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?

Ok, the tax issue can be one thing. I guess that can be quite different for each region.

After trying out and working with defy I can answer my original question:
One big topic is that you actually want to keep ETH and want to benefit when ETH prices go up. You can still work with your DAI to yield farm, use it for liquidity pools or do something else, but at the end of the day you can supply your borrowed DAI back and take out the ETH

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I would borrow against my ETH rather than sell it, even paying an interest rate, because I know the value of my ETH will go up more than what the interest will cost.


Longterm selling ETH or BTC is usually very expensive.
Defi is amazing.