Ask HN: How to think about crypto lending?
It looks like this is growing very rapidly (e.g. [0], though not sure how reliable this source is), so it seems significant to the evolution of the market. It looks like mostly people are lending to themselves (so that they effectively have leveraged/borrowed bitcoin) rather than lending to others.
Is this a tax loophole that makes bitcoin very attractive for people trying to keep their money "off-shore"? Is it a tactic to get more bitcoin for the same amount of dollars? Is this a sign that bitcoin is maturing and starting to back economic activity (after all, paper money also started as bank IOUs on gold)? I'm not sure whether to see this as a major red flag, or whether legitimate new markets are forming here.
[0] https://ambcrypto.com/how-did-bitcoin-lending-become-so-popular/
46 comments
[ 3.6 ms ] story [ 96.5 ms ] threadThe way it works (~roughly) is that instead of selling the crypto, you deposit it into a smart contract that then issues you a loan in eg stable coins (DAI, USDT), with your crypto locked as collateral.
Makes sense in theory, but are people actually doing this? Can you point us to more info about it?
This is one such example of an 8-figure credit line using 4.5k worth of Bitcoin: https://defiexplore.com/cdp/9167.
In case it wasn't clear, DAI is a stablecoin, 1DAI=1$.
Lock up ethereum -> borrow dai against it -> lend dai out and earn interest on it, withdraw whenever you want.
There are more complex yield farming strategies to get the best rates on your assets, leveraging them through debt positions and lending. There are pools to automate this like yearn.
There are now sites like alchemix where you can lock up your collateral into a lending pool, borrow against it, and the yield on the locked collateral pays off the borrowed debt position. Self-repaying loans!
Multiple times over the past year I have locked eth, taken $s to pay rent/buy stuff. Then come back later paid back the owed $ and get my eth back.
https://defipulse.com tracks the value locked in different protocols, it was less about $0.5 billion this time last year, now over $40 billion.
https://compound.finance/ https://oasis.app https://yearn.finance https://aave.com
It's interesting to watch the progression of DeFi projects as they're being developed. Being an early adopter in experimental financial technologies has its own set of risks, but at least these risks don't affect non-participants.
I don't think "depositing into a smart contract" is any more necessary than someone moving out of their house when that's used as collateral.
Conceivably one could simply pledge a set of UTXOs as collateral, and the moment any of them move, which is easily monitored, THAT potentially triggers action on the loan.
This is a simplistic idea of what auditors do.
Auditors do more than verify "they have $50M in their bank account". They're also there to verify more complicated things like "they haven't promised that $50M to someone else already".
This was a major issue with Tether, for example.
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
That seems like a shoddier implementation of what the smart contract would do
not possible. Once collateral is moved, it's moved. You can't even call it collateral if the other person can easily take it away in front of your eyes. It's only collateral if it's locked up and has a dispute period (see: payment channels collateral)
Some people online like to imply that paying for advice means you can blindly trust it. It's always a good idea to DYOR regardless.
Something that you get with communities like HN and Reddit is being able to read replies to comments pointing out bad advice.
Again, generally speaking they carry insurance much like a doctor has malpractice insurance.
The risk for them is causing enough damage (and the resulting insurance payouts) rendering them uninsurable which is generally a career ending state to be in.
Truly egregious stuff can end up with disbarment and other certifying bodies revoking stuff. Again much like a doctor screwing up to the point where they lose their license.
Then, like anyone else, criminal liability is always a possibility if the situation calls for it.
It ultimately comes down to accountability, which Bitcoin is designed to distribute among it's users. The more accountability you add to the system, the more pointless your cryptocurrency becomes. All of this is basically impossible without some sort of middleman facilitating the transaction, hopefully with collaterals on either side. Again though, it's kinda a self-defeating premise.
The risk may be worth the 8-10% interest.
But many people confuse borrowing with lending, companies like blockfi offer you both. If you borrow to get yourself into leverage, you're running risk of liquidation. If you're simply lending it, you can make back 3-7% back interest in your crypto and blockfi and other places will provide that crypto as liquidity to institutions (presumably to short-sell).
You can also do it through DeFi protocols, MakerDAO is the most popular, you can see some stats at daistats.com (roughly 3B+$ in collateral and debt). It creates this weird cycle where if the price goes up, you can borrow against your increased collateral value to buy back even more which in turn increases the price further. I suspect there's some things slowing that dynamic at the moment, but it certainly plays some role.
And I should also add that this is a fairly common way for wealthy people to access liquidity while keeping their assets, I believe Larry Ellison is one of the famous example of this[1], but now it's democratized for anyone who has cryptocurrencies.
1: https://www.steubencourier.com/article/20140926/BUSINESS/309...
There are probably hedge funds or other large institutions who want to trade USDC or BTC without owning it. I am not a professional investor, so I don't understand quite why they wouldn't just buy USDC or Bitcoin outright and trade it...
