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Comment by ogogmad | Hacker News Reader

> Right now, you can take out a loan without involving a bank from one of the many crypto lending protocols. You put up some collateral and can take out a loan for extremely cheap, because there isn't a bank in the middle to take a cut.

"Loan" is a very misleading description of what this is. This is margin trading. A loan is when you post a non-liquid asset in the real world -- like a house -- as collateral. Margin trading is when you post a fairly liquid asset (like other cryptocurrencies) as collateral so that you can buy more cryptocurrencies. You can't use these "DeFi loans" to buy a house in the real world.

One reason I think DeFi is bullshit is because its critics describe what it does better than its advocates, who spout incoherent word salad.

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> who spout incoherent word salad

I affectionally call it crypto-babble.

> critics describe what it does better than its advocates

Seems to be true of pretty much all crypto. Most of the advocates have a very poor understanding of how it works, what the benefits/tradeoffs are and worst of all a complete ignorance of the systems they are seeking to "replace".

As a result we see all the crypto stuff simply repeat mistakes/failures/weaknesses that have been known in financial systems for around a century or more in most cases.

Most of the discussion about HN is not about technicalities of smart contracts or block times or ledgers. The skeptics are interested in repeating the same lines but have a very poor understanding of how it works.

That is much less of a problem than the reverse scenario.

Being sceptical of something doesn't necessitate a strong understanding, being an advocate does, or at least should.

Remember the existing systems work and thus far crypto isn't offering anything new, just alternatives with different trade-offs. That places an awfully high burden of proof on any crypto advocate and such a bar is far from being reached.

> Remember the existing systems work and thus far crypto isn't offering anything new, just alternatives with different trade-offs. That places an awfully high burden of proof on any crypto advocate and such a bar is far from being reached.

No it doesn't. Crypto doesn't need to do anything better to succeed. It only needs to capture the imagination of the public. That's what terrifies the anti-crypto folks here and why they furiously post against crypto. You are powerless against this trend just like many were powerless when Facebook, Instagram, and TikTok started their domination of everyone's attention.

You can post collateral, borrow coins, convert to Fiat and spend the borrowed money on what you like. Sounds like a (collateralised) loan to me?

As a peer comment says, collaterlised lending is very popular in traditional finance to avoid taxable events and gain leverage.

There are plenty of critiques around Crypto but this isn’t one of them.

> avoid taxable events and gain leverage

This is a highly specialised use-case unlike a normal loan. And the collateral for this is as difficult to obtain as the cash you'd like to borrow in the first place. [EDIT: More difficult because the "loan" is over-collateralised!]

> There are plenty of critiques around Crypto but this isn’t one of them.

No. It's a perfectly good critique of how DeFi people abuse the word "loan".

Defi isn’t just bullshit as far as I know, it is an actual scam that wouldn’t be allowed at banks - I’m surprised regulators haven’t shut down Defi yet. Doesn’t everyone wonder why exchanges advertise interest at 10% - 20% on deposits and at the same time advertises 0.1% loans to others. These things can’t coexist at the same and no one questions the method. What I understand they do is take your deposit and essentially lend that same deposit out 100 times over in a chain of transactions and different cryptos to pay you back interest - and then like Celsius eventually fail. How can they loan out the same cash 100 times? As far as I know, they take control of the deposit - loan that to someone and take that someone’s crypto as collateral, and then loan that collateral out taking collateral from others again, then loan that out, and so on. This is possible in the ecosystem by going between several different cryptos that all allow them to “Defi” with themselves as well. Basically they only need a very small amount of deposits to create a crazy number of loans. I won’t claim to be in the industry but this was the best explanation I’ve received yet, from essentially a leaked, on how they make money.

> You can't use these "DeFi loans" to buy a house in the real world.

You can if the person selling the house agrees to accept the token (likely some form of stablecoin). Whether that matches your definition of 'real world' or not, these things have happened already. We will probably see less of this in the US, but I can imagine someone in another country gladly accepting tokens. I don't see why this is so far fetched at this point.

