The idea is to hedge against that risk by spreading one's portfolio across the DeFi space. I do believe there will be smart contract bugs, but that isn't to say that these bugs will eliminate the DeFi industry. It's like telling someone not to invest in internet companies because the internet might break / shut down. Ask yourself this, is the technology going to zero or is the technology too early?
In DeFi, the perspective to have is there will be things that break as the ecosystem matures. That is okay, because bugs don't destroy the ecosystem but rather makes it more resilient. As it evolves, the eventual upside becomes so enormous it becomes riskier to not have exposure to the industry, as it could quite literally rewrite the rules of how finance operates. If you're not in these protocols early, it may prove infeasible to enter them several years from now when they are used with significantly more volume.
The fact that 5 billion dollars has been staked in the liquidity pools of these protocols is a signal that if DeFi can absorb several billion in capital, then it may absorb hundreds of billions. The global market of 80% of people who don't have access to advanced financial services, and the cryptocurrency market who cannot access these services through traditional banking, demand them now. Thus, we are at the very beginning of a paradigm shift in supplying the highly sophisticated financial instruments to this population.
In order to interact with DeFi contracts, you need ERC20 tokens (a convention on how to interact with a ethereum token. BAT, LINK, are all ERC20 compliant).
WBTC is a token that is backed by BTC. To get WBTC, you need to send BTC to a specific address (I believe controlled by multiple parties using multisig wallets to avoid centralisation, but don't quote me on that).
DeFi offer various products. People converting their BTC to WBTC are using them either as collateral to take loans (and therefore pay interest), or to lend them (and therefore earn interest).
You can convert your WBTC to BTC of course.
(tbh I haven't seen a lot of people taking loans, most people are yield farming. I'd love to hear about someone on why they took a crypto loan backed by crypto, I don't see a lot of possible usages)
Long answer incoming! TL;DR: there could be several reasons to take out a DeFi loan.
Some of these are very similar to each other, but they're all based on real examples I've either done myself or heard being done by others:
- One obvious usecase is to loan more of your token of choice to set up a leveraged position. You believe e.g. BTC will go up and want to maximize your gains. Add another 50-75% to your stack, if BTC goes up you'll make more money than simply hodling. It's not as high-stakes as margin trading on CEXs, but it's permissionless and requires no KYC.
- You believe token B is just about to spike, but you don't want to sell your token A, just in case it also were to make a move in the meantime. Taking a loan for B backed by A gives you upside (and downside!) from both tokens, and comes out net positive provided that your interest is lower than whatever gains you make on the principal. It's not always easy to know which token is the best to hold and time the swaps to have the correct exposure. It's just as easy to get caught out by the swings of token A while waiting for B to make a move, only to miss the eventual moon mission of token B when you finally bite the bullet and go back into A. You could split the holdings, but that has lower upside than using one as collateral to loan the other. Some folks want the added risk/reward.
- Conversely, you want to short token B. Issue a loan denominated in token B, swap it for a stablecoin or old trusty token A for more spice. Swap back and repay the loan once B has tanked. You keep the surplus.
- You want to farm yield. With the DeFi craze in full force, there are new yield farming ploys popping up every week. Many folks on Ethereum care mostly about growing their ETH stack, but yield farming often requires a protocol-specific token. You don't want to risk missing out on an ETH rally, so you accept the interest as a cost of keeping your ETH while farming. Works great so long as the yield offsets the interest you pay.
- You've made a pretty penny on crypto and want to buy a car. But you think your coins of choice could climb higher still and feel bummed having to give up that upside by selling. So you take out a loan instead. You issue your loan in stablecoin so that the principal is locked at a specific fiat amount, and pay down the loan as one would in traditional finance. Interest rates are likely somewhat higher than a traditional loan from your tradfi bank, but if your collateral makes a 10x you probably don't care too much.
- You live in a country where getting a loan can be exceedingly difficult, has predatory interest rates, or is subject to invasive KYC regulations. You just want some short term liquidity while things are tight and don't like the opportunity cost of selling your stack of moonshots. DeFi is probably a better option than credit card debt or other short term loans from the traditional space, where interest can easily go into 30% or more. You also don't have to deal with any KYC or paperwork, and are good to go in seconds.
- Bonus reason: there's a great arbitrage opportunity in the market, and you want to maximize gainz. So you get a 1000 ETH flash loan with no collateral, make several convoluted swaps that take advantage of the arb. opp., repay the loan in full and net the remainder — all within a single transaction. Flash loans are crazy, and the smartest arbitrageurs can net 6 figures in single transactions.
To sum up: here's a lot of appetite for taking out DeFi loans in the market. After all, that's where the lending platforms get their interest from. If no one borrowed, there'd be no lending either. Just to illustrate, there's currently about $900M in loans issued on Compound, against $1.6B lent. Aave probably has similar orders of magnitude. Have you used DAI? All DAI in circulation are minted using Maker's CDPs, which essentially are loans issued against some collateral. Loans are everywhere!
Another reason why some of the lender protocols like Aave and Compound are, in my belief, the next generation of banking. If they succeed on staking and lending, they wipe out 25% of all U.S. banks and credit unions.
tranceology3Silver | QC: BTC 474, CC 285, ETH 57 | TRX 400 | T3 months ago
One other feature. You can get cash from your BTC and not have to pay taxes, and then just pay back the loan overtime and get your BTC back - and it becomes a long term investment.
> as collateral to take loans
Can someone explain this to me? Say you use "Coin A" as collateral to take a loan of "Coin B". Why don't you just exchange "Coin A" for "Coin B" without paying interest?
ambidextrous12Platinum | QC: CC 89, BTC 59 | TraderSubs 623 months ago
Say you hold $100k of BTC, and want a loan for your business or personal emergency. But you don't want to sell your BTC as you are bullish on its price appreciating in the next 12 months (and you're going to lose out on that if you sell your BTC for cash now)
So you place it as collateral in a defi loan provider like Aave, and get $50K in USDC which you can cash out via a fiat on-ramp.
12 months later, when you're ready to pay back, you transfer the $50k to aave, and your $100k of BTC is unlocked and released to you. Except it's now probably worth about $400k, after some price appreciation (note: you don't have to pay $400k, only the previous price of BTC at the time of lockup).
(This is the official reasoning. In reality, many will take loans on their BTC and other crypto using the above method as a mean of getting further usdc/usdt to invest back into buying more crypto. A kind of synthetic leverage. While the long term consequences of this are moot, it can certainly fuel one hell of a bubble in the short term)
tranceology3Silver | QC: BTC 474, CC 285, ETH 57 | TRX 400 | T3 months ago
Just be careful, cause if the 100k of BTC drops to 60K, they start selling off your BTC to pay back your loan.
I am Nigerian Prince. We had to lock up $50k of bit Coin to fund crazy night of stripper.
Now bit Coin worth $200k but I no have $50k.
If you send me $50k I unlock bit Coin, sell for $200k, and give back you $100k
If A goes up against B, doing two changes will make you loose some A, while taking a loan will fully give you back your A once your done with your B.
It's only interesting if you need to have B in your hand tho. Otherwise, if you believe A is going up against B, just hold A.
That's why I said I'd be interested to talk to someone who took a loan, I don't know what kind of situation makes you seriously *need* B, while believing A is better to hold.