablecoins.
The lower the percentage of the amount you take, the less risk.
It even allows you to hedge against downside risks:
Let's say the price of Ethereum is $ 500, you send Ethereum to a smart contract and receive $ 375 in stablecoins. Ethereum drops to $ 300, your smart contract is canceled, but you still have $ 375.
You get the opportunity to buy more Ethereum
You can hold Ethereum and use stablecoins to trade.

For example, I'm a bank. You want to buy an apartment for $ 100,000. I buy an apartment and say that I will sell it to you for 160,000, provided that you pay $ 10,000 straight away and $ 834 every month for 15 years. We tokenize your apartment and create a smart contract for $ 160,000. As soon as you pay $ 160,000 to this smart contract, the contract will be closed and the documents of ownership will be sent to you by means of an electronic digital signature. A copy of the documents will be sent to the state registration authority.

There are many questions, but they arise due to the lack of legislation in this area.

Here is the clear explanation how DeFi projects got hyped and also how it works but as the use case it is not going to be profitable for the people who take loan out of it.And I had seen someone made $40K in few minutes with the method you explained above but it not going to work all the time since many people may find that strategy and started to practice it so the project will go bankrupt for sure.

[Chlotide]

How about flash loans then?
From what I managed to understand is you take a no-collateral loan and you pay it back instantly.
Did not understand what "instantly" means tbh.
I am having a hard time wrapping my head around it. Would anyone be so kind to dumb it down for me please?

[zasad@]

Here is the clear explanation how DeFi projects got hyped and also how it works but as the use case it is not going to be profitable for the people who take loan out of it.And I had seen someone made $40K in few minutes with the method you explained above but it not going to work all the time since many people may find that strategy and started to practice it so the project will go bankrupt for sure.

You are most likely talking about arbitration, you can make money there, but it is very difficult to find a profitable arbitration opportunity and, most importantly, pay such a commission so that your transaction goes through quickly. The arbitration opportunity does not last long - a few minutes.

How about flash loans then?
From what I managed to understand is you take a no-collateral loan and you pay it back instantly.
Did not understand what "instantly" means tbh.
I am having a hard time wrapping my head around it. Would anyone be so kind to dumb it down for me please?

The most famous flash loan is described here
https://medium.com/@peckshield/bzx-hack-full-disclosure-with-detailed-profit-analysis-e6b1fa9b18fc
The Ethereum ecosystem allows you to perform multiple operations in 1 transaction.
You can take any amount without collateral that the pool approves of you, but you must return it in this transaction. That's why it's called "flash".

__
To see how defi works visually, check out this project:
https://furucombo.app/
and read the book (I see it free on the Internet)
https://landing.coingecko.com/how-to-defi/

[IvugeoEvolutionCoin]

There are many similar services on the Internet, but they are centralized. They offer cash or stablecoins for 50-70% of the amount you deposit in cryptocurrency. But you may be deceived, you may not receive money.

Defi offers a secure option that is based on a smart contract. You can lock your cryptocurrency and get from 10 to 75% of its value in stablecoins.
The lower the percentage of the amount you take, the less risk.
It even allows you to hedge against downside risks:
Let's say the price of Ethereum is $ 500, you send Ethereum to a smart contract and receive $ 375 in stablecoins. Ethereum drops to $ 300, your smart contract is canceled, but you still have $ 375.
You get the opportunity to buy more Ethereum
You can hold Ethereum and use stablecoins to trade.

For example, I'm a bank. You want to buy an apartment for $ 100,000. I buy an apartment and say that I will sell it to you for 160,000, provided that you pay $ 10,000 straight away and $ 834 every month for 15 years. We tokenize your apartment and create a smart contract for $ 160,000. As soon as you pay $ 160,000 to this smart contract, the contract will be closed and the documents of ownership will be sent to you by means of an electronic digital signature. A copy of the documents will be sent to the state registration authority.

There are many questions, but they arise due to the lack of legislation in this area.

I actually learnt something new from this piece, thanks for the insight. The DEFI concept is unique, only if projects in this line will strive to proffer solutions related to what decentralized finance is all about, and not just after the money bag. Thanks once more, I added what I learnt from here to my jotter.

[Chlotide]

...

I read about the bzx "hack" but could not understand much.

In the meantime finally found an article that kind of made sense (to me at least) : https://cryptos.com/flash-loans-ethereum-can-make-you-rich-under-15-seconds/

So you need to code a script that takes the borrowed loan, uses it somehow (trade, arbitrage etc) and return the loan within the same block (so around 13 sec with the current ETH hashrate and difficulty).
And if you make some profit, you keep it. If not the transaction is "reverted" and you lose the gas fees.

Does this sound about right?

[zasad@]

...

Does this sound about right?

Yes it is.
But you should understand that the fees for arbitrage transactions are very expensive now. It can cost thousands of dollars in commission and more.
This will depend on the number of operations in 1 transaction, and we must understand that with an increase in the number of operations, the time for an arbitration opportunity decreases proportionally
(projects recalculate the value of assets according to internal algorithms). Therefore, the cost of a mistake can be large.

[Chlotide]

But you should understand that the fees for arbitrage transactions are very expensive now. It can cost thousands of dollars in commission and more.
This will depend on the number of operations in 1 transaction, and we must understand that with an increase in the number of operations, the time for an arbitration opportunity decreases proportionally
(projects recalculate the value of assets according to internal algorithms). Therefore, the cost of a mistake can be large.

You mean because of the high mining fees in ETH blocks recently?

