DeFi - Lending Collateral

[GreatArkansas]

Hi everyone. Recently I started diving deeper into Decentralized Finance (DeFi) and there are some questions or behavior that I am really curious about.

For example,
When you borrow some assets, you needed some assets as collateral (this is given).
But, what if instead of borrowing some assets, you can just use the one you are willing to use as collateral?

Can anyone have a good explanation here of borrowing using collateral versus not borrowing and using the collateral instead for the exchange of other assets?

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[dbshck]

Can anyone have a good explanation here of borrowing using collateral versus not borrowing and using the collateral instead for the exchange of other assets?

People borrow from DeFi lending pools because they don't want to sell their assets. There are several reasons why someone might choose to do this. Some examples:

• Someone might need liquidity but doesn't want to sell their assets because they believe the value of the asset will increase in the future and they want to maintain their exposure to that asset.
  
• Someone might want to create a leveraged position using margin. For example, if they believe that the price of ETH will increase, they can borrow USDC using their ETH as collateral and use that borrowed USDC to purchase more ETH, creating a leveraged long position on ETH.
• This can also work in the opposite way, where someone uses USDC as collateral to borrow ETH and then sells the borrowed ETH, creating a leveraged short position on ETH.

This way they can create net short or long position on the asset with some leverage. Worth noting that this is a high-risk activity and should be done with caution, as leveraged positions can lead to significant losses if the market moves against you.

[GreatArkansas]

Can anyone have a good explanation here of borrowing using collateral versus not borrowing and using the collateral instead for the exchange of other assets?

(.....)
This way they can create net short or long position on the asset with some leverage. Worth noting that this is a high-risk activity and should be done with caution, as leveraged positions can lead to significant losses if the market moves against you.

Cool! Awesome explanation. This action seems like you are trading futures, like USDT futures where you just need USDT then you can short or long any assets with leverage.
But using Decentralized Finance (DeFi) you can do it on platforms that are not centralized, this is indeed risky too.
I am also wondering how these DeFi platforms can generate revenue, through transaction fees? spreads?

[dbshck]

But using Decentralized Finance (DeFi) you can do it on platforms that are not centralized, this is indeed risky too.

Yeah, it's just a different kind of risk. In a centralized platform, it's counterparty risk while on DeFi you're exposed to smart contract risk, especially on newer protocols.

I am also wondering how these DeFi platforms can generate revenue, through transaction fees? spreads?

Usually between those two. Maker protocol (DAI) has something called stability fee, which is basically the protocol's interest rate to borrow DAI. Others, like Solend, take a spread from interest rates directly.

[el kaka22]

This was explained to me this way, and I hope I can explain it the same way here again. Let's assume that you have A token, and you give your A token as collateral and using that loan to buy B token, your A token was worth 120 dollars, and B token you bought worths 100 dollars. When the market goes up, the A token you gave became 200 dollars worth, and the B token you bought worths 180 dollars.

Now you have enough money to pay the loan back. You sell 100 dollars worth of B token to get your tokens back, and you get ALL of your A tokens, which now worths 200 dollars. Now you end up with 280 dollars. If you kept your A tokens, you would have just 200 dollars. That is why, or at least I hope I understood it correctly.

[BIT-BENDER]

Can anyone have a good explanation here of borrowing using collateral versus not borrowing and using the collateral instead for the exchange of other assets?

People borrow from DeFi lending pools because they don't want to sell their assets. There are several reasons why someone might choose to do this. Some examples:

• Someone might need liquidity but doesn't want to sell their assets because they believe the value of the asset will increase in the future and they want to maintain their exposure to that asset.
  
• Someone might want to create a leveraged position using margin. For example, if they believe that the price of ETH will increase, they can borrow USDC using their ETH as collateral and use that borrowed USDC to purchase more ETH, creating a leveraged long position on ETH.
• This can also work in the opposite way, where someone uses USDC as collateral to borrow ETH and then sells the borrowed ETH, creating a leveraged short position on ETH.

