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Comment by w_TF | Hacker News Reader

Defi protocols are incredibly powerful tools; the only thing preventing me from never using a bank again is not being able to pay for goods directly with stable coins. It's obvious the vast majority of people maligning them have never used them.

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Consider this; other countries are more advanced than yours.

While China offered a centralized solution to p2p payments, the concept of paying for everything digitally is already ingrained into their culture. Stable coins are not far off from that.

Instead of getting a "cash rebate" by giving up all of our information to credit card companies (they are making a whole lot more than they are giving back), we should be collecting interest on our holdings and spending it more anonymously. Most people won't need credit when they have collateral. That seems like a more entertaining future.

It has nothing to do with digital. We could pay with credit cards and that's digital enough. The issue is the government seizing your assets, banks deciding to freeze your bank accounts, all the gatekeeping, all the rent seeking fees, all the institutional red tape, etc.

For example if I wanted to take out a loan, it'd take me days to weeks, high interest rates, and may not even get approved. With defi I can take out a loan in just a few minutes, no permission needed.

Also put aside your privilege and realize not everyone is in a first world country privy to the banking many take for granted.

So you get a loan and what if you just walk off with the cash? What piece am I misunderstanding that has enforcement for repayment?

Liquidation. Most (all?) crypto loans are collateralized for the concerns you mention. If asset value drops to debt value plus a buffer, it’s liquidated. Someone else pays your debt and gets your assets. To pay back, you simply repay the same amount of the coin you borrow, lowering liabilities.

You get to keep what you borrowed in the case of liquidation but your assets are gone.

So you take the money, walk away and someone else pays for it?

No, you pay for it with your assets. Someone else pays to settle your debt and get your assets.

Example. You have $1000 btc deposited in a lending platform, you can borrow up to 80%. You borrow $800 usd. You keep the usd no matter what. If btc drops to $850 then someone pays $800 (usd debt) and gets btc worth $850. The buffer is so assets never drop below debt value.

.... so you can... never borrow more than you already have? that seems like the exact opposite of a loan. Why not just keep the $1000 yourself and spend $800 of it? If you can't pay yourself back, then you're only out $800 instead of the $1000 in your example.

Most threads about wealthy complain they don’t have to sell for capital gains but average person does. This is exactly that vehicle for anyone.

You could spend $800 but your total capital is $1000 vs $1800.

In my example, you would only be out $200 because you have $800 usd and the btc was $1000 when you put it in.

Even if you go get a loan from a bank, you need 20% equity and either collateral (this case) or co sign or proof of income. All collateral just the same. It’s just risked out to be possible to borrow many multiples due to the stability of real estate collateral.

In business loans, you have to put in 20% and the assets of the purchase are collateral.

It’s the same but crypto doesn’t have debt collectors since it’s not an org. Instead the collateral has to be in the system directly so they can automate liquidation.

This is similar to a securities line of credit(SLOC). Brokerages already have this. Am not getting how this is so different from todays system. M1 finance and E*Trade, IB all have SLOC. If you own a house you can get an equity line of credit. Either way you a borrowing against an asset that has some value. It just so happens in this case it’s Bitcoin. Is that the only difference?

It is precisely the same but provided in a decentralized fashion. This allows anyone to participate with any amount (theoretically).

Yeah the idea is the same except for bitcoin as the asset. Additionally no minimum asset amount. SLOC allow borrowing up to 35-50% of asset vs 80% or more. The interest rates are comparable tho.

I'm honestly trying to understand the benefit of going this route vs just using 800 of the 1000. It just seems obtuse. Coins can't possibly be trading at the insane prices because of the fundamental you are getting a crappy deal with defi

Avoiding capital gains tax that happens when you sell.

Well, it’s a kind of debt. Think of it like this. You have a car. Your car is worth $10k. You have no money. But if you had $1k today you could have $2k next month. One way you could do this is sell your car. Now you have $10k and you can spend $1k and next month have $11k. But you’d much rather end next month with a car and $1k rather than $11k.

This is a tool that lets you keep the car and get the $1k by mortgaging the car for the $10k. If car prices drop precipitously next month, you won’t get it back. But if they go up, then you have your car (now worth more than $10k) and you pay back the loan and keep the extra $1k you made too.

Perhaps you are familiar with house mortgages, etc. The closest thing a normal person would come to this is probably a HELOC.

So why would I bother borrowing some if I already have more that is readily available at my fingertips

I see your confusion but you don’t have more. After borrow, you have your deposit plus your borrow.

As to why, there are any number of reasons.

- you can avoid capital gains in deposit since a loan is not capital gains. Pay for an expense or start a biz. Anything.

- you can keep your btc while borrowing usd and put it into a yield. 5-20% isn’t uncommon to earn.

- you can buy other coins with the usd to extend your exposure although risky.

- you can borrow any coin, not just usd, as an effective short. Borrow a meme coin and pay back same amount of meme coin later but it’s worth less usd now.

Compare this to say credit card borrowing rates of 20+%. Borrow rates are based on the coin but can be effectively zero.

The why is up to you. It’s just not something that is possible with the regular system because of lock out.

When you use defi for a while, it becomes clear how much the traditional system locks us all out.

I personally deposit usd to get 5+% apy and then borrow for investing or expenses.

How do DeFi protocols handle loan defaults and repayment? shane_b describes in a sibling comment a scheme where your loan is over collateralized, but that doesn't make any sense—why take out a loan if you already have the money and could just "loan it to yourself" at 0% interest? How do DeFi loaning protocols handle Sybil attacks?

"It's obvious the vast majority of people maligning them have never used them."

No, it's only obvious that people haven't thought through their supposed solutions.

If all we had was Defi, someone would have this glorious notion of inventing a regular centralized system and we'd all be the richer for it.

Our monetary system works pretty well. Some things are a bit tricky, but otherwise it's fine.

The on- and off-ramps into the cryptoverse are still really clunky. But I think we left the point of no return so it will only be a question of time until that is solved as well.

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