Crypto mania !

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txhill
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Re: Crypto mania !

Post by txhill »

NiceUnparticularMan wrote: Fri May 14, 2021 10:41 am
txhill wrote: Fri May 14, 2021 10:24 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:21 am I can believe there are better ways to lend to high-risk borrowers that may allow those borrowers to get lower rates in the end. Of course in many cases, these truly are high-risk borrowers, who might not in fact pay back those loans. But the notion that maybe some such high-risk borrowers are nonetheless underserved, and that even maybe somewhat lower rates for such borrowers could still allow their lenders to make a reasonable aggregate return on such loans, is not inherently suspect to me.

What I am skeptical about is the notion that being the lenders to such high-risk borrowers is likely to produce a risk-adjusted financial windfall for such lenders. Indeed, the very premise here would seem to be that such lenders will do worse, not better, in risk-adjusted terms, if such borrowers are getting lower rates.

So, I guess if you are a high-risk borrower, and now you are borrowing crypto through these systems, and then you are converting that crypto to dollars and paying off higher-rate credit cards or avoiding payday loans or paying off the local loan shark--good for you!

But if you are the person newly LENDING to such borrowers? I mean, I guess good for you in a different sense, but not necessarily a financial sense.
I think what will happen over time as DeFi becomes more widespread and established, the rates will decrease to closer to a risk-free rate of return (still above that but certainly less than what's achievable now). Much better for borrowers and still better for lenders than a traditional savings account. That's just my uneducated guess because lower risk implies lower returns. It's just that right now there is a huge demand for DeFi that is not even close to satisfied yet, and also DeFi is still risky as it is not fully established and fully tested (high risk). A program glitch could wipe out lenders. But give it time...
But fundamentally, that prediction makes no economic sense.

There are in fact borrowers who are a risk to not fully pay back their lenders, and some have a pretty high risk of that.

Why would they be able to borrow at risk-free or near-risk-free rates? That makes no sense, because in the aggregate their lenders will predictably lose money on those loans.

You seem to only be talking about risk in the form of a program glitch or something like that. But a major risk to lending is just that some person or company takes your money based on the promise of paying it back on certain terms, and then they don't actually do that.

As we are discussing in multiple places now, traditional FDIC savings accounts have extremely favorable terms for those lenders--the principal is guaranteed (up to the FDIC limit), and the money is fully callable on demand. It makes sense with terms so favorable, the rates would be so low.

In contrast, if you loan that same money to someone offering you a lot higher rates, it is almost surely the case that they are not actually able to guarantee the principal, nor that the money will be fully callable on demand. Even if they say all that, they are probably not telling you the truth. Because if they could credibly promise all that, they could get much cheaper loans.

So I am really puzzled by this logic. Completely independent of issues about intermediaries, loaning people money is generally a pretty risky thing to do, and sometimes it is a VERY risky thing to do. And if you are loaning to people at a risk-free rate, or near risk-free rate, and then too many of those people don't pay you back, you will lose money. Hence why in fact many borrowing rates are a lot higher than the risk-free rate--they are not risk-free loans!
With overcollateralized lending they should be able to borrow at low rates over time, and lending won't be obtaining 10% rates forever. Maybe I'm wrong and rates stay high. And for other types of lending without overcollateralization, of course borrowers will be subject to higher rates, but even then there will probably be DeFi solutions that will provide lower rates to borrowers than can be achieved through other CeFi means while minimizing risk of default to any individual lender through use of sufficiently large liquidity pools. I don't know enough about that frontier though yet.
txhill
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Re: Crypto mania !

Post by txhill »

NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am What sort of collateral?
Currently, crypto assets. But folks are developing protocols that use what are called oracles, which are trustless protocols that assess the value of physical assets. I am sure that it will be possible over time to use non-digital assets as collateral.
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HomerJ
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Re: Crypto mania !

Post by HomerJ »

JonnyDVM wrote: Fri May 14, 2021 7:13 am This can all be true, and yet as long as you're towards the front of the line cashing out your chips everything is hunky-dory. There will be bag holders in this just like every other financial mania in history. That doesn't mean you can't participate in the fun, and make a quick buck.
That is correct. Some people do get rich in pyramid schemes. The fact that some people do get rich doesn't change the fact that it's a pyramid scheme and a lot more people get hurt. It's dangerous to call it "fun". It won't be fun for many real people when they lose their real life savings.

The point to remember, some guy is screaming "Look at me, I got rich, it must be legit" is not enough to prove it's legit.

Until there is a huge crash, AAVE has not been tested, and has not been proven to be legit. It certainly doesn't pass the common-sense test.

"Only when the tide goes out do you discover who's been swimming naked."
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csmath
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Re: Crypto mania !

Post by csmath »

NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am
txhill wrote: Fri May 14, 2021 10:30 am
csmath wrote: Fri May 14, 2021 10:24 am *color emphasis is mine*

I know things get contentious in crypto threads, so please read this as an honest question with no bad intentions.

If we are talking about people in poor financial conditions then aren't we talking about people who have a high likelihood of not actually being able to pay the debts in the first place? I know that there is such thing as predatory lending but I always rationalized some the high lending fees to the fact that not all the borrowers actually pay back the money in the first place which increases the risk for the lenders. In order to stay in business with a profit they need high enough interest rates to cover for the people that never pay up right?

So here is the logic to my question.
  • First, not all users of crypto are in it for the same reason. Let's ignore the innocent "bankless" people and include the people who are over-leveraged with debt in the first place. This is not a small group.
  • Add another group utilizing exponential leverage where crypto is borrowed to invest/speculate with.
  • What happens in cryptoland when someone borrows crypto and then never pays it back? I'm assuming bankruptcy works the same way for both crypto debt and USD debt right? Or doesn't it? This may be a whole new topic entirely because who's laws get applied in a decentralized, worldwide system?
  • If things are becoming exponentially leveraged, and someone doesn't pay back a crypto debt, doesn't that create a time bomb?
Many DeFi systems require overcollateralization. Meaning that the borrower has to put up more collateral than they borrow, and the DeFi platform automatically liquidates that collateral in favor of lenders if the borrowed amount is not repaid / collateral drops in value.
What sort of collateral?

Edit: Oh, and how is this consistent with your narrative about replacing payday lenders, loan sharks, high-rate credit cards, and such? Those folks typically don't have collateral that can actually be liquidated to cover those loans.
Good question. If the collateral is crypto, and a market correction drops the value of the collateral triggering a liquidation, doesn't that further depress the markets, which trigger the next rung of collateral to be liquidated, depressing the market further, triggering the next rung, etc. In the traditional financial world, most collateral is required to be of stable value and cannot be used over and over again for different loans right? That sounds like a Robinhood world.

Can I deposit $100k into cryto and invest it, then use it as collateral for a cryto loan and invest that borrowed crypto, then get another loan off that investment... to invest... etc? This sounds like a really dumb question but while I feel I have a decent grasp of the tech side of blockchain/crypto, I haven't kept up with the "ecosystem".
Hustlinghustling
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Re: Crypto mania !

Post by Hustlinghustling »

I've pointed out many times now but most people who are borrowing cryptocurrency with overcollateralized arrangements are likely to be institutions shortselling the cryptocurrency (the opposite of buying more crypto as everyone fears!)

The futures and options derivatives market for crypto requires crypto lending in order to operate.

I can see borrowing in the stablecoins though to perhaps be the more conventional cases you guys are talking about where I'd guess easier KYC or perhaps deferral of capital gains is a big draw.
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HomerJ
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Re: Crypto mania !

