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Comment by gh55 | Hacker News Reader

> The real problem in lending is to ensure that the borrower can afford the loan and uses the money on what he says he will.

So the lender pays the money into a multisignature 2-of-3 wallet, gives 1 key to the borrower, and if when the borrower signs a transaction with that key to spend the funds is buying what they are authorised to buy, countersigns, else does not. And then you wrap this up in a smart contract, call it DeFi, have a liquidity pool for people to loan out a token for car financing, and if those people don't want to perform the check themselves, plug in an oracle like chainlink to deal with the real world part. On the repayment side, if repayment not made, a company can buy the debt and chase it, or can be hired to chase it. Wall torn down around car (insert asset here) financing..

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The repossession is the hard part. Let’s say I lend ten grand to some wallet so they can buy a car. They do so. Now they’ve got a car. They now move all their wealth to other wallets or fiat and refuse to pay me back. I need some mechanism of repossessing their car, which only works if I have state infrastructure and a legal system attached to my contract.

“Btc bounty hunters” isn’t a good enough explanation.

Your correct to say the debt would need to be legally recognised, before it could be sold on to a legally registered debt collector. Aave for example has a UK Electronic Money Institution license, you might need some legal entity to take part in what I describe until laws catch up with innovation. Self driving cars, uber, Airbnb, face similar issues with regulation needing to adjust, that doesn't invalidate the innovation.

I think the comparison to airbnb is revealing.

Airbnb allowed individuals to rent their home to other individuals. But this is done through a centralized service. Scams and abuse exist, but the centralized service offers some nice benefits like reviews and bans for abusive participants. The innovative part was the new model of what you could rent, not the how of how you rent it.

In comparison, the defi loan innovation is "how" rather than "what". As a borrower I still get some cash and pay interest on it. Same as with a bank. As a lender I still deposit some cash and obtain interest on it. Same as with a bank. And a centralized service provides some nice guarantees about checking that my money isn't going to criminal organizations or that I have some guarantee that I can withdraw my money when needed and risk is amortized. Like with airbnb, I'd expect a centralized model to be more appealing to many people than a decentralized model. And we already have a centralized model. They are called banks.

Airbnb succeeded because it created a product that didn't exist before.

I only think that the defi loan system is interesting if it enables a ton of people to obtain a different thing than the thing they can already get from a bank. This matters for people with bad credit and people without access to banking institutions... but how many people are super excited to personally lend to those people?

I suppose, with software eating the world, I want to believe we will collectively own and operate that software, rather than a particular company, that it will be open source, and if those who own it charge too much someone will fork it and outcompete them.

That might be nice, but it isn't a feature. Vanishingly few people consider "the product is collectively owned and open source" to be a feature that they are willing to prioritize over other things. As such, it is hard to support any very large endeavor just off this thing. There is a reason why Blender shows up over and over and over and over again on "lists of awesome FLOSS apps" and that is because it has damn good features. Decentralization is not itself a business strategy outside of niche cases.

I think you're conflating two things. Collectively owned, as in how large companies are owned by their shareholders. Decentralized, as in instead of a company, its a piece of software, that we are collectively funding the development of and profiting from. As more business can be done with software, with less people, I see this as a way for us to own that software, and contribute to it. If some group of owners charge too much, it can be forked, similar to how a business can be undercut by a competitor if they charge too much.

At the moment DeFi loans are fully collateralized, with the loan to value ratio affecting the interest rate you pay. If your collateral drops in value you have to recollateralize the loan, or are liquidated.

I don't understand. Why would I need a loan for $X if I already have $X to put up as collateral?

I have been trying to understand this too. Best I can figure, it's basically a short sell on USD.

The key element is that the loan is not denominated in BTC, but a stablecoin pegged to fiat. DAI is one of these pegged 1:1 to USD.

Say you are holding Bitcoin and think it's going to the moon. You tie up your Bitcoin as collateral and take out a loan of roughly 75% of its value, in DAI. Then you spend that DAI to buy more Bitcoins. Now you are exposed to Bitcoin's price movements on two ends: the BTC you bought with your loan, and the BTC you put up as collateral. If Bitcoin's DAI price goes up by more than the interest rate on the loan, you can sell and have more than enough to repay the loan. The extra is pure profit and plus your collateral grew in value in the meantime too, so you're a winner on both fronts.

On the other hand, if Bitcoin's price goes down by too much and you can't repay the loan, your collateral could be liquidated and become property of the lender. You lose everything.

Color me surprised that the amazing decentralized finance, the future of banking, etc. is... yet another way to speculate on "number go up".

DAI is mostly minted from ETH, at a rate of $150 collateral to $100 DAI. https://daistats.com/#/. The $200m DAI minted from WBTC represents 0.02% of Bitcoin's market cap.

Is what I outlined still basically correct in terms of describing the utility of an overcollateralized loan? That is: Use crypto for collateral to borrow stablecoins, to buy more crypto, to make profit (hopefully exceeding loan interest) when the crypto price goes up.

Or do I have that all wrong? I really am not sure that I grok how this works, at all. I'm trying to figure out what is going on in this space and you seem to know a lot more about it than I do. I couldn't figure out another good reason to use an overcollateralized loan but it's clearly something people are interested in and using as a selling point for DeFi.

What actually happens if the borrower defaults on the loan? Do they "just" lose their collateral, or can they be held to account for the DAI somehow too?

If loan repayment is not made, or the collateral falls in value sufficiently that the loan becomes undercollateralized, the collateral will be sold to cover the outstanding debt. The outstanding debt can be invested on a new business, stocks or gold - its not restricted to buying digital assets.

If what you are saying is true then this is literally the housing crisis with variable rate loans and a collapsing market putting everybody underwater. If the value of the item used as collateral sinks then you go from fine to broke in an instant.

The total being used as collateral can be seen here https://defipulse.com/defi-lending, and https://nexostatistics.com/loans/. A small proportion of market cap, and these loans have low loan to value ratios - typically 20%; no-one wants to risk liquidation.

But then we are back at the original problem, which is that I have no ability to repossess a nontrivial amount of property to handle a default and this system is explicitly constructed to be outside of the bounds of things like credit scores.

Regarding the auto financing. Traditional lenders will typically have no ability to repossess secured assets themselves, they will send out a colourful letter and if that doesn't work, sell the debt to a collection agent. DeFi in the form currently available doesn't need a credit score as it is secured against collateral, but a credit score would likely be needed in this case. New cars sold in the EU are likely trivial to repossess; I believe they have built in location trackers.

Incidentally, it is my hope that once laws change the collateral can be any type of asset, not only digital assets. The collateral could also be some sort of tokenized reputation issued by a collective, whom have decided you are worthy of credit. Perhaps they are affiliated with your employer or have enough knowledge to assess the stability of your income due to their knowledge of your skillset. The lenders would then be paid by them, by proxy - allowing those capable of assessing risk, and those with sufficient funds to lend, to be distinct. Incidentally, this is all bleeding edge, let's see what is actually built and what works with all this new possibility.

To avoid triggering the taxes (and in many cases, never paying them).

Now I'm wondering if software contracts have ever been legally tested. I'd enjoy a lawyer reading out the relevant if statement to the court.

I certainly don't think it is impossible. But the "defi will let everybody make 8% on their savings accounts by loaning cash to people around the world with no barriers" folks need to provide some evidence that I'm not actually going to lose everything to people just refusing to pay me back.

While it is interesting that you can implement this on block-chain this is a perfect example of how block-chain does not provide more than just being trustless.

(personally I like having trusted third parties)

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