Is anyone else starting to become a bit excited?

One More Toy wrote: »

I'm a long tíme in cryto (if 8 years counts) but I don't understand defi. How does one take a loan out against their crypto?

Basically you use your crypto as collateral against the loan.

For example - You want to take out a loan of 1000 euro, you deposit 2000 euro worth of BTC into a smart contract on a lending platform, and you get back 1000 euro in stablecoins in return. Pay back the loan, get your crypto back, don’t pay back the loan, they keep the collateral.

*Ratio doesn’t have to be 2:1, some platforms offer lower rates for a lower loan to value ratio. You’ll always need to put in more than you take out though, that’s to cover the lenders end in case you don’t pay it back.

I’ll preface by saying I’m by no means an expert, and I’m sure someone else here will be able to give you better answers, but my understanding is this -

Mucashinto wrote: »

And how secure are smart contracts? Like In the event of not meeting repayments the collateral reverts to them, so how are the repayments, or any of the other contract terms/obligations, verified - is it different with these new systems and transactions are verified through blockchain technology or just the outcome (however it’s confirmed) is put on the blockchain?

A smart contract is a self executing program built on the relevant blockchain protocol (eg Ethereum, Cardano etc). It’s essentially a piece of code, and I’m guessing in the case of loans it’s an expanded IF ELSE statement, ie IF loan value is repaid, revert collateral to depositor, ELSE revert collateral to lender. Some (most? all? I’m not sure) smart contracts are placed onto a coding repository so people can see how they are coded and audit them.

Mucashinto wrote: »

And is it currently unregulated, so no reserve requirements for the lenders etc?

As far as I know crypto lenders operate outside of regulation and don’t have a Financial Services Licence. Celsius did make a big deal about reminding everyone they were registered with the SEC once the ripple fiasco went down, but that doesn’t equate to financial regulation as such.

Mucashinto wrote: »

I lodged some ETH to CEL and when I was doing it I told myself there’s a risk I could never see it again, but I’ve no idea what’s really going on tbh. They have a display of their assets and liabilities, but is that just them saying it or can be seen independently on the blockchain or something? Will my actual deposit be matched in a corresponding loan or is it a general pool from there on etc?

So Celsius do offer loans, but when you deposit into Celsius it’s a bit different to taking out a loan. Your money isn’t locked up and you are free to take it out at any time. Celsius make money in two ways - 1) They give loans to retail and charge small interest rates (around 1% on the value iirc) and 2) Use your deposited crypto to lend out to institutions who want to borrow crypto as an investment for a short period of time. This process is known as rehypothecation and happens with regular banks on a massive scale. The difference between Celsius and regular banks is that Celsius give back 80% of the profit to depositors hence the high rates of return, while regular banks, under near 0% interest rates, give back almost nothing. Obviously there’s still risk involved in this from a depositor point of view, and Celsius reputation at the moment looks to hinge on its founder Alex Machinksy being sound and having a good track record with startups, which as worrying as it sounds is about as good as it gets in crypto land.

I think with Celsius your ETH will just be mixed with other people ETH and lent out, it won’t be specifically matched to a same value loan.

Mucashinto wrote: »

You probably don’t want a highly volatile asset for this kind of thing also surely? Price starts tanking and all the borrowers realise it’s more economic to default than repay.

Very good point, and this is exactly the reason the lender will ask for two or three times the value of the loan in collateral as it will cover themselves if the price tanks and the debtor decides to walk away.

Again, not an expert so don’t take my word for it, just my understanding of the process!

Also, fwiw I also hold deposits in Celsius for the high returns (currently making 16% apr on Synthetix). It is a risk and a worry, although it seems like as reputable a company as you’ll find in the space. But nothings a scam until it is, so it all depends on your appetite for risk.