Post by HomerJ »

txhill wrote: Fri May 14, 2021 9:03 am
Janus887 wrote: Fri May 14, 2021 8:46 am That being the case, can you explain to me who in their right mind would prefer to borrow crypto at a rate of 8, 10 or 12% at at time when fiat interest rates have never been lower? If The USDC stablecoin is actualy backed by dollars 1 for 1, why wouldn't you just borrow in dollars in the first place? To ask the question is to answer it. Obviously no one would do this. Something fishy is afoot.
I see this argument quite a lot, which is perfectly sensible from a Boglehead perspective where all of us have solid credit ratings and access to cheap credit. This is not the case for everyone. When you're well off, life is cheaper. You are forgetting about:

- The amount of credit card balances that aren't paid off every month, so they're paying outrageous usurious rates.
- People who use payday lenders. They pay even MORE outrageous rates. You wouldn't believe it. In some states without rate caps it gets to 600% APR.
- Number of adults in the United States who do not have ANY credit score: 53 million. Worldwide? Yeah, it's probably in the billions.

These are all people who would benefit from a bankless system. They'd pay 10% to borrow compared to the options they otherwise have available to them (which may be none at all). And lenders can finally lend because there's now a programmatic system that minimizes any counterparty default risk, and doesn't require even going out and finding borrowers in the first place.

And even among the banked, how many people really want to fill out a bunch of loan docs AND sell assets incurring capital gain taxes, if they want to have immediate access to additional capital for a trade or opportunity (which does NOT have to be in crypto)? It's more than you think (because many of those people already are making use of these platforms already).

You're underestimating the addressable market here because you are failing to consider the underbanked and unbanked in the world, just because you have it good already.
Those people you are talking about who might be interested in 10% loans, 99% DON'T HAVE 2X COLLATERAL in crypto-currency.

And if they do, they last thing they should be doing is risking it like this. They should take 1x, and pay off credit cards or buy a car or whatever they wanted to borrow money for, and let the other 1x ride if they have that much faith in crypto-coin.

You're pushing a false story. The only use for those loans right now is more trading.
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NiceUnparticularMan
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Re: Crypto mania !

Post by NiceUnparticularMan »

txhill wrote: Fri May 14, 2021 10:45 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:41 am
txhill wrote: Fri May 14, 2021 10:24 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:21 am I can believe there are better ways to lend to high-risk borrowers that may allow those borrowers to get lower rates in the end. Of course in many cases, these truly are high-risk borrowers, who might not in fact pay back those loans. But the notion that maybe some such high-risk borrowers are nonetheless underserved, and that even maybe somewhat lower rates for such borrowers could still allow their lenders to make a reasonable aggregate return on such loans, is not inherently suspect to me.

What I am skeptical about is the notion that being the lenders to such high-risk borrowers is likely to produce a risk-adjusted financial windfall for such lenders. Indeed, the very premise here would seem to be that such lenders will do worse, not better, in risk-adjusted terms, if such borrowers are getting lower rates.

So, I guess if you are a high-risk borrower, and now you are borrowing crypto through these systems, and then you are converting that crypto to dollars and paying off higher-rate credit cards or avoiding payday loans or paying off the local loan shark--good for you!

But if you are the person newly LENDING to such borrowers? I mean, I guess good for you in a different sense, but not necessarily a financial sense.
I think what will happen over time as DeFi becomes more widespread and established, the rates will decrease to closer to a risk-free rate of return (still above that but certainly less than what's achievable now). Much better for borrowers and still better for lenders than a traditional savings account. That's just my uneducated guess because lower risk implies lower returns. It's just that right now there is a huge demand for DeFi that is not even close to satisfied yet, and also DeFi is still risky as it is not fully established and fully tested (high risk). A program glitch could wipe out lenders. But give it time...
But fundamentally, that prediction makes no economic sense.

There are in fact borrowers who are a risk to not fully pay back their lenders, and some have a pretty high risk of that.

Why would they be able to borrow at risk-free or near-risk-free rates? That makes no sense, because in the aggregate their lenders will predictably lose money on those loans.

You seem to only be talking about risk in the form of a program glitch or something like that. But a major risk to lending is just that some person or company takes your money based on the promise of paying it back on certain terms, and then they don't actually do that.

As we are discussing in multiple places now, traditional FDIC savings accounts have extremely favorable terms for those lenders--the principal is guaranteed (up to the FDIC limit), and the money is fully callable on demand. It makes sense with terms so favorable, the rates would be so low.

In contrast, if you loan that same money to someone offering you a lot higher rates, it is almost surely the case that they are not actually able to guarantee the principal, nor that the money will be fully callable on demand. Even if they say all that, they are probably not telling you the truth. Because if they could credibly promise all that, they could get much cheaper loans.

So I am really puzzled by this logic. Completely independent of issues about intermediaries, loaning people money is generally a pretty risky thing to do, and sometimes it is a VERY risky thing to do. And if you are loaning to people at a risk-free rate, or near risk-free rate, and then too many of those people don't pay you back, you will lose money. Hence why in fact many borrowing rates are a lot higher than the risk-free rate--they are not risk-free loans!
With overcollateralized lending they should be able to borrow at low rates over time, and lending won't be obtaining 10% rates forever. Maybe I'm wrong and rates stay high. And for other types of lending without overcollateralization, of course borrowers will be subject to higher rates, but even then there will probably be DeFi solutions that will provide lower rates to borrowers than can be achieved through other CeFi means while minimizing risk of default to any individual lender through use of sufficiently large liquidity pools. I don't know enough about that frontier though yet.
We're sort of having the same basic conversation in like three different exchanges.

To try to fold it together:

A typical person borrowing through payday loans, high-rate credit cards, loan sharks, or so on does not have liquid collateral to offer to secure that loan.

So it can't actually be the case that such a system can better serve such borrowers AND also protect their lenders with "overcollateralized lending" at the same time.

Which leads me to wonder what you actually mean by liquid collateral in this case.

As for "minimizing risk of default to any individual lender through use of sufficiently large liquidity pools"--I mean, this is STRAIGHT out of the MBS financial crisis that led to the Great Recession. Some would-be mortgage borrowers are facing prohibitively high rates at conventional mortgage lenders due to the perceived risk of those loans. But, through the "magic" of pooling all these risky mortgages together into securities, we can treat these mortgage-backed securities as low-risk assets instead, right? And then since they are low-risk--right?--we can use them as collateral for more borrowing, and circulate that capital back into more MBS, and on and on! What could possibly go wrong?

And then it turns out there was no magic, the mortgages actually were risky, the MBS were also risky, and they weren't low-risk collateral, and whammo--the whole thing collapses.

Now, I am not saying whatever you are calling "DeFi solutions" have to lead down such a path. But, I do think if your pitch for such "solutions" is that they will magically make lending risk go away such that lenders don't actually have to charge higher rates to high-risk borrowers . . . that pitch is economically implausible and far more likely to end very badly.
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HomerJ
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Re: Crypto mania !

Post by HomerJ »

txhill wrote: Fri May 14, 2021 9:23 am
dt123 wrote: Fri May 14, 2021 9:19 am So you're saying, "Crypto now has a foot in the door on predatory lending. The more the merrier."

Whether people who are already on the debt treadmill should be borrowing more money, as opposed to pursuing other debt-lessening actions, is an argument for another day. I personally want the best for all concerned, so I would never want them to take on more debt, especially at the expense of giving up control of what may be their only asset, an inflated crypto holding. But that's just me.

The bigger fear is that they're borrowing money to buy more crypto, and of course, that's no act of a sane person.

Crypto has already experienced long periods of price decline. To think it won't happen again, once governments start to crack down, is lunacy.
No, I'm saying that when someone is paying 25% to 600% to get loans today, or cannot even access loans at all, and they can get the same loans for 10% instead through DeFi, then it is a net benefit to them. It also benefits those who lend through DeFi as well but the bigger benefit goes to those who otherwise have no access to capital at all. DeFi competes with banks, payday lenders, credit card issuers, and other existing predatory lenders that you are so willing to defend simply because ... why? Why would you even defend payday lenders?
No, txhill... they don't have access to the "same loans" for 10%. They have to put down MORE than the loan itself. And if they already have the money, they don't need the loan.

Maybe someday there will DeFi banking, but there is NOTHING there today for people who you claim could be helped.
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txhill
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Re: Crypto mania !

Post by txhill »

csmath wrote: Fri May 14, 2021 10:53 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am What sort of collateral?

