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Author Topic: What is the point of collateralized loans ?  (Read 543 times)
spy100 (OP)
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January 17, 2021, 12:32:41 AM
 #1

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 ?



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January 17, 2021, 12:40:38 AM
 #2

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.
spy100 (OP)
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January 17, 2021, 12:57:28 AM
Last edit: January 17, 2021, 01:21:19 AM by spy100
 #3

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 Smiley

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






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January 17, 2021, 03:44:22 AM
 #4

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.
Tytanowy Janusz
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January 17, 2021, 09:17:31 AM
 #5

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.
spy100 (OP)
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January 17, 2021, 10:27:10 AM
 #6

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 ...

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January 17, 2021, 10:34:09 AM
 #7

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

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?

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crzy
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January 17, 2021, 11:48:55 AM
 #8

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 ...

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.
amishmanish
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January 17, 2021, 12:08:06 PM
 #9

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.
davis196
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January 18, 2021, 12:16:46 PM
 #10

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.

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.
 

overttherainbow
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January 18, 2021, 12:56:55 PM
 #11

This type of loan is only profitable for companies that give you this loan, thats simple
Sterbens
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January 19, 2021, 04:38:14 PM
 #12

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.

.
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January 19, 2021, 10:51:03 PM
Last edit: January 19, 2021, 11:17:33 PM by Hydrogen
 #13

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 ?



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

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January 21, 2021, 08:53:20 AM
Merited by Hydrogen (1)
 #14

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).

OP is asking about the point of putting your crypto as a collateral and getting a crypto loan,not about earning from crypto loans.

Sure about it?

What's the catch ? I just lost money... How can you make money from taking this type of loan ?
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January 21, 2021, 11:59:35 AM
 #15

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.
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January 21, 2021, 02:00:10 PM
 #16

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.

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January 21, 2021, 09:02:13 PM
Last edit: January 21, 2021, 09:28:11 PM by Hydrogen
 #17

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).


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?   Smiley
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January 22, 2021, 07:51:19 AM
 #18

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?   Smiley

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).
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January 22, 2021, 09:08:50 AM
 #19

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 ?




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.
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January 22, 2021, 09:21:49 AM
 #20

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.
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