If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.

You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.

If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Only if the amounts being borrowed and loaned are exactly the same.

I.e 20% on $100 is less than 10% on $1000

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Like a sibling comment you are not accounting for the profit that comes from the collateral.

Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.

That’s not how it works in the real world though. A landlord takes out a loan at a particular interest rate, and makes repayments based on that. The bank doesn’t “get” the rent, they get the repayment that ideally for the landlord is less than the rental income, unless they’re relying on capital gains. The collateral only comes into account if the borrower defaults, for the lender to sell to make back what they were owed. Otherwise they have no claim on anything to do with the collateral - neither the rent nor capital gains.

I was just trying to make up some sort of example where you can gain income by holding on to someone's collateral. I wasn't trying to say how something typically works.

That isn't how collateral works, so you really are just making stuff up. If you did start doing this sort of thing as a bank you would attract regulatory attention pretty quick.

You're basically talking about reypothecation[0]

[0]: https://www.investopedia.com/terms/r/rehypothecation.asp

> Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

At which stage, people with savings withdraw funds because of the lower interest rate and the Ponzi scheme collapses.

>the Ponzi scheme collapses

The only thing that collapses would be the APY. Everyone can still withdraw their full deposit.

Their deposit has been loaned. No free lunch here…

As in they lose money on every loan but make it up in volume?

The irony here is that’s supposed to be a joke and not an actual business plan.

I think you missed a key detail. The collateral for taking out a loan earns staking rewards that get distributed to the depositors. The amount of money staking rewards are worth can fluctuate too depending on the state of the project / cryptocurrency ecosystem.

A lot of businesses operate at a loss for the sake of growth early on, including a lot of the unicorns from the last decade or more.

Yes, but most of them have a business plan that doesn't involve taking a loss, once they've reached a certain scale. And while they're taking that "loss" it's not usually due to revenues being below the cost of goods sold, it's because they're spending all profits + some investor money to grow. Many (though not all) can simply stop growing and be instantly profitable. Businesses that sell you $10 for $5 tend to fail as soon as they run out of capital, because they've got no path to profitability.

So you are saying it was sustainable at some point?

Yes, it was sustainable for a period of time.

The most likely reason to pay much higher interest on money deposited than money they lend out is to steal the deposited money. It isn't illegal to do it, but it is a huge red flag which is why it would warrant an inspection.

Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.

I wonder how they verified borrowers identity.

Stealing the deposits would require

a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors

Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".

The sky high interest is its sole raison d'être