Edit: Oh, and how is this consistent with your narrative about replacing payday lenders, loan sharks, high-rate credit cards, and such? Those folks typically don't have collateral that can actually be liquidated to cover those loans.
Good question. If the collateral is crypto, and a market correction drops the value of the collateral triggering a liquidation, doesn't that further depress the markets, which trigger the next rung of collateral to be liquidated, depressing the market further, triggering the next rung, etc. In the traditional financial world, most collateral is required to be of stable value and cannot be used over and over again for different loans right? That sounds like a Robinhood world.

Can I deposit $100k into cryto and invest it, then use it as collateral for a cryto loan and invest that borrowed crypto, then get another loan off that investment... to invest... etc? This sounds like a really dumb question but while I feel I have a decent grasp of the tech side of blockchain/crypto, I haven't kept up with the "ecosystem".
Yes, that would be the biggest concern--market is not sufficiently liquid to liquidate collateral. DeFi survived the March 2020 crash fairly well, although it was not anywhere near the size it is today. So it is possible that a sufficiently large market event could cause the protocols to be unable to liquidate quickly enough to cover lost collateral value.

And what you're describing about using borrowed crypto as collateral is indeed what some folks do. A lot of them lose their entire stack frequently, given that crypto is frequently losing 30% of its value essentially overnight, which flushes out those leveraged positions. It might even be healthy for the markets that Elon tweets and causes a crash on occasion, flushing out overleveraged longs that otherwise are propping up the market artificially. It's hard to play with leverage in such a volatile environment.

That's actually the distinguishing feature that makes me less scared of a GFC, because in the lead-up to the GFC housing prices ONLY went up, so collateralized debt obligations got out of control because none of them ever got flushed out leading to a huge house of cards.
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HomerJ
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Re: Crypto mania !

Post by HomerJ »

txhill wrote: Fri May 14, 2021 10:45 amWith overcollateralized lending they should be able to borrow at low rates over time
Overcollateralized lending is a dead end.

There is no market for overcollateralized lending for real people in the real world.

It's for crypto-gambling only.

It's not a solution to anything.

Now, can DeFI transition to something different? Sure, that would be wonderful.

But right now, it does not serve the purpose you think it will. Overcollateralized loans have no future in DeFi expanding to normal people.
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NiceUnparticularMan
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Re: Crypto mania !

Post by NiceUnparticularMan »

txhill wrote: Fri May 14, 2021 10:46 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am What sort of collateral?
Currently, crypto assets. But folks are developing protocols that use what are called oracles, which are trustless protocols that assess the value of physical assets. I am sure that it will be possible over time to use non-digital assets as collateral.
So as many have pointed out, using crypto as collateral for crypto lending in no way is a sufficient guarantee that those loans will actually be paid off in real terms. Again, it sounds an awful lot like the sort of reasoning that led to the Great Recession.

But if and when those loans are actually secured (right through the whole legal process necessary for collection) by real assets of some sort, then that might be a different situation. I mean, obviously many people can still get mortgages at nice low rates, because THAT sort of "overcollateralization" often makes economic sense for lenders.

But It doesn't sound like anyone has any experience yet with what that would look like, what rates would be involved, and so on in the systems you are describing.
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OohLaLa
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Re: Crypto mania !

Post by OohLaLa »

csmath wrote: Fri May 14, 2021 10:53 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am
txhill wrote: Fri May 14, 2021 10:30 am
csmath wrote: Fri May 14, 2021 10:24 am [...]
[*]If things are becoming exponentially leveraged, and someone doesn't pay back a crypto debt, doesn't that create a time bomb?
[/list]
Many DeFi systems require overcollateralization. Meaning that the borrower has to put up more collateral than they borrow, and the DeFi platform automatically liquidates that collateral in favor of lenders if the borrowed amount is not repaid / collateral drops in value.
What sort of collateral?

Edit: Oh, and how is this consistent with your narrative about replacing payday lenders, loan sharks, high-rate credit cards, and such? Those folks typically don't have collateral that can actually be liquidated to cover those loans.
Good question. If the collateral is crypto, and a market correction drops the value of the collateral triggering a liquidation, doesn't that further depress the markets, which trigger the next rung of collateral to be liquidated, depressing the market further, triggering the next rung, etc. In the traditional financial world, most collateral is required to be of stable value and cannot be used over and over again for different loans right? That sounds like a Robinhood world.

Can I deposit $100k into cryto and invest it, then use it as collateral for a cryto loan and invest that borrowed crypto, then get another loan off that investment... to invest... etc? This sounds like a really dumb question but while I feel I have a decent grasp of the tech side of blockchain/crypto, I haven't kept up with the "ecosystem".
This is one of the major pain points I see with crypto loans and I haven't seen anyone explain this away.

Collateral by itself is not sufficient. Even over-collateralization. Doubly so when the collateral is an extremely volatile asset. Aave seems to take that into account somewhat, with different risk rates associated with different coins, but it's not enough.

Traditional lending works because, not only do you have the option of bolstering safety with high-quality collateral, a borrowers' overall financial health (assets, liabilities EDIT: even income!) is transparent. The only things outside the view of the banks, credit agencies etc. are any aspects outside the system (personal loans, assets you are hiding etc.)

It's extremely hard to create a castle of cards with debts compounding, in the traditional system. In DeFi, this actually seems extremely easy precisely because of the lack of traceability. Aave and company don't check, and can't check, whether you have 5 other crypto loans going already.

If anybody has info on how this is actually being handled by DeFi, I am extremely curious to hear it, because it's one of the key weaknesses, in my mind.
Last edited by OohLaLa on Fri May 14, 2021 11:14 am, edited 1 time in total.
EnjoyIt
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Re: Crypto mania !

Post by EnjoyIt »

csmath wrote: Fri May 14, 2021 10:53 am .......
Can I deposit $100k into cryto and invest it, then use it as collateral for a cryto loan and invest that borrowed crypto, then get another loan off that investment... to invest... etc? This sounds like a really dumb question but while I feel I have a decent grasp of the tech side of blockchain/crypto, I haven't kept up with the "ecosystem".
Yes. Yes you could and that is exactly what is going on out there and the crypto fans either dismiss it, don’t understand why this is a problem, or simply call us ignorant for bringing it up.
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txhill
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Re: Crypto mania !

Post by txhill »

NiceUnparticularMan wrote: Fri May 14, 2021 11:07 am
txhill wrote: Fri May 14, 2021 10:46 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am What sort of collateral?
Currently, crypto assets. But folks are developing protocols that use what are called oracles, which are trustless protocols that assess the value of physical assets. I am sure that it will be possible over time to use non-digital assets as collateral.
So as many have pointed out, using crypto as collateral for crypto lending in no way is a sufficient guarantee that those loans will actually be paid off in real terms. Again, it sounds an awful lot like the sort of reasoning that led to the Great Recession.

But if and when those loans are actually secured (right through the whole legal process necessary for collection) by real assets of some sort, then that might be a different situation. I mean, obviously many people can still get mortgages at nice low rates, because THAT sort of "overcollateralization" often makes economic sense for lenders.

But It doesn't sound like anyone has any experience yet with what that would look like, what rates would be involved, and so on in the systems you are describing.
The last bit is right. I don't think it's clear what shape DeFi will take. As HomerJ loves to point out, most of DeFi today is powered by traders. The idea though is that it will start to fill the gap between what CeFi can offer and what people need, while reducing costs along the way. Buying ETH/DeFi tokens today is NOT a sure thing, don't get me wrong. It's a bet on the rumor and not the news, but I think there's plenty of reason to think that the space is developing at the right pace and in the right direction for it to be a good investment. It's not just a scam or a pyramid scheme, anyway.
txhill
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Re: Crypto mania !

Post by txhill »

HomerJ wrote: Fri May 14, 2021 11:01 am No, txhill... they don't have access to the "same loans" for 10%. They have to put down MORE than the loan itself. And if they already have the money, they don't need the loan.

Maybe someday there will DeFi banking, but there is NOTHING there today for people who you claim could be helped.
If I had to guess, the actual addressable market is in between my overly optimistic take and your overly pessimistic take.
NiceUnparticularMan
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Re: Crypto mania !

