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Comment by ArtTimeInvestor | Hacker News Reader

I am not sure if lending makes sense if the collateral is the same asset that is borrowed.

A more typical example I can envision:

Someone owns land in Decentraland. The land is an NFT on the Ethereum blockchain. To make profits from the land they need to put a hotel on top of it. But they don't have the means to buy/build the hotel. So they lend Decentracoins (some other asset on the Ethereum blockchain) and provide the land as collateral.

If all goes well, the borrower buys/builds a hotel with the decentracoins. Makes more decentracoins from visitors. Pays back their debt.

If it does not work out, the land goes to the lender.

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> I am not sure if lending makes sense if the collateral is the same asset that is borrowed.

It doesn't. And if the collateral is a different asset, there is no certainty that the value of the collateral exceeds the value of the principal. So there's a risk involved and that explains the premium over the risk-free rate. It's got nothing to do with the fact that the loan is denominated in some cryptocurrency.

> It doesn't

Proof needed. I can in fact think of counter examples:

Say there is a DAO that gives more voting power if you own more ETH. In that situation, it might make sense to borrow 900 in ETH with 1000 ETH collateral. Then you make your vote on the DAO with a power of 1900. And pay back 910 in ETH to the lender. The vote on the DAO might trigger an action that is worth more than the 10 ETH you paid in interest. For example if you run a company and the vote on the DAO was to buy a service from your company.

> it might make sense to borrow 900 in ETH with 1000 ETH collateral. Then you make your vote on the DAO with a power of 1900

No, you would vote on the DAO with a power of 900, because your original 1000 ETH collateral is being held by the lending protocol

Not necessarily. There are mulitple ways it could work.

Two examples:

The DAO could support the lending protocol. Counting your assets in the lending protocol towards your voting power.

The lending protocol could support the DAO. Not allowing you to withdraw you collateral but allowing you to signal something to the DAO.

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