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Comment by shane_b | Hacker News Reader

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.

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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.

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?

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.

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

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.

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.

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