Post by NiceUnparticularMan »

txhill wrote: Fri May 14, 2021 11:04 am
csmath wrote: Fri May 14, 2021 10:53 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am What sort of collateral?

Edit: Oh, and how is this consistent with your narrative about replacing payday lenders, loan sharks, high-rate credit cards, and such? Those folks typically don't have collateral that can actually be liquidated to cover those loans.
Good question. If the collateral is crypto, and a market correction drops the value of the collateral triggering a liquidation, doesn't that further depress the markets, which trigger the next rung of collateral to be liquidated, depressing the market further, triggering the next rung, etc. In the traditional financial world, most collateral is required to be of stable value and cannot be used over and over again for different loans right? That sounds like a Robinhood world.

Can I deposit $100k into cryto and invest it, then use it as collateral for a cryto loan and invest that borrowed crypto, then get another loan off that investment... to invest... etc? This sounds like a really dumb question but while I feel I have a decent grasp of the tech side of blockchain/crypto, I haven't kept up with the "ecosystem".
Yes, that would be the biggest concern--market is not sufficiently liquid to liquidate collateral. DeFi survived the March 2020 crash fairly well, although it was not anywhere near the size it is today. So it is possible that a sufficiently large market event could cause the protocols to be unable to liquidate quickly enough to cover lost collateral value.

And what you're describing about using borrowed crypto as collateral is indeed what some folks do. A lot of them lose their entire stack frequently, given that crypto is frequently losing 30% of its value essentially overnight, which flushes out those leveraged positions. It might even be healthy for the markets that Elon tweets and causes a crash on occasion, flushing out overleveraged longs that otherwise are propping up the market artificially. It's hard to play with leverage in such a volatile environment.

That's actually the distinguishing feature that makes me less scared of a GFC, because in the lead-up to the GFC housing prices ONLY went up, so collateralized debt obligations got out of control because none of them ever got flushed out leading to a huge house of cards.
OK, so now you are describing a system in which there is a risk that the purported liquid collateral might not actually function as liquid collateral, and thus that there is a risk the lender could end up not being paid despite the purported liquid collateral. And they absolutely should be demanding higher than risk-free rates to make loans on such terms.

Generally, again, the inconsistency I am seeing is on the one hand you are expecting certain sorts of high-risk borrowers, typically without real liquid collateral, could nonetheless be getting loans at near a risk-free rates. And on the other hand, you think lenders could be getting substantially higher than risk-free rates, but without any real risk due to purported liquid collateral.

Both of these things can't be true at the same time. And it actually doesn't make economic sense for either to be true.
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Re: Crypto mania !

Post by Hustlinghustling »

HomerJ wrote: Fri May 14, 2021 11:07 am
txhill wrote: Fri May 14, 2021 10:45 amWith overcollateralized lending they should be able to borrow at low rates over time
Overcollateralized lending is a dead end.

There is no market for overcollateralized lending for real people in the real world.

It's for crypto-gambling only.

It's not a solution to anything.

Now, can DeFI transition to something different? Sure, that would be wonderful.

But right now, it does not serve the purpose you think it will. Overcollateralized loans have no future in DeFi expanding to normal people.
I agree with you that the overcollateralized loans average use case is not consumer debt but for institutional trading purposes and probably doesn't help down and out Joe much. but seriously, I don't know how people can't get it into their heads about the connection for lending and short exposure and only spout fears of enriching a crypto bubble. especially on a forum as financially savvy as this one.
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Re: Crypto mania !

Post by txhill »

NiceUnparticularMan wrote: Fri May 14, 2021 11:17 am OK, so now you are describing a system in which there is a risk that the purported liquid collateral might not actually function as liquid collateral, and thus that there is a risk the lender could end up not being paid despite the purported liquid collateral. And they absolutely should be demanding higher than risk-free rates to make loans on such terms.

Generally, again, the inconsistency I am seeing is on the one hand you are expecting certain sorts of high-risk borrowers, typically without real liquid collateral, could nonetheless be getting loans at near a risk-free rates. And on the other hand, you think lenders could be getting substantially higher than risk-free rates, but without any real risk due to purported liquid collateral.

Both of these things can't be true at the same time. And it actually doesn't make economic sense for either to be true.
I'm not saying lenders will get risk-free rates, as there will always be programmatic risk and some liquidity risk, but rather that the rates they will get through overcollateralized DeFi will not remain at the 10-20% rates that are currently achievable today, and which folks here love to point out as incredibly unsustainable. I don't know where they will settle but they'll surely be lower than they are today to reflect lower perceived risk of DeFi over time.
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Re: Crypto mania !

Post by Prahasaurus »

It's actually rather funny to see so much discussion on crypto borrowing and lending here. So many crypto experts Bogle-splaining why Aave will fail. OK, I guess we'll see!

Aave's TVL has increased dramatically over the past couple of months, it's now close to 20 billion: https://aave.com. Not surprisingly, the price of the AAVE governance token has increased a lot of late, as well.

You can also see the types of assets supported by Aave at that link, which include higher risk crypto assets like ETH and BTC, but also stablecoins like DAI and USDC, pegged to the dollar. A good healthy mix. As crypto projects begin to decouple from each other and especially BTC, risk will be lowered further. It's all coming, I am very confident of that. Again, Aave has been live for just over 1 year, it's amazing what they've done to date!

Aave let it slip a few days ago that corporate clients are testing their services before they "go live," doing their own due diligence, etc. Someone here asked some time back if Aave was so great, why isn't more money locked in the protocol? 20 billion USD is not so bad, but in any case, I'm expecting a massive increase once more corporations cotton on to how they can earn high rates on their dollar deposits. Good news for them is they can verify the smart contracts themselves, since it's all open source. Once one high profile company starts to leverage Aave, the flood gates will open. Musk putting 10% of cash into BTC was definitely risky, perhaps even irresponsible. But what about using Aave for dollar deposits, earning significantly higher rates on short term cash than banks can offer? Only a matter of time before companies get on board in a big way. :moneybag :moneybag :moneybag

My regular reminder that Aave is 1/30 the market cap of Wells Fargo, but tick tock...
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Re: Crypto mania !

Post by decapod10 »

OohLaLa wrote: Fri May 14, 2021 11:08 am
csmath wrote: Fri May 14, 2021 10:53 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am
txhill wrote: Fri May 14, 2021 10:30 am
csmath wrote: Fri May 14, 2021 10:24 am [...]
[*]If things are becoming exponentially leveraged, and someone doesn't pay back a crypto debt, doesn't that create a time bomb?
[/list]
Many DeFi systems require overcollateralization. Meaning that the borrower has to put up more collateral than they borrow, and the DeFi platform automatically liquidates that collateral in favor of lenders if the borrowed amount is not repaid / collateral drops in value.
What sort of collateral?

Edit: Oh, and how is this consistent with your narrative about replacing payday lenders, loan sharks, high-rate credit cards, and such? Those folks typically don't have collateral that can actually be liquidated to cover those loans.
Good question. If the collateral is crypto, and a market correction drops the value of the collateral triggering a liquidation, doesn't that further depress the markets, which trigger the next rung of collateral to be liquidated, depressing the market further, triggering the next rung, etc. In the traditional financial world, most collateral is required to be of stable value and cannot be used over and over again for different loans right? That sounds like a Robinhood world.

Can I deposit $100k into cryto and invest it, then use it as collateral for a cryto loan and invest that borrowed crypto, then get another loan off that investment... to invest... etc? This sounds like a really dumb question but while I feel I have a decent grasp of the tech side of blockchain/crypto, I haven't kept up with the "ecosystem".
This is one of the major pain points I see with crypto loans and I haven't seen anyone explain this away.

Collateral by itself is not sufficient. Even over-collateralization. Doubly so when the collateral is an extremely volatile asset. Aave seems to take that into account somewhat, with different risk rates associated with different coins, but it's not enough.