This way they can create net short or long position on the asset with some leverage. Worth noting that this is a high-risk activity and should be done with caution, as leveraged positions can lead to significant losses if the market moves against you.

This is a wise explanation I must say but it goes against my personal rules of investing, I can have funds no matter the currency or crypto-currency the funds is in and then go out using it as a collateral to collect something else.

If you actually believe in a particular coin let’s say Ethereum and not willing to let it go for your own personal reason then you should also be strong enough to resist the urge of getting another coin for any reason what so ever.

[JeromeTash]

Similar to the whole lending and borrowing thing, even with traditional banks. If I have collateral worth more than the value of the funds I want to borrow, then It would be sensible to just sell off the collateral and avoid the loan, but I guess people borrow for different reasons as explained.

I still don't believe in DeFi's. They way too many ways risking losing money than gaining from them.

[cryptoaddictchie]

I still don't believe in DeFi's. They way too many ways risking losing money than gaining from them.

Some work efficiently and they just simply like borrwing their capital or should we say free money at all. Of course the risk is quite high however, there are some guys who can see the potential of market and use that in their favour and Ive seen so many have done this and really cool. But also some newbies trying this in a wrong way which lead to a negative result.

[vv181]

I am also wondering how these DeFi platforms can generate revenue, through transaction fees? spreads?

Each platform has its own tokenomics, which is managed by at least the DAO. I just browse through AAVE, Solend and Curve, it seems that most of the DeFi platforms have their own term to incentive both the liquidity provider and the ecosystem itself. Specifically about the platforms mentioned, it is well explained on their own respective documentation page, Solend, Aave, and Curve.

Other platforms might have a different decision in regard to how to manage the ecosystem, but generally making a token to incentive the platform DeFi is usually taken and mainly it managed by DAO.

[zasad@]

Hi everyone. Recently I started diving deeper into Decentralized Finance (DeFi) and there are some questions or behavior that I am really curious about.

For example,
When you borrow some assets, you needed some assets as collateral (this is given).
But, what if instead of borrowing some assets, you can just use the one you are willing to use as collateral?

Can anyone have a good explanation here of borrowing using collateral versus not borrowing and using the collateral instead for the exchange of other assets?

You have 1 ethereum at its price of 1500 dollars for example.
On the DeFi platform, you can get from 100 to 1000 USDT against 1 ethereum. If the price of Ethereum has risen, then you can take more USDT as collateral. If the price of ethereum drops to $900, then you will have your $1000 left . And DeFi ecosystems additionally distribute their tokens to all users. It's all a lot of fun and seems like a break even trade, but there are always smart contract risks involved. Hacking a smart contract, developer mistakes can deprive you of all collateral.
There are many reasons for using DeFi ecosystems: token farming for users, financial manipulation, risk diversification, and so on.
But there is a big downside
DeFi hacks [history]
https://bitcointalk.org/index.php?topic=5267124

[Blitzboy]

It's encouraging to see you exploring DeFi in more depth. You provide an intriguing contrast between borrowing with collateral and not borrowing and exchanging other assets in place of the collateral.

You normally need to provide collateral to obtain a loan when you borrow assets. The lender will be able to retrieve their assets if you fail on the loan thanks to this safety mechanism. However, if you are just exchanging your own assets for other assets rather than borrowing them, you are really just conducting a deal.

When you trade assets using collateral, you don't borrow the other asset; instead, you use your assets as security to get the other item. If you want to profit from price changes in the market or want to have exposure to a certain asset without owning it altogether, this might be a good technique.

On the other hand, a more conventional technique of lending is to borrow assets against collateral. It enables you to utilize assets that you do not own and gives you the option to borrow certain assets to pay back with interest in the future. This is a means for you to get access to money or other resources that you would not have had previously. It can also be a good approach for you to invest in resources that you think will increase in value.

It's important to keep in mind that utilizing your assets as collateral in either situation carries some risk. You can end up losing part or all of your collateral if the value of the assets you're using as collateral declines. Because of this, it's critical to be constantly informed of the risks involved and to determine your comfort level with possible losses before putting your assets up as collateral.