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Can someone ELI5 why any average joe would ever use DeFI loans?

I mean, in a normal loan, you get the loan because you don’t have the money to pay for the thing outright (eg car, mortgage, etc).

If you had the money, it would be cheaper in the long term to just buy the thing, because then you don’t have to pay interest.

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But with DeFI, you have to put up collateral >= the value of the loan you receive.

So you must already have the money.

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I understand how this can be useful for speculators who’d want to take advantage of price changes of the collateral token vs the loan token, but DeFI is always pitched as a way to empower the averge joe to not be dependent on banks for these financial services.

So how would this work for anything other than speculation?

What do you think?

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11 Comments

  1. You are right. Borrowing and lending on these protocols is a market for rich people to leverage and get yield/passive income off of their assets. Not really suited for the average joe who just wants to take a loan on their car.

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    You would need a way to incentivize/punish people for paying/nonpaying people back after taking the loan, and it’s just impossible to do in a decentralized way. The real world uses a combination of lawsuits and credit scores as punishments, you can’t incorporate that in Defi

  2. You have to look into wealth management to understand. Your wealth is composed of many different parts, each with different risk and investment profiles. You take a debt against a position if you believe this debt is less costly than the potential gains of your position. Look up opportunity cost of capital.

    If I own $100K worth of real estate tokens paying 5% yearly dividends with a 2% yearly appreciation and I need $50K for something, then I have 2 choices. Either I sell half my real estate tokens and call it a day or I put up the $100K tokens as a collateral for a $50K loan.

    Without the loan, when reimbursing myself, I would be buying back real estate at the current market price which will tend to go up while losing out on dividends. With the loan, I would pay back the $50K regardless of real estate movements, effectively maintaining my position in real estate.

    The investment decision then is will this real estate position earn more than the loan interest? If loan interest is below 7%, it makes sense to take a loan. If it’s above 7%, it makes sense to sell.

  3. Well, you can use your crypto without selling and triggering capital gains is one. Second, is the fact that with a defi loan, I don’t have to quality with credit, proof of income, KYC and all the other regulatory headaches. The interest on the loans can also be fairly competitive.

    My favorite part is the fact that I can use my crypto as collateral without triggering capital gains, and I can pay back whenever I want. No late fees, no signature agreements. Essentially, you are your own bank. Don’t have to deal with the corrupt financial institutions. Whether you agree with it or not, crypto and defi are the future of finance for humanity. The old way of using banks and 3rd part financial institutions is archaic in comparison and on its way out. Peer-to-peer electronic cash transactions are the future. None of this ‘get rich quick’ moons and lambos bullshit. Cryptos with ACTUAL use-value (not store of value) will win.

  4. Keep in mind that DeFi is very young.

    A token in the future may be able to link real world items via the blockchain to allow for a more consumer appropriate type loan.

    A token that could get a credit score, the number of transactions through a wallet (income), VIN number and value of the car ,!etc.

  5. I’m using it to borrow against my Bitcoin. I don’t want to sell my Bitcoin right now, but I do want a little bit of cash. So, I borrow 40%* of the value of my Bitcoin in stablecoins, cash it out for USD and use it for the down payment on a house. That way, I’m still exposed to the price action of Bitcoin.

    Michael Saylor recommends only borrowing 20% against your Bitcoin.

  6. Just as you can use defi for speculation, you can also use it for anti-speculation. You can think of that as insurance, or paying for stability. You could, for example, build something approximating a stablecoin out of defi, and sacrifice potential gains in exchange for security.

    However, you’re right that 90% of the interest is in speculation, another 9% is in money laundering, and 0.9% in tax avoidance.

  7. If I have $10000, and I buy 20 BCH at $500 each, and then BCH goes up to $600 and I sell, then I have $12000.

    If I buy 20 BCH, use it as collateral for a loan, and then buy another 20 BCH, then if the price goes up to $600, I sell and pay back the loan and I have $14000.

    Of course, if the price goes down, then losses are magnified too.

    This is what’s known as ‘leverage’ or ‘margin trading’.

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