Lecture 5.0.0. Some Use Cases for DeFi Lending
But why would anyone want to borrow money that is less than what he has deposited as collateral?
The answer is that there are many reasons why such collateralized borrowing is made. All these reasons can be summarized as follows:
(1). Not willing to part with precious asset.
In the crypto world, Bitcoin, Ethereum, Binance coin, etc. are regarded as precious assets. Many hodlers of these cryptos are not ready to part with them because they know that their prices presently are at their infancy – there is much room for more price appreciation.
Hence, instead of selling off their precious assets at the time of need, these hodlers will rather use them as collateral to raise a loan to service the need. Once they have repaid the loans, they can then get their precious assets back.
For example, if you have 100 000 dollar-worth of ETH but you don’t want to sell them, you can supply them to a lending protocol and borrow up to 75% of that value. After you have repaid the loan, you will get your Ethereum back.
This opens a world of possibilities such as:
(a). Crypto lending allows you to take out a short-term loan for real-world emergencies such as paying a hospital bill, starting a business, etc.
(b). Crypto lending allows you to acquire a crypto you don’t own
(c). Crypto traders can execute margin trading on the open market
(d). Crypto lending can be used by hedge funds and institutions that hold crypto as part of their portfolio to borrow against their own crypto assets, receive a loan, and move it to traditional financial instruments.
(2). Tax Deferral
Many jurisdictions don’t tax on borrowed money. Hence, borrowing against a collateral is, therefore, a way of tax deferral.
These are just a few of the many use cases for DeFi lending that opens up a new world of financial possibilities.