Traditional lending works because, not only do you have the option of bolstering safety with high-quality collateral, a borrowers' overall financial health (assets, liabilities EDIT: even income!) is transparent. The only things outside the view of the banks, credit agencies etc. are any aspects outside the system (personal loans, assets you are hiding etc.)

It's extremely hard to create a castle of cards with debts compounding, in the traditional system. In DeFi, this actually seems extremely easy precisely because of the lack of traceability. Aave and company don't check, and can't check, whether you have 5 other crypto loans going already.

If anybody has info on how this is actually being handled by DeFi, I am extremely curious to hear it, because it's one of the key weaknesses, in my mind.
No, I think that's a reasonable snapshot of the situation. You can buy $100k of ETH, use it as collateral for $50k USDC, buy $50k more of ETH, take another loan of $25k USDC, buy more ETH, etc. etc. If the cryptomarket were to have a huge crash, it definitely could have the impact you are thinking about. As of now, there is not a great way to put up hard assets as collateral in DeFi. There is no KYC at all for something like AAVE, as long as you have the assets you can lend/borrow. They don't even know your name.
Last edited by decapod10 on Fri May 14, 2021 11:28 am, edited 2 times in total.
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Re: Crypto mania !

Post by NiceUnparticularMan »

txhill wrote: Fri May 14, 2021 11:11 am
NiceUnparticularMan wrote: Fri May 14, 2021 11:07 am
txhill wrote: Fri May 14, 2021 10:46 am
NiceUnparticularMan wrote: Fri May 14, 2021 10:42 am What sort of collateral?
Currently, crypto assets. But folks are developing protocols that use what are called oracles, which are trustless protocols that assess the value of physical assets. I am sure that it will be possible over time to use non-digital assets as collateral.
So as many have pointed out, using crypto as collateral for crypto lending in no way is a sufficient guarantee that those loans will actually be paid off in real terms. Again, it sounds an awful lot like the sort of reasoning that led to the Great Recession.

But if and when those loans are actually secured (right through the whole legal process necessary for collection) by real assets of some sort, then that might be a different situation. I mean, obviously many people can still get mortgages at nice low rates, because THAT sort of "overcollateralization" often makes economic sense for lenders.

But It doesn't sound like anyone has any experience yet with what that would look like, what rates would be involved, and so on in the systems you are describing.
The last bit is right. I don't think it's clear what shape DeFi will take. As HomerJ loves to point out, most of DeFi today is powered by traders. The idea though is that it will start to fill the gap between what CeFi can offer and what people need, while reducing costs along the way. Buying ETH/DeFi tokens today is NOT a sure thing, don't get me wrong. It's a bet on the rumor and not the news, but I think there's plenty of reason to think that the space is developing at the right pace and in the right direction for it to be a good investment. It's not just a scam or a pyramid scheme, anyway.
I think we are just beating a dead horse at this point, but to sum up: that bolded bit is certainly a nice-sounding IDEA, but it still has to make actual economic sense in practice. And the idea there is some magical way around the fact lenders need to charge high-risk borrowers higher rates in order to cover when those risks actually materialize is not plausible.

So again--are there maybe some market inefficiencies in the current system that lead to certain high-risk borrowers being undeserved? Sure.

Is it plausible that a bunch of people will actually get a windfall from lending to such borrowers on better terms for such borrowers? No, that is in truth a contradictory thought.
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Re: Crypto mania !

Post by HomerJ »

txhill wrote: Fri May 14, 2021 11:16 am
HomerJ wrote: Fri May 14, 2021 11:01 am No, txhill... they don't have access to the "same loans" for 10%. They have to put down MORE than the loan itself. And if they already have the money, they don't need the loan.

Maybe someday there will DeFi banking, but there is NOTHING there today for people who you claim could be helped.
If I had to guess, the actual addressable market is in between my overly optimistic take and your overly pessimistic take.
Fair enough. I agree we could both be wrong. :)
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Re: Crypto mania !

Post by NiceUnparticularMan »

txhill wrote: Fri May 14, 2021 11:21 am
NiceUnparticularMan wrote: Fri May 14, 2021 11:17 am OK, so now you are describing a system in which there is a risk that the purported liquid collateral might not actually function as liquid collateral, and thus that there is a risk the lender could end up not being paid despite the purported liquid collateral. And they absolutely should be demanding higher than risk-free rates to make loans on such terms.

Generally, again, the inconsistency I am seeing is on the one hand you are expecting certain sorts of high-risk borrowers, typically without real liquid collateral, could nonetheless be getting loans at near a risk-free rates. And on the other hand, you think lenders could be getting substantially higher than risk-free rates, but without any real risk due to purported liquid collateral.

Both of these things can't be true at the same time. And it actually doesn't make economic sense for either to be true.
I'm not saying lenders will get risk-free rates, as there will always be programmatic risk and some liquidity risk, but rather that the rates they will get through overcollateralized DeFi will not remain at the 10-20% rates that are currently achievable today, and which folks here love to point out as incredibly unsustainable. I don't know where they will settle but they'll surely be lower than they are today to reflect lower perceived risk of DeFi over time.
Well, if nothing else we seem to have clarified that you really do seem to think plain old credit risk will disappear for lenders in these systems you are imagining, such that they can offer lower rates to high-risk borrowers who don't actually have real liquid collateral.

I don't find that vision economically plausible, and bad things have happened when people have engaged in similar logic at a large scale, but I fully admit it would be nice if I was wrong and that credit risk could simply be magicked away.
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Re: Crypto mania !

Post by NiceUnparticularMan »

Prahasaurus wrote: Fri May 14, 2021 11:21 amBut what about using Aave for dollar deposits, earning significantly higher rates on short term cash than banks can offer? Only a matter of time before companies get on board in a big way. :moneybag :moneybag :moneybag

My regular reminder that Aave is 1/30 the market cap of Wells Fargo, but tick tock...
Doesn't it concern you at all that what you are describing makes no economic sense?

Forget about the technical details for the moment. You have cash you want to lend, but you want the principal to be fully guaranteed, and you want it to be fully callable on demand.

Banks have such products available, but they pay such low rates! It is almost like they don't view those borrowing terms as very attractive!

But aha, someone comes along and offers you much better rates! So obviously you should loan to them instead, right?

But don't you think you should ask why they are offering you so much better rates? Is it possible they are not in fact actually able to offer the same terms?

Again, if someone can explain to me why this makes sense economically, OK. But you are implicitly claiming there are lots of borrowers out in the world who would happily pay high interest rates on truly fully guaranteed, fully callable on demand loans, but gosh darned it, they just can't right now.

And I don't think that is remotely plausible.
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Re: Crypto mania !

Post by Freefun »

Sounds like this discussion can be wrapped up into a screenplay for the sequel to the Michael Douglas movie, Wall Street.
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Re: Crypto mania !

Post by Top99% »

NiceUnparticularMan wrote: Fri May 14, 2021 11:39 am
Prahasaurus wrote: Fri May 14, 2021 11:21 amBut what about using Aave for dollar deposits, earning significantly higher rates on short term cash than banks can offer? Only a matter of time before companies get on board in a big way. :moneybag :moneybag :moneybag

My regular reminder that Aave is 1/30 the market cap of Wells Fargo, but tick tock...
Doesn't it concern you at all that what you are describing makes no economic sense?

Forget about the technical details for the moment. You have cash you want to lend, but you want the principal to be fully guaranteed, and you want it to be fully callable on demand.

Banks have such products available, but they pay such low rates! It is almost like they don't view those borrowing terms as very attractive!

But aha, someone comes along and offers you much better rates! So obviously you should loan to them instead, right?

But don't you think you should ask why they are offering you so much better rates? Is it possible they are not in fact actually able to offer the same terms?

Again, if someone can explain to me why this makes sense economically, OK. But you are implicitly claiming there are lots of borrowers out in the world who would happily pay high interest rates on truly fully guaranteed, fully callable on demand loans, but gosh darned it, they just can't right now.

