Borrowing on crypto

Defi 101 Course
#1

Ok, so if I get a loan, I can only borrow up to 70% of the value of the coins I put as collateral. However, if the value of the coins I put up for value drops, I may get liquidated. Ok got it.

With all that in mind, do the lending services give the people getting the loan a chance to add more collateral to maintain the 70% ratio or do you just automatically get liquidated?

Also, do you always get liquidated no matter what or is it up to the governance people?

How are liquidation decisions made? Is it automatic, like a strick smart contract or are people involved to make the final decision to liquidate?

Thanks

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#2

You can always add funds to your debt position, but it must be done before the price drops!

The liquidation is via smart contract, and will execute when the conditions are met, in this case, when your position is greater than 70%. When you are borrowing this high, and you are using a browser-based UI, the UI will warn you that your position is at risk of liquidation.

You must always be aware of this risk. The main use case for these loans would be arbitrage. It works well because your debt position will exist for a few blocks max (minutes in real time). Taking out long term loans will surely increase your risk of liquidation.

Keep in mind, as the value of collateral increases, your ability to borrow is always proportional to the collateral, so it will increase as well. Also, you liquidation will also be proportional to your debt position. You will be liquidated for the debt, not the entire collateral (plus fees).

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#3

That answered all my questions. Thank you so much. Next question. How do you suppose I could get into arbitrage? Do I just have to be in a bunch of exchanges or is there a more efficient way? Thanks for your insights.

#4

By definition, you would have to leverage gains against prices of two exchanges, one being lower than the other. You do have to be quick, as these prices change fairly quickly.

In the case of flash loans, you will have to find an opportunity with one block, which on ETH based DeFi is an average of around 14 seconds. I have discussed in other conversations using bots (namely node.js) to search and perform such trades.

Why isn’t everyone doing so? ETH fees are high enough that the amount of funds required to actually leverage gains will be in the $10,000+ range. Finding such available opportunities requires liquidity pools available in such amounts, and then there is the issue of front-running bots (needs to be seperate discussion).

In short, it is very difficult executing profitable arb trades without the use of bots or other automated processes.

#5

This sounds like why YFI is so important

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#6

Keep in mind, according to the devs, YFI has zero monetary value, and serves as a governance token. Anyone who buys the token most likely expects to sell it higher, but in reality, you would have to convince someone else to buy it. It truly serves as voting rights to amend and append the protocol.

These tokens are farmed, and makes little sense to purchase. The valuation of the coin doesn’t take into account the mechanics and function of the coin, so only looking at the price is very misleading. In fact, yield farming has been giving DeFi as a whole a bad rep, as BTC maxis shill it as a scam for these points above.

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#7

I totally agree. I wish I still bought yfi when I saw it at 1000 though. LOL

#8

Pardon my French and a stupid question, but

Why do I want to borrow less than I’ve got already?

#10

This is typically done with large portfolios for tax purposes because debt is tax free. This way you can borrow against appreciating assets without having to sell. Ideally the appreciated amount could be sold off to pay back the loan so that you still have the original amount of crypto.

For example you borrow 10,000USD against your portfolio, and it appreciates by 10,000USD or more before the loan needs to be repaid you could use that amount to pay it back with no loss.

#11

https://www.youtube.com/watch?v=OvAEQhbuvMI

#12

Thank U for clear answer and smooth sentence. This makes sense in borrowing fiat (if U want to use in everyday life) and put Ur tokens as colateral. But when U get token U have to exchange it anyway, so a tax obligation is born in that moment. Isn’t it?

And second though, maybe it is middle-school crisis, but I see serious doubts in saying all the time how it is changing the finance world for unbanked in poor countries. Costs are huge for transactions in ETH, f/ex. I wanted to check this pool loterry and a cost of confirming 200 USDC deposit was 148 USD. I got upset living a comfy life in EU, so what some farmer in Philippines will say?