DeFI Interest rates

I don’t completely get how the interest rates are generated in the long run. Yes, the interest rates for borrowing are higher than lending, but you need to deposit an initial collateral before you can borrow anything.

Example with compound:

  • I need 7,5 ETH worth of DAI and I hold 10 ETH in my wallet
  • I can supply 10 ETH and borrow DAI which are worth 7,5 ETH (due to collateral factor of 75%)
  • If I really need to pay with DAI for something, woudn’t it be way “cheaper” to simply trade the ETH to DAI on an exchange?

If you just need another coin why not simply trade it and use it? Is anyone really “spending” their coins or is everyone just interesting in earning COMP during the borrowing process? Also what are some applications or goods where are the usual BAT, DAI, Augur etc are currently spend?

What am I missing? I appreciate any answers :slight_smile:

You wouldn’t need to sell the ETH therefore would avoid a tax position. I’m not an accountant and am new to this, so my answer is a novice perspective.

I have another query about Interest rates, I was on and trying to save my dai to earn interest, but the interest rates are 0% today (05/August/2020). What is the scenario causing 0% interest - is it supply/demand and everyone wants to lend and earn interest, but no one is borrowing?