I agree, but isn't the point of borrowing against collateral that you have some utility from the collateral (e.g. a car you drive, a house you live in, part of a business you own) while you carry the loan?
If these crypto "assets" like Kitties are rather unfungible for crypto "coins", then I suppose it would make sense, but then I'd be confused why the lender would accept the collateral.
>but isn't the point of borrowing against collateral that you have some utility from the collateral (e.g. a car you drive, a house you live in, part of a business you own) while you carry the loan?
Close, you can abstract "utility" one layer higher to "demand", or more accurately demand relative to supply. The thing you collateralize needs to be in demand by enough people to ensure it remains valuable over at least the life of the loan, but realistically much longer (so the lender is assured it will always be perceived by the market to have current and future value over any period during which the lender may need to reposses and resell the collateral). Utility gives things value which gives them demand, but it's really the demand that matters. There must always be a ready buyer for the collateral. Scarcity, like with Cryptokitties, gives things value too (rationally or not, but welcome to the human race).
Borrowing against collateral means the lender has something to seize if you fail to pay them back. The more valuable the collateral, the more money the lender will recover when they repossess and sell the collateral. This likelihood of recovery (if you default!) may make them willing to lend you more money, or give you a better interest rate.
I'm on the Dharma team with Nadav, and happy to shed some insight here.
So we think a really interesting use case in the short term is margin lending of crypto assets. Say you have 10 ETH and want to short-sell a different ERC20 token. You could lock up your ETH as collateral in a loan denominated in the other token, and then sell those tokens. If those tokens depreciate in value vs. ETH, when you buy back the tokens you'll have made a profit.
I get a loan for 20 magic bean coins, secured with 1 eth when the exchange rate is 20 magic bean coins for 1 eth. (Do I have to pay interest on this? Do I forfeit it at some point? Iiuc Dharma seems to be just a framework for setting up these schemes, so this might be controllable by the person creating the eth-mbc loans?)
Then I sell my 20 magic beanstalk coins for 1 eth.
A week later, magic beans have massively depreciated because there was a critical vulnerability discovered, code-named GIANTS and now I can get 40 magic bean stalks for 1 eth.
So I sell 0.5 eth for 20 bean stalks, and use that to pay off my loan?
Yeah that's essentially right. The only modification I'd make is in your last step, what'd you need to do is buy back the magic bean coins (because you owe them to someone else). So you you wouldn't "sell 0.5 eth for 20 bean stalks", you'd buy 20 bean satlks for 0.5 ETH. You'd then pay back the loan, at which time your 1 ETH of collateral would be released back to you. Now you'd have 0.5 ETH in profit from selling magic bean coins high and buying low, as well as your original 1 ETH.
Regarding your parenthetical questions:
1) yes, you'd pay interest on this. you'd negotiate this interest rate with the person lending you the magic bean coins
2) yes, there are a couple scenarios where you'd forfeit your collateral: a) if you were wrong, and the price of magic bean coins appreciated beyond the value of your collateral; b) if even if you were right and the price depreciates you forget to pay back the loan
3) that's correct, Dharma is just the protocol for the creation of the loans, so the terms of the loan would be determined by the constituent parties (the borrower, lender, and underwriter)
I was thinking the other day about a service called Verifier that could be implemented with something like this.
Verifier would allow a person to take a token of some sort from a website, and send some eth to the Verifier. Now the service knows that the person has put in some stake, and can grant them an account (this is as a sort of abuse protection).
If the person wants they can take their money back, but the website can find this out and cancel the person's account.
If these crypto "assets" like Kitties are rather unfungible for crypto "coins", then I suppose it would make sense, but then I'd be confused why the lender would accept the collateral.