[hatshepsut93]

How can you loan money without trust? Background checks, credit history. I understand if someone uploads collateral like Bitcoin or Ethereum, But then why not just spend the bitcoin or Ethereum? Why take out a loan?

Baiscally, these loans is just an instrument for speculating, they are indeed impractical from a consumer's point of view. DeFi is not a replacement for traditional finance, because it's strictly limited to dealing with blockchain assets. And you can't tokenize any sort of non-blockchain asset without having some trusted third party. So, DeFi is just a parallel, very limited finance in the world of crypto. People who are saying that it will replace traditional finance are either lying or they don't understand how either of those things work.

[justdimin]

To the example that was given with 500 dollars of ethereum and 375 dollars of usdt loan and when value of ethereum drops to 300 dollars and you still have 375 so you can buy more, well.. you can also sell your 500 dollar worth ethereum, it could drop to 300, you could buy even more that way.

DeFi just doesn't make sense at all, it is just a method that some people could show you that it is possible, not because it is better or great but it is possible and they convinced some people that it would be a great idea to do it but just because they said it is a great idea doesn't mean that it is a great idea, they are the project owners and shill accounts so they will say it is a great idea, but in reality it is a mediocre idea, not a bad one but not great neither.

[zasad@]

But you should understand that the fees for arbitrage transactions are very expensive now. It can cost thousands of dollars in commission and more.
This will depend on the number of operations in 1 transaction, and we must understand that with an increase in the number of operations, the time for an arbitration opportunity decreases proportionally
(projects recalculate the value of assets according to internal algorithms). Therefore, the cost of a mistake can be large.

You mean because of the high mining fees in ETH blocks recently?

This is due to the demand for defi projects.
Miners always include the highest commission transactions in their blocks to get more money.
https://etherscan.io/gastracker
For example, now the cost of an Ethereum transaction from one address to another costs no more than 80 cents.
Saturday and Sunday are always the lowest commissions because people don't have working days. Use this opportunity to send Bitcoins, Ethereums and other coins.
Commissions will skyrocket on Monday.
But keep in mind that even now, sending an Ethereum token will cost from 5 to 25 dollars, and if you need to interact with several smart contracts, the price will increase proportionally.
Understand the most important thing that sending Ethereum tokens costs 5 times or more, depending on the situation.

To the example that was given with 500 dollars of ethereum and 375 dollars of usdt loan and when value of ethereum drops to 300 dollars and you still have 375 so you can buy more, well.. you can also sell your 500 dollar worth ethereum, it could drop to 300, you could buy even more that way.

DeFi just doesn't make sense at all, it is just a method that some people could show you that it is possible, not because it is better or great but it is possible and they convinced some people that it would be a great idea to do it but just because they said it is a great idea doesn't mean that it is a great idea, they are the project owners and shill accounts so they will say it is a great idea, but in reality it is a mediocre idea, not a bad one but not great neither.

Interesting opinion, but I have a question, how do you diversify your risks?
You can sell Ethereum for $ 500, and its price rises to $ 700 - you are at a loss.
You can use centralized exchanges:
1. Stop loss, for example $ 450. But the price can drop to 440 dollars and rise to 700 - you are at a loss.
2. You can use Ethereum futures to diversify your risks.

But how to do this in a decentralized manner, do not trust your money to other participants?
 "I am hodling" . and wait for a price of 2000-5000 dollars
Tell me how?

[pakhitheboss]

How can you loan money without trust? Background checks, credit history. I understand if someone uploads collateral like Bitcoin or Ethereum, But then why not just spend the bitcoin or Ethereum? Why take out a loan?

Is it simply to avoid paying capital gains?

Can someone please explain to me how DEFI could ever lend someone money for a mortgage?

They are not paying you a single dime without any collateral. They only pay you 70% or 80% of your collateral. Any any case they are always in a win win situation as none of your collateral will be released until you pay the capital amount.

I have not heard any DEFI lending for a mortgage because their business is based on digital collateral not physical.

[asder250]

For me, it is similar to printing money, but on the bottom, there is at least something valuable. But when we all take a lot of loans, there will be huge debt and when price collapse, all of us lose almost everything...

[tsaroz]

It's not an entirely new thing but on Defi everything happens on the base of safe contract which can be unhackable and automatic which decreases the expenditure of the platform and the risks involved in lending and borrowing which overall benefits the users with low cut leading to better rates on both lending and borrowing. It's an automated bank that depends on pre defined circumstances. No one to modify them or no excuses about anything.

[shakesbear]

I have a bitcoin, but I believe that in a week it will be 2 times more expensive, but I need money today, so i go in defi take a loan, gradually pay it off and take my bitcoin back in a week, everything is simple.

[zasad@]

I have not heard any DEFI lending for a mortgage because their business is based on digital collateral not physical.

There are projects in defi that work with real estate.
https://realt.co/
https://realt.co/progress-of-real-estate-tokenization/

The main problem is not defaults, but the lack of cryptocurrency legislation in many countries.

Even now, it is possible to tokenize all the world's stocks and trade them in a decentralized manner, but then all existing intermediaries will suffer billions of dollars in losses.

[Chlotide]

I have not heard any DEFI lending for a mortgage because their business is based on digital collateral not physical.

Maybe tokenize your house and use those as collateral. You might need some lawyers to also draft something for it and bang: DeFi mortgage
Issue some ERC20 security token for that and you should be golden, as the grand majority of DeFi are on the ETH network.

Might just work...