What is the point of collateralized loans ?

[Hydrogen]

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

[...]

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).

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.

[exstasie]

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.

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.

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?

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

[shoreno]

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

[yhiaali3]

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.

[Karartma1]

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.

[Taskford]

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.

[KennyR]

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.

[Broly46]

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.

[redsun114]

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.

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.

[error08]

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.

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

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.

[disconnectme]

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

[Tytanowy Janusz]

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.

[Twentyonepaylots]

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.

[barbara44]

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.

[faulkner27]

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.

[Webetcoins]

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.

[aesma]

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...

[iamsheikhadil]

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.

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!

[Tytanowy Janusz]

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?

[justdimin]

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.