And I don't think that is remotely plausible.
+1 on this logic. If there really was an opportunity to earn 5%+ returns with essentially the same risk as FDIC savings accounts professional money managers would be flocking to this in droves. Stock prices would come down quickly as investors fled to these 5%+ return low risk investments. The fact that professional money managers are scouring the entire world for low risk returns in the sub 3% range and somehow missing this "opportunity" doesn't pass the sniff test to me.
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Re: Crypto mania !

Post by Prahasaurus »

Top99% wrote: Fri May 14, 2021 12:04 pm
NiceUnparticularMan wrote: Fri May 14, 2021 11:39 am
Prahasaurus wrote: Fri May 14, 2021 11:21 amBut what about using Aave for dollar deposits, earning significantly higher rates on short term cash than banks can offer? Only a matter of time before companies get on board in a big way. :moneybag :moneybag :moneybag

My regular reminder that Aave is 1/30 the market cap of Wells Fargo, but tick tock...
Doesn't it concern you at all that what you are describing makes no economic sense?

Forget about the technical details for the moment. You have cash you want to lend, but you want the principal to be fully guaranteed, and you want it to be fully callable on demand.

Banks have such products available, but they pay such low rates! It is almost like they don't view those borrowing terms as very attractive!

But aha, someone comes along and offers you much better rates! So obviously you should loan to them instead, right?

But don't you think you should ask why they are offering you so much better rates? Is it possible they are not in fact actually able to offer the same terms?

Again, if someone can explain to me why this makes sense economically, OK. But you are implicitly claiming there are lots of borrowers out in the world who would happily pay high interest rates on truly fully guaranteed, fully callable on demand loans, but gosh darned it, they just can't right now.

And I don't think that is remotely plausible.
+1 on this logic. If there really was an opportunity to earn 5%+ returns with essentially the same risk as FDIC savings accounts professional money managers would be flocking to this in droves. Stock prices would come down quickly as investors fled to these 5%+ return low risk investments. The fact that professional money managers are scouring the entire world for low risk returns in the sub 3% range and somehow missing this "opportunity" doesn't pass the sniff test to me.
Because it's only been available for 14 months? Because you will get fired if you do this and something bad happens? Because they needed time to test? Because it's crypto, and there are so many fallacious takes on what crypto really is, especially with the over 50 crowd?

I'm shocked at how fast Aave have grown the protocol, it's truly amazing.
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Re: Crypto mania !

Post by bogledogle »

HomerJ wrote: Fri May 14, 2021 10:59 am
txhill wrote: Fri May 14, 2021 9:03 am
Janus887 wrote: Fri May 14, 2021 8:46 am That being the case, can you explain to me who in their right mind would prefer to borrow crypto at a rate of 8, 10 or 12% at at time when fiat interest rates have never been lower? If The USDC stablecoin is actualy backed by dollars 1 for 1, why wouldn't you just borrow in dollars in the first place? To ask the question is to answer it. Obviously no one would do this. Something fishy is afoot.
I see this argument quite a lot, which is perfectly sensible from a Boglehead perspective where all of us have solid credit ratings and access to cheap credit. This is not the case for everyone. When you're well off, life is cheaper. You are forgetting about:

- The amount of credit card balances that aren't paid off every month, so they're paying outrageous usurious rates.
- People who use payday lenders. They pay even MORE outrageous rates. You wouldn't believe it. In some states without rate caps it gets to 600% APR.
- Number of adults in the United States who do not have ANY credit score: 53 million. Worldwide? Yeah, it's probably in the billions.

These are all people who would benefit from a bankless system. They'd pay 10% to borrow compared to the options they otherwise have available to them (which may be none at all). And lenders can finally lend because there's now a programmatic system that minimizes any counterparty default risk, and doesn't require even going out and finding borrowers in the first place.

And even among the banked, how many people really want to fill out a bunch of loan docs AND sell assets incurring capital gain taxes, if they want to have immediate access to additional capital for a trade or opportunity (which does NOT have to be in crypto)? It's more than you think (because many of those people already are making use of these platforms already).

You're underestimating the addressable market here because you are failing to consider the underbanked and unbanked in the world, just because you have it good already.
Those people you are talking about who might be interested in 10% loans, 99% DON'T HAVE 2X COLLATERAL in crypto-currency.

And if they do, they last thing they should be doing is risking it like this. They should take 1x, and pay off credit cards or buy a car or whatever they wanted to borrow money for, and let the other 1x ride if they have that much faith in crypto-coin.

You're pushing a false story. The only use for those loans right now is more trading.
+1

I don't know if people are really clueless or this is how pyramid scheme mentality manifests.

CRYPTO IS GOING TO SAVE THE UNBANKED POOR AROUND THE WORLD - But first, they need to figure out how to deposit money in a bank, or convert it to some currency that the exchanges would accept, learn how to use this cutting edge tech that evolves every other day, get a hardware wallet, learn how to stake, and not screw up.

CRYPTO IS GOING TO GIVE CHEAP LOANS TO THE FOLKS WHO TAKE PAYDAY LOANS - but we will charge them insane rates anyway and make that money ourself instead of some evil payday lender of course. Also, we can give you 60% of your collateral as loan. Oh, you don't have collateral because you are so broke that you are forced to deal with payday lenders? Fear not .... have you heard about our lord and savior "Flash Loans"?

Adding a link: https://academy.binance.com/en/articles ... ns-in-defi
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Re: Crypto mania !

Post by Cycle »

Crypto is the casino. Crypto owners are the customers.

If crypto crashes massively, like it did one year ago, its customers will come back, they always do.

By staking, you can be the casino.
Never look back unless you are planning to go that way
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Re: Crypto mania !

Post by Texanbybirth »

Prahasaurus wrote: Fri May 14, 2021 11:21 am My regular reminder that Aave is 1/30 the market cap of Wells Fargo, but tick tock...
What do you think about ICP (Internet Computer)? Do you have any thoughts on their market cap being 1/10th something like Cisco?

(I'm not mocking at all. I'm long BTC and ETH, just trying to learn however I can. BH posters are one way.)
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Re: Crypto mania !

Post by watchnerd »

decapod10 wrote: Fri May 14, 2021 10:33 am
ETH staking is a particular issue for taxes because your ETH and rewards are locked for the foreseeable future, which means you can't sell the ETH to pay the taxes. So if ETH moons to like $10000 or something, 1 node is generating like $20k in gains per year, but you have to come up with the tax money somehow without selling the ETH
Will the lock up apply to staking pools?
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Re: Crypto mania !

Post by watchnerd »

Cycle wrote: Fri May 14, 2021 1:02 pm Crypto is the casino. Crypto owners are the customers.

If crypto crashes massively, like it did one year ago, its customers will come back, they always do.

By staking, you can be the casino.
I was thinking the same thing earlier today.

I've always liked the house odds.
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Re: Crypto mania !

Post by decapod10 »

watchnerd wrote: Fri May 14, 2021 1:33 pm
decapod10 wrote: Fri May 14, 2021 10:33 am
ETH staking is a particular issue for taxes because your ETH and rewards are locked for the foreseeable future, which means you can't sell the ETH to pay the taxes. So if ETH moons to like $10000 or something, 1 node is generating like $20k in gains per year, but you have to come up with the tax money somehow without selling the ETH
Will the lock up apply to staking pools?
You can stake ETH now, and yes no matter how you stake, your ETH gets locked, whether through Kraken/Coinbase or other exchanges which offer staking, or decentralized pools like Rocketpool. Some exchanges will give you a substitute coin that you can trade until ETH gets unlocked sometime after the 2.0 merge, but it's not technically ETH, and also it is not allowed for US stakers for whatever reason. I'm guessing it's some sort of coin that you will be able to trade in and get ETH back down the road once ETH is unlocked.
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Re: Crypto mania !

Post by watchnerd »

decapod10 wrote: Fri May 14, 2021 1:41 pm
You can stake ETH now, and yes no matter how you stake, your ETH gets locked, whether through Kraken/Coinbase or other exchanges which offer staking, or decentralized pools like Rocketpool. Some exchanges will give you a substitute coin that you can trade until ETH gets unlocked sometime after the 2.0 merge, but it's not technically ETH, and also it is not allowed for US stakers for whatever reason. I'm guessing it's some sort of coin that you will be able to trade in and get ETH back down the road once ETH is unlocked.

