AML seems a non issue too, as the loan only moves the question.
KYC remains one big problem but there are many startups providing those services and they are slowly gaining acceptance in courts.
Don't be impressed if a few years (and maybe even months) from now you start to see classical banks trading mortgages onchain.
It doesn't.
AML seems a non issue too, as the loan only moves the question.
No, anti-money-laundering laws are at the heart of why the financial system can't do this. KYC laws apply at the customer level, so you only need to handle KYC once per customer. AML laws apply at the transaction level, so you need to apply them to each loan.
Cryptocurrency solves absolutely none of the existing legal reasons that banks can't issue large loans in minutes or seconds to existing (or new, well collateralized) clients.
Yes, this is definitely correct in that crypto does nothing to solve the legal requirements of the banks and does not help the banks.
But it's worth mentioning that this sort of fully collateralized and anonymous borrowing does not (and would not) happen through banks, but through platforms like AAVE and Compound. It's a financial tool separate from banks. And these tools cannot be shutdown, as long as ethereum exists, these tools exist.
As for anonymous loans, those exist solely to service criminal customers, so that is not an advantage of cryptocurrency.
And overall, it's a demonstration of a financial product which can only be built in the space of decentralized finance. I do not know of another tool which allows anyone around the world to borrow significant amounts of money anonymously and without an account. Whether it's a net good for the world I don't know, but I do believe it's a powerful technology and space.
Other freely operating entities across the globe are not in the same position.
The anonymity part is cool, but if I want to borrow to get a mortgage how exactly does this help me? I do not have $500,000 in crypto laying around and a traditional lender will give me a 2% interest rate instead of 15%
Eventually, some companies are working on tokenizing homes, so once that happens, you could potentially deposit that as collateral just as easily, but that's still far out.
The fees I am seeing on Uniswap/Aave are much much higher than 4.5%. Even at 4.5% that equates to six figures of additional interest payments over my 30 year mortgage.
> and you didn't have to pay a capital gains tax.
This isn't true. Any conversion between crypto assets is technically a taxable event...even if we both can agree that the rules are silly.
> Eventually, some companies are working on tokenizing homes, so once that happens, you could potentially deposit that as collateral just as easily, but that's still far out.
Okay great, but how does this promised future development help me secure a loan for the home I want to buy? Or the business I want to start? Again, I do not have 500k in bitcoin laying around nor a "tokenized home."
It was super easy to get approved for a 500k mortgage just based on my income.
But to my amateur mind, treating it as property doesn't seem like a problem for this view. If you get a loan from a pawn shop, you're not selling them your property, you're just putting it up for collateral while you pay back the loan.
What happens when it stops appreciating? Or is the premise that bitcoin will alway outpace interest rates?
It's a scarce/deflationary/limited supply asset which is compared against an endless money printer.
You can either withdraw a portion of it back to your normal wallet or you can just borrow more against the same collateral. So it's like a credit line that's always appreciating in value.
If one day, you need the whole collateral for whatever reason, then you'd pay the loan to unlock it fully and withdraw it.
You're never going to get an amazing loan deal from a trustless system.
I think that ethereum might have great applications, but a loan backed by more collateral than it is worth doesn't seem like one of them, unless Dao starts allowing for the use of collateral that is less liquid than eth.
The issue is that contracts don't have any way of "calling in" to the legal API, so you can't put up your house as collateral.
For house mortgages, there are companies that are "tokenizing" houses on the blockchain, so putting it up collateral would be as simple as depositing that token. That said, I think this is far from becoming reality anytime soon, just because there's lots of legal issues, etc. Nonetheless, the future is pretty exciting!
Once you include your exchanges fees in your cost basis, you actually lost like 30-40$, so it's a taxable event with capital gains loss.
For what it's worth, if you use AAVE or Compound, you also have to declare interest income on what you've earned.
With maker, you'd be responsible for capital gains if it was liquidated because you fell below the 150% minimum ratio.
I guess the difference between me and someone who would use these DeFi apps, is that they are using crypto as a speculative investment (which is fine, I speculate with other assets all the time). But most people do not have a significant portion of their net worth in crypto tokens. For me, it is much cheaper/easier/safer to just get a traditional loan.
Flash loans are an example of that innovation, where if you see an arbitrage opportunity in the market, you can profit from it even if you don't own huge capital, so it levels the playing field for all these financial actors.
See Chesterton's Fence: https://fs.blog/2020/03/chestertons-fence/
That's just a slogan. The devil is in the details. To use an extreme example: Murder laws removes my freedom to kill random people; how is that good?
It is always a tradeoff. In the case of the particular tech discussed, it's a tradeoff between being able to somewhat control crime (e.g, making payment for human trafficking harder, making it possible to reverse theft) and financial privacy. It's freedom from having things stolen and freedom from being regulated.
Well it's great in theory until you hit a problem nobody was incentivized to guard against the resulting failure cascades.
The mafia probably doesn't need your name for a loan, too. They'll find you anyway.
But maybe I'm all alone in finding this somewhat shady.
What? They'll know your name, address and your whole family history usually.
It's just a smart contract execution on the global computer that is Ethereum, how is that shady?
Once you actually try it, you're going to be like "this is the future", every single one of my friends that tried came to the same conclusion.
Everything is denominated in Bitcoin, which is always going up in price. Everyone borrows some lame legacy asset X and collateralixes with Bitcoin.
Do weird things happen? for example of Bitcoin is ubiquitous then the price of Bitcoin essentially gets factored out of the equation, so this magical leverage goes away. There are other effects but this idea that this is the future (or rather that this is a superior future ) seems a bit naive to me. Gravity will catch up to you no matter what.