Why would anyone borrow using a DEFI (Decentralised Finance) platform?

Question

Introduction 
DEFI lending platforms like Aave are decentralised finance protocols which enable anyone to either lend their crypto-assets (usually ethereum) for high % interest, or lock up their crypto-assets to borrow a fractional amount (usually up to 75%) of another crypto-asset.
For example, using Aave you could lock up $100 of Ethereum and get a loan of $75 in USDC.
There is an incentive to lend your cryptocurrency on a DEFI platform, because the platforms typically offer higher interest than a bank deposit. As a crypto-asset lender, you can get up to 9% PA on some assets, which is better than any bank deposit.
My Confusion...
However, I don't see why anyone would borrow another crypto-asset using a DEFI website/protocol, because you need to lock up more collateral than the total loan is actually worth.
My Question...
If the person already has enough crypto to trade into the other asset in the first place, then why would they bother borrowing it from a DEFI platform?

David Schwartz · Accepted Answer

You would only do this if you don't mind locking up the collateral. For example, say you have $100 worth of ETH and you plan to hold it long term anyway. Having to lock it up has near zero cost to you.
With the $75 in USDC you borrowed, you could even buy more ETH. So now, you have a leverage long -- you have $175 worth of ETH for only $100 cost of your position. Of course, you lose big if ETH goes down.
Alternatively, you could spend the $75 worth of USDC. This lets you get most of the benefit of spending your ETH while retaining your exposure to any upward movement of ETH's price.
Again, you would only do this is you wanted to have a long position in ETH.

Why would anyone borrow using a DEFI (Decentralised Finance) platform?

One Answer

Add your own answers!

Ask a Question