Sorry, I should have been more specific.

I was referring to the Eth 2.0 pooled staking on Coinbase for which there is a waitlist.
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Re: Crypto mania !

Post by decapod10 »

watchnerd wrote: Fri May 14, 2021 1:45 pm
decapod10 wrote: Fri May 14, 2021 1:41 pm
You can stake ETH now, and yes no matter how you stake, your ETH gets locked, whether through Kraken/Coinbase or other exchanges which offer staking, or decentralized pools like Rocketpool. Some exchanges will give you a substitute coin that you can trade until ETH gets unlocked sometime after the 2.0 merge, but it's not technically ETH, and also it is not allowed for US stakers for whatever reason. I'm guessing it's some sort of coin that you will be able to trade in and get ETH back down the road once ETH is unlocked.

Sorry, I should have been more specific.

I was referring to the Eth 2.0 pooled staking on Coinbase for which there is a waitlist.
Yes, your ETH is locked with Coinbase as well, and they do not give you a repalcement token. We don't know when it will be unlocked, presumably some time after the 2.0 merge.

The waitlist is very fast BTW, I was approved within a few days. But I ultimately just decided I'm going to stake and run my own node, so I didn't stake any with Coinbase.

But they did say this in the approval email:

"After staking, you’ll be unable to trade, send, or sell the ETH you’ve staked until the Ethereum 2.0 upgrade is complete. However, later this year we expect to offer a way for you to trade your staked ETH. Stay tuned."
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Re: Crypto mania !

Post by watchnerd »

decapod10 wrote: Fri May 14, 2021 1:56 pm
Yes, your ETH is locked with Coinbase as well, and they do not give you a repalcement token. We don't know when it will be unlocked, presumably some time after the 2.0 merge.

The waitlist is very fast BTW, I was approved within a few days. But I ultimately just decided I'm going to stake and run my own node, so I didn't stake any with Coinbase.

But they did say this in the approval email:

"After staking, you’ll be unable to trade, send, or sell the ETH you’ve staked until the Ethereum 2.0 upgrade is complete. However, later this year we expect to offer a way for you to trade your staked ETH. Stay tuned."
I haven't received any notification mail yet of waitlist approval - fingers crossed.

I wonder if I need to move my Eth out of Pro and into regular Coinbase first?
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Re: Crypto mania !

Post by decapod10 »

watchnerd wrote: Fri May 14, 2021 2:00 pm
decapod10 wrote: Fri May 14, 2021 1:56 pm
Yes, your ETH is locked with Coinbase as well, and they do not give you a repalcement token. We don't know when it will be unlocked, presumably some time after the 2.0 merge.

The waitlist is very fast BTW, I was approved within a few days. But I ultimately just decided I'm going to stake and run my own node, so I didn't stake any with Coinbase.

But they did say this in the approval email:

"After staking, you’ll be unable to trade, send, or sell the ETH you’ve staked until the Ethereum 2.0 upgrade is complete. However, later this year we expect to offer a way for you to trade your staked ETH. Stay tuned."
I haven't received any notification mail yet of waitlist approval - fingers crossed.

I wonder if I need to move my Eth out of Pro and into regular Coinbase first?
I applied on 5/6, was approved on 5/8. I have like 3 ETH in my regular Coinbase account, none in my Pro account. Not sure if that makes a difference
YRT70
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Re: Crypto mania !

Post by YRT70 »

For the people staking Ethereum, isn't it a risk that the move to Ethereum 2.0 may never happen or fail?
bogledogle
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Re: Crypto mania !

Post by bogledogle »

watchnerd wrote: Fri May 14, 2021 1:34 pm
Cycle wrote: Fri May 14, 2021 1:02 pm Crypto is the casino. Crypto owners are the customers.

If crypto crashes massively, like it did one year ago, its customers will come back, they always do.

By staking, you can be the casino.
I was thinking the same thing earlier today.

I've always liked the house odds.
This kind of honest truth is something I can get behind. There is money to be made in the casino business if you are the house.

The whole spin about how Crypto is going to save people from the evil clutches of the banks and their fees, USD going to be worthless ... banking for the unbanked and saving the poor .. all of that is just crazy talk.
NiceUnparticularMan
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Re: Crypto mania !

Post by NiceUnparticularMan »

Prahasaurus wrote: Fri May 14, 2021 12:42 pm
Top99% wrote: Fri May 14, 2021 12:04 pm
NiceUnparticularMan wrote: Fri May 14, 2021 11:39 am
Prahasaurus wrote: Fri May 14, 2021 11:21 amBut what about using Aave for dollar deposits, earning significantly higher rates on short term cash than banks can offer? Only a matter of time before companies get on board in a big way. :moneybag :moneybag :moneybag

My regular reminder that Aave is 1/30 the market cap of Wells Fargo, but tick tock...
Doesn't it concern you at all that what you are describing makes no economic sense?

Forget about the technical details for the moment. You have cash you want to lend, but you want the principal to be fully guaranteed, and you want it to be fully callable on demand.

Banks have such products available, but they pay such low rates! It is almost like they don't view those borrowing terms as very attractive!

But aha, someone comes along and offers you much better rates! So obviously you should loan to them instead, right?

But don't you think you should ask why they are offering you so much better rates? Is it possible they are not in fact actually able to offer the same terms?

Again, if someone can explain to me why this makes sense economically, OK. But you are implicitly claiming there are lots of borrowers out in the world who would happily pay high interest rates on truly fully guaranteed, fully callable on demand loans, but gosh darned it, they just can't right now.

And I don't think that is remotely plausible.
+1 on this logic. If there really was an opportunity to earn 5%+ returns with essentially the same risk as FDIC savings accounts professional money managers would be flocking to this in droves. Stock prices would come down quickly as investors fled to these 5%+ return low risk investments. The fact that professional money managers are scouring the entire world for low risk returns in the sub 3% range and somehow missing this "opportunity" doesn't pass the sniff test to me.
Because it's only been available for 14 months? Because you will get fired if you do this and something bad happens? Because they needed time to test? Because it's crypto, and there are so many fallacious takes on what crypto really is, especially with the over 50 crowd?

I'm shocked at how fast Aave have grown the protocol, it's truly amazing.
So even if those are satisfying answers to Top99%'s question, you didn't actually answer my question.

Doesn't it bother you it makes no economic sense for someone to offer to borrow your money at such high borrowing rates on such otherwise unfavorable terms for the borrower?
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watchnerd
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Re: Crypto mania !

Post by watchnerd »

bogledogle wrote: Fri May 14, 2021 2:12 pm

This kind of honest truth is something I can get behind. There is money to be made in the casino business if you are the house.

The whole spin about how Crypto is going to save people from the evil clutches of the banks and their fees, USD going to be worthless ... banking for the unbanked and saving the poor .. all of that is just crazy talk.
Honestly, I might feel a little guilty about earning high APR off some distressed working class person trying to pay bills, or emerging markets farmer.

I would feel no particular shame in loan sharking at 8% to gamblers.
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decapod10
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Re: Crypto mania !

Post by decapod10 »

YRT70 wrote: Fri May 14, 2021 2:09 pm For the people staking Ethereum, isn't it a risk that the move to Ethereum 2.0 may never happen or fail?
Yes, that's the biggest risk in the short term.

What happens after the merge is that there will be 2 different forks of Ethereum. The current Ethereum chain will continue to exist, but the assumption is that everyone will move to the new Ethereum 2.0. Normally what happens after a fork like that is that you actually own duplicate assets on both forks. In theory, if ETH 2.0 is a massive failure, Vitalik could decide to abandon it and go back to the "old" Ethereum network and continue on that path. You would still have your old Ethereum, so things would continue as before. You could also try to sell your old Ethereum in theory after the fork if anyone is willing to buy it.