But, every market needs liquidity and you basically are providing it by lending out your assets. There are some protocols emerging which lets you keep ownership of your coins and still lending them out.
I would go to BlockFi or other 2-3 bigger institutions (maybe even Kraken or Coinbase) and lend USDC out for currently 10%.
I don't know about taxes much, it depends on the country. All crypto is tax free in Germany after 1 year, so people mostly hold for a year and sell.
I am lending out USDC because, well, where do I get 10%? Also, lending out BTC means you can still keeping it while profiting from it.
Few people here understand that people actually don't want to sell Bitcoin since it seems to be a hard asset, and you don't want to get rid of it. So you can profit from the gains on the BTC price WHILE ALSO profiting around 5% a year of it. It's like a dream.
I don't expect this to go on for ever, but the market needs liqudity and its a perfect time to do so.
[0] https://www.realvision.com/shows/the-interview-crypto/videos...
how is it possible? When you lend your assets, someone can give it to other person. You cannot keep ownership of something others control?
The US stock market has returned more than that on an annualized basis over the past decade.
(yes, I realize past performance isnt future returns in stock markets, but returns are hardly riskless in crypto either)
I would question some of those assertions. Especially the ones about counterparty risk.
Lots of times in finance when things are too good to be true it's because they are.
I'm not the most sophisticated in tax avoision strategies but other than straight up illegal evasion I don't see how Bitcoin changes the picture at all. Oh yeah and as far as Bitcoin having it all on a public ledger that just makes their job easier. Don't even start with tumblers or whatever else... Taxing authorities have been tracking down income since the days of Rome. They know what they're doing. I believe the current stats for IRS enforcement measures are they return $4 for every $1 spent on investigation, recovery, and prosecution. When it comes to a government agency they likely provide the best ROI (and I'm betting by a large margin).
Simply put, if you're evading taxes with bitcoin (or virtually any other method) and they decide to even take a peek at you you'll likely get caught and upgrade your charges to criminal tax evasion. While there is some cherry picking of cases to game this statistic last I checked the Government has a 97% conviction rate in Federal cases. Once again, unless you're "too big to fail" if they investigate evasion you're going to prison.
As for loans, you've ALWAYS been able to take out loans against other assets - it's a common leverage tactic and some would argue it's stupid not to. Loans against secured (real) assets typically come with comically low interest rates because there's less risk to the lender (the asset can always be seized). Think mortgage vs credit card.
I haven't looked at this crypto lending yet but I would imagine that as part of the loan either the private keys of the wallet or the wallet itself would need to be placed in escrow (or similar). If you default on your loan the escrow company just moves it to your lender (much like a bank, storage facility, etc receiving a lein or judgement against you would). It's just that in the real world for physical assets the bank has to pay for the police to show up at your house and kick you out or seize the asset at gunpoint. Once again, Bitcoin just makes their job easier.
When comparing interest rates to potential asset appreciation it's borderline stupid to have liquid capital sunk in to an asset you can loan against. Sure you're kind of rolling the dice in some regard but if over the term of the loan the asset appreciates more than what you paid in interest you made money from the loan. Trump famously got into trouble with this in the 80s/90s with some EXTREMELY risky leverage strategies.
But at level, as was said then and now: "When you owe $100,000 to the bank you have a problem. When you owe $100,000,000 to the bank they have a problem."
EDIT: When talking about escrow I completely forgot about smart contracts and the like. Either way it's quite possibly the easiest collateral to recover.
With crypto, one cannot simply short by temporarily minting a new coin. If you borrow a coin from me and sell it on to someone else, there is no way, if you default, for me to claw it back. Someone more-clever may have found a way to mitigate that risk somehow, but I don't immediately see one.
MakerDAO has a pretty well thought-out economic model that lends out stablecoins to borrowers that provide crypto collateral: https://youtu.be/wW1IEZeWY4k
Seems like a good way to get access to spendable funds to buy something like a car without losing crypto exposure and subjecting yourself to capital gains taxes.
It doesn't work as a way of leveraging your money with a small "down payment" like you'd do with a traditional auto loan or home mortgage.
There's alot more to it and details on all the different platforms, I would take your questions away from HN though. People here are very anti crypto.
Uh oh. See the section in the article on "re-hypothication", where the same collateral is behind multiple loans. One problem with these things is that a small but widespread down period can turn into a collapse. Like the mortgage collapse in 2008.
Anything that's paying 7% a year on borrowed funds is worrisome. No institutional investor will pay 7% a year for money.
The borrowing rate can be much higher than 7% for short positions.
There are many different institutional investment strategies that are willing to incur wildly varying rates of interest.
Most companies that do this take custody over your collateral, and often times lend it out (pocketing some or all of the interest earned). This is called rehypothication, and is very risky. I do know that Unchained Capital is one company that let's you take a loan using your bitcoin as collateral without giving them custody of your coins nor rehypothicating them. You have a 2 of 2 multisig wallet where you hold one key and they hold one key.