[perfunctory]

When one lends cryptocurrency I assume the loan comes with an interest? Given the fixed supply of bitcoins or what have you, where will the coins to pay the interest come from? Or does it work differently in cryptocurrency world? Genuinely curious.

[tlrobinson]

I'm not the op, but fractional reserve lending isn't the only form of lending, and fixed supply isn't the only form of cryptocurrency.

[nahollander]

Beat me to the reply :)

Indeed, even with a fixed supply token, a borrower would simply have to come across the necessary amount of principal + interest in the loan term.

[perfunctory]

But that's kind of the point, isn't it. With the fixed supply the "+ interest" would be harder to come by. Wouldn't it lead to elevated levels of defaults?

[bpforster24]

One way or another, the borrower has to come up with the principal + interest or they will forfeit their collateral. So they will want to use the loan in some sort of income generating capacity: financing a project, speculative trading, etc. If they are able to use the loan to earn more than the interest rate they've committed to, they'll make money overall. If not, they'll lose money.

Bottom line: we don't think the monetary policy of crypto-assets will have much of an impact on default rates in the short term.