However, if you want to stake in ETH 2.0, I believe you actually burn your existing ETH, then you have "new" ETH that is locked into the ETH 2.0 fork. If ETH 2.0 fails, not only is your "new" ETH worthless, you've burned your old ETH so you can't go back to the old Ethereum fork.

This is actually what "Ethereum Classic" (ETC) is. It's an old fork of Ethereum for people who refused to migrate to the new chain when it split in 2016 (since it was controversial at the time). It still exists, and there are people who mine on it. But there is almost no development on it as far as I know.

Could Ethereum 2.0 be such a massive failure that Vitalik completely abandons it? Seems implausible, but you can never say never.
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OohLaLa
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Re: Crypto mania !

Post by OohLaLa »

watchnerd wrote: Fri May 14, 2021 1:34 pm
Cycle wrote: Fri May 14, 2021 1:02 pm Crypto is the casino. Crypto owners are the customers.

If crypto crashes massively, like it did one year ago, its customers will come back, they always do.

By staking, you can be the casino.
I was thinking the same thing earlier today.

I've always liked the house odds.
I was thinking about this too (DOT on Kraken) but the potential tax implications are a huge turn-off, especially at lower volumes. Just doesn't seem worth the hassle.

From what I've seen for you US folks, staking rewards are taxed as income upon receipt and if you dispose of the coins, after that, proceeds will be taxed as capital gains or losses.

In Canada, nothing very clear, but all points to staking rewards being business income. :oops: I'm not sure why simple "other income", much like savings account interest, wouldn't be OK in the case of a particular who doesn't engage in larger-scale staking.
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Re: Crypto mania !

Post by decapod10 »

OohLaLa wrote: Fri May 14, 2021 2:29 pm
From what I've seen for you US folks, staking rewards are taxed as income upon receipt and if you dispose of the coins, after that, proceeds will be taxed as capital gains or losses.
Yes, that's my interpretation of staking rewards taxation in the US (obligatory I am not a tax expert). You get taxed on market value of the staking reward upon receipt, cost basis would be the market value at the time the coins are received.

Crypto gains when sold are treated as capital gains.
Last edited by decapod10 on Fri May 14, 2021 2:34 pm, edited 1 time in total.
NiceUnparticularMan
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Re: Crypto mania !

Post by NiceUnparticularMan »

watchnerd wrote: Fri May 14, 2021 2:22 pm I would feel no particular shame in loan sharking at 8% to gamblers.
I actually do feel pretty bad for gambling addicts.

But I think my biggest concern would be loan sharking to gamblers without legbreakers is not necessarily a viable business model. And who are my legbreakers?
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Re: Crypto mania !

Post by watchnerd »

OohLaLa wrote: Fri May 14, 2021 2:29 pm
I was thinking about this too (DOT on Kraken) but the potential tax implications are a huge turn-off, especially at lower volumes. Just doesn't seem worth the hassle.

From what I've seen for you US folks, staking rewards are taxed as income upon receipt and if you dispose of the coins, after that, proceeds will be taxed as capital gains or losses.

In Canada, nothing very clear, but all points to staking rewards being business income. :oops: I'm not sure why simple "other income", much like savings account interest, wouldn't be OK in the case of a particular who doesn't engage in larger-scale staking.
Yeah.

Luckily, it's a trivial amount, of interest in this case, so the monetary tax implications are not large.

But it may be just a total paperwork PITA and not worth it.

I was also thinking that a lot of people's plans to live forever off of ETH staking is going to have some heavy tax consequences.

Earning 6-8% APR, taxable, vs total stock returns in a tax-sheltered accounts doesn't sound like an awesome deal.
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OohLaLa
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Re: Crypto mania !

Post by OohLaLa »

NiceUnparticularMan wrote: Fri May 14, 2021 2:33 pm
watchnerd wrote: Fri May 14, 2021 2:22 pm I would feel no particular shame in loan sharking at 8% to gamblers.
I actually do feel pretty bad for gambling addicts.

But I think my biggest concern would be loan sharking to gamblers without legbreakers is not necessarily a viable business model. And who are my legbreakers?
I can imagine Buterin coming in and knee-capping you if you don't pay up. :mrgreen:
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Re: Crypto mania !

Post by YRT70 »

decapod10 wrote: Fri May 14, 2021 2:23 pm
YRT70 wrote: Fri May 14, 2021 2:09 pm For the people staking Ethereum, isn't it a risk that the move to Ethereum 2.0 may never happen or fail?
Yes, that's the biggest risk in the short term.

What happens after the merge is that there will be 2 different forks of Ethereum. The current Ethereum chain will continue to exist, but the assumption is that everyone will move to the new Ethereum 2.0. Normally what happens after a fork like that is that you actually own duplicate assets on both forks. In theory, if ETH 2.0 is a massive failure, Vitalik could decide to abandon it and go back to the "old" Ethereum network and continue on that path. You would still have your old Ethereum, so things would continue as before. You could also try to sell your old Ethereum in theory after the fork if anyone is willing to buy it.

However, if you want to stake in ETH 2.0, I believe you actually burn your existing ETH, then you have "new" ETH that is locked into the ETH 2.0 fork. If ETH 2.0 fails, not only is your "new" ETH worthless, you've burned your old ETH so you can't go back to the old Ethereum fork.

This is actually what "Ethereum Classic" (ETC) is. It's an old fork of Ethereum for people who refused to migrate to the new chain when it split in 2016 (since it was controversial at the time). It still exists, and there are people who mine on it. But there is almost no development on it as far as I know.

Could Ethereum 2.0 be such a massive failure that Vitalik completely abandons it? Seems implausible, but you can never say never.
Thank you for the clear explanation. Seems a bit risky to me but I am pretty new to crypto.
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OohLaLa
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Re: Crypto mania !

Post by OohLaLa »

watchnerd wrote: Fri May 14, 2021 2:36 pm Yeah.

Luckily, it's a trivial amount, of interest in this case, so the monetary tax implications are not large.

But it may be just a total paperwork PITA and not worth it.

I was also thinking that a lot of people's plans to live forever off of ETH staking is going to have some heavy tax consequences.

Earning 6-8% APR, taxable, vs total stock returns in a tax-sheltered accounts doesn't sound like an awesome deal.
Exactly my thoughts... it's not the tax bill itself but implication of "running a business", and the paperwork involved, for something like 500 bucks of income.

If things don't get cleared up, I think I will just be happy with any capital gains I can get and call it a day (in my tax-sheltered account, like you said).
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Re: Crypto mania !

Post by decapod10 »

watchnerd wrote: Fri May 14, 2021 2:36 pm
OohLaLa wrote: Fri May 14, 2021 2:29 pm
I was thinking about this too (DOT on Kraken) but the potential tax implications are a huge turn-off, especially at lower volumes. Just doesn't seem worth the hassle.

From what I've seen for you US folks, staking rewards are taxed as income upon receipt and if you dispose of the coins, after that, proceeds will be taxed as capital gains or losses.

In Canada, nothing very clear, but all points to staking rewards being business income. :oops: I'm not sure why simple "other income", much like savings account interest, wouldn't be OK in the case of a particular who doesn't engage in larger-scale staking.
Yeah.

Luckily, it's a trivial amount, of interest in this case, so the monetary tax implications are not large.

But it may be just a total paperwork PITA and not worth it.

I was also thinking that a lot of people's plans to live forever off of ETH staking is going to have some heavy tax consequences.

Earning 6-8% APR, taxable, vs total stock returns in a tax-sheltered accounts doesn't sound like an awesome deal.
There is some expectation that, at least initially after the merge, staking rewards will be very high. In addition to the 6-8% that stakers are currently getting, they will also get some portion of the transaction fees on the ETH 2.0 network. Currently, that of course is 0, but there are some estimates it will be as high as 25% immediately after the merge, however this is just a guess since we don't know how many stakers there will be (more stakers = lower % rewards). If the rewards are that high, people will see that and immediately start trying to stake as well, so it will inevitably come down. On the other hand, the speed at which validators can be added to the network is limited, so that may protect early stakers to some degree.
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