> don't see why this is so far fetched at this point

Because you've fetched it far with "I can imagine someone gladly accepting tokens for a house"

You mean like this?

https://www.cnbc.com/2022/05/02/greenwich-mansion-for-sale-w...

May 2? Before the fall of Bitcoin? Well, I doubt they will sell now

I don't know how how many deals went through but there were ads in my country for buying houses with bitcoin [1]

[1] https://www.mercadolibre.com.ar/inmuebles/blog/propiedades-e...

I've seen many an advertisement for many a thing.

Accepting tokens isn't the issue. The issue is you can't put up the house you're going to buy as collateral for a DeFi loan. You need to have other crypto assets worth 1.5x or more than the house you're going to buy.

> The issue is you can't put up the house you're going to buy as collateral for a DeFi loan.

Of course not, you don't own it.

Do you understand what a mortgage is? You put up the house you're buying as collateral for a loan for the money you're using to buy the house.

Sorry, I guess my word timing sarcasm was missed. You kind of have to buy the house and get the mortgage at the same time. "going to buy" was said multiple times, which implies that the house wasn't purchased yet.

Well this is why having humans in the loop is an advantage, so you get an Agreement in Principle to move the process forward.

Also, we're back to the fundamental problem which is that you can't use a house as collateral on the blockchain but you can in the real world.

There are also things like leveraged buyouts of companies which operate on a similar principle. The capital for the buyout is fronted by a bank loan secured against the company being bought.

And again, there's no timing issue because humans can understand there isn't really a sequencing issue and one party isn't going to just disappear with the funds halfway through the process, and everything is reversible through banking and / or the courts.

> Also, we're back to the fundamental problem

Is it really a problem?

Just to be clear, are you being intentionally dense?

It's by far the most common type of loan a private citizen is likely to need. I want to buy an asset, I take a loan and use the money to buy the asset, if I don't repay the loan the creditor takes the asset.

I don't need to have 1.5x the value of the assets in anything to get such a loan. I just need to convince the creditor that (a) I am likely to eventually repay the loan, and (b) that the resale value of the asset will be sufficient to cover the loan if I don't pay.

If DeFi loans can't handle this scenario, as far as 99% of the population is concerned they're not loans at all.

> You can't use these "DeFi loans" to buy a house in the real world.

Yes you can, the same way you can with stocks. But yes as you said, you need to have more crypto than the house is worth.

I know of people who have used lending protocols to borrow stablecoins, used a centralized exchange to convert those stables to fiat, and used that fiat to purchase things like cars and houses. As I understand it the reason they did this is they assumed it would avoid a taxable event?

It also allows them to stay long crypto.

I don't know exactly the tax situation, but with stocks it's very common that founders or wealthy people in general take loans against their stocks instead of selling, so there's probably good reasons.

"incoherent word salad" is a tautology... "word salad" is already incoherent.

What if it's a salad of incoherent words? :)

>You can't use these "DeFi loans" to buy a house in the real world.

Sure you can. Take out a loan, convert it to USD at an exchange, withdraw into your bank account, buy a house.

This is typical of DeFi people. "Technically correct is the best kind of correct."

Your collateral would be other crypto. So it would:

- Be worth more than the house.

- Be completely virtual, so you can't use it to do anything in the real world.

- Be fairly liquid, as if it were already money.

- Be as difficult to obtain in the first place as the cash needed to buy a house without a loan. [EDIT: More difficult because of over-collateralisation!]

> Be completely virtual

Isn't all money completely virtual? Yes, of course there are physical notes, but those just represent the money

In physical world a collateral can be a car or house. In that case you continue using them while paying out the loan. In crypto world "loan" is a pretty pointless construct useful only for attracting clueless investors.

Only if you already had the money equivalent in the first place. Whatever you used as collateral will be something the other side would have gladly bought for the same amount. It's a speculative transaction between you and the other side that is completely unrelated to the house.

In real life, the collateral for the loan you use to buy a house is that house itself, something you did not own before (and arguably not before you are done paying back to mortgage).

Loans do not need collateral, for example educational loans.

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