Yesterday I had a spirited discussion with a friend of my on the merits of DeFi Lending. I could not convince him of the benefits from a borrowers perspective.
He could not understand why anyone would put up collateral for a loan, just to be able borrow a fraction of it.
I would like someone more knowledgeable about this topic to list their use cases. Please exclude use cases that do not include speculation (trading schemes).
I look forward to hearing your responses.
From what I hear, some people do this to get cash out of their crypto portfolio without a tax consequence. They put up ETH for example as collateral, borrow DAI, sell that for cash with no tax event. It gives them liquid cash and they get to keep their crypto which they expect to go up.
Or people leverage their existing crypto to buy more of it. Put up ETH for example to get DAI to buy more ETH.
I'm not an investment advisor or an accountant so this is for entertainment purposes only 😄
Not sure if this meets your criteria but its what came to mind.
Hey Kenny,
Thanks for the info. I'm just trying to understand the use cases. How have you been?
Stayin' alive! Still here and on Steem. Playing Splinterlands most days. Working on a little coding project on Hive based on Splinterlands cards, mainly just for fun and programming practice. Playing water volleyball every weekend, its the perfect summer game! That's basically how I've been lately. Hope you're doing well!
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I think @kenny-crane summarizes it very well. Tax is one factor but I think the key factor is still getting that extra leverage with your crypto as collateral. This is of course highly speculative and people will need to understand the risk before taking on such extra leverage.
That aside, from the lender point of view, over-collateralization is actually much more prudent. Many of us are just seeing from the borrowers point of view. In DeFi, there is no concept of a credit rating, at least for now. Hence, as a lender, how can I be sure that the borrower can pay up? Over-collateralization is the answer for now.
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Thanks for the reply. I took a look at the defi campus community and subscribed.