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Comment by JonathanBeuys | Hacker News Reader

"SALT Lending launched in early 2018, allowing cryptocurrency owners to take out a loan using their crypto as collateral"

I guess the math for such a business is:

- User deposits crypto worth X dollars.

- User can take out up to X * Y dollars as a loan.

- If the value of the crypto falls below X * Y * Z, it gets liquidated

Where Y<1 and Z>1.

Any ideas, what Y and Z usually are?

I also wonder what the use case for using such a service is? Anybody here ever used such a service? If so, why?

My vague feeling is that it is for tax prevention? Say you bought BTC for $1, and now it is worth $101. If you convert it into dollars, you will have to pay taxes on the $100 you earned. If instead you loan $90 and hand over your BTC as collateral, you do not have to pay any taxes, correct?

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It's not for tax reasons, it's usually because you want to participate in a protocol which uses some other asset but you don't want to sell your bag.

eg.

Buy BTC for $1. BTC goes to $150, you think it might go to $10000 but you want to earn interest on your unrealised gains in the mean time.

You use your BTC as collateral on a 100 USDC loan and put your 100 USDC in an interest earning pool.

Now you're earning interest on USDC while you wait for your BTC to go to the moon.

Alternatively, BTC goes to 125, you get margin called. You either deposit more BTC or you get liquidated and keep the remainder, less any liquidation fee that typically goes back to the protocol that gave you the loan.

The amounts of collateral and margin needed totally depends on the protocol, collateral assets, etc. and in many cases is not even a fixed ratio. One example for you is DAI (1 DAI ~= 1 USD) which has a minimum of 150% collateralization ratio when being minted with ETH.

Yes, I would file that use case under leverage:

https://news.ycombinator.com/item?id=33620143

If you use your credit to buy USDC or some other asset, in any case, you are taking on more risk.

But I would not say it is not for tax prevention. How do we know for which of the two reasons users use lending platforms?

> I would not say it is not for tax prevention. How do we know for which of the two reasons users use lending platforms?

Debt is a classic way to prevent tax, but that there are also other reasons to take on debt.

> I guess the math for such a business is: - User deposits crypto worth X dollars. - User can take out up to X * Y dollars as a loan. - If the value of the crypto falls below X * Y * Z, it gets liquidated

My understanding is (deliberately) limited here but I have friends who participated in this or some other scheme like it, and the point is just purely speculative gambling. Take some slightly legitimate crypto token, take out a loan against it to buy shitcoin, rinse and repeat while hoping that everything goes up forever and/or you cash out right before everything comes crashing down.

I think what you described is leverage.

You own an asset worth $100. You give away your asset as collateral to borrow $90. You buy more of that asset for $90. You give away your asset as collateral to borrow $80. You buy more of that asset for $80. Now, if the asset goes up/down in value, you earn/loose as much as if you invested $270 into that asset. Even though you only invested $100. The downside is that you have to pay fees to the lending service. And that you are exposed to counterparty risk.

Shouldn't Z be greater than 1? Or else you're guaranteed screwed when the market turns. But then I guess that's what happened here.

You are right! Fixed!

I have never heard of SALT, but what you describing sounds like an overcollateralized loan to me. One use case would be to short something. For example, you could deposit USDC and borrow ETH. Sell ETH, wait for price to go down, buy it back, and pay back your loan.

Yes, it is an overcollateralized loan.

And yes, borrowing an asset and selling it means you are short regarding that asset.

I assume you mean borrowing an asset. You cannot short most assets because for most of them only spot markets exist, no derivatives. So the ability to have a short position on these assets is a big use case.

Yes, "borrowing". Fixed!

Correct. It's a way to either spend your gains or move them into a different crypto/asset while deferring what would otherwise be a taxable event.

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