In the current implementation / use cases we're focused on, your collateral, which is held in a smart contract, would become eligible for seizure by the lender.
And what is the collateral here? My house? A car? Money?
If my collateral is another liquid asset it doesn’t make sense to borrow, and if it isn’t how exactly does the lender go about seizing it? I want this explanation to reach a satisfactory conclusion.
The collateral can be any other asset that is represented by a cryptographic token. Right now, few crypto-assets map to real world assets in some capacity, but we're willing to make a bet that this will change faster than most expect.
Already, though, there are many interesting assets in the world of crypto that are particularly well suited to being put up for collateral -- namely, the emerging class of crypto-collectibles such as CryptoKitties.
Look at the number of people that collect all kinds of crap: DVDs, video games, stamps, baseball cards, in-game virtual items, comics, art, etc. You can argue that some of it has more utility -- art is culture! you can watch a DVD! -- but the mindset of collecting goes beyond that, and certain utility, like games or trading cards, maps just as well to the crypto collectible world. Cryptokitties is an early example, but I am 95%+ confident something like it will be a HUGE hit within the next few years. So yeah, why not use the crap you already collect to secure a loan?
You have no idea how much you underestimate what CryptoKitties started. Cryptocollectibles will most likely be the first killer app. It's not about the kitties, it's about the underlying mechanic of owning a truly unique digital item.
I'm not a crypto-apologist, but this use case I can see (sorry if it's a little rambling).
Each property/car could essentially be represented by its own smart contract, initially held by the mortgage lender. When you pay an instalment of your mortgage, it executes the contract to "release" the equity to you.
When it comes to selling, to change the name on the contract, the buyer would pay based on the split between the lender and the owner, or pay to the owner who has to close the contract with the bank (in the event of moving to a new property, the bank and owner get their relevant proportions on Property 2's smart contract, and it goes again).
You could then "lend" out the equity you've earned from the bank, and use it as collateral for something else, getting it back once you've satisfied the terms of that agreement (meaning, if you don't, the person you lent it to is a creditor on the selling of the house/closing of the contract).
It's essentially automating/giving an interface to an existing contractual relationship. I think this interface might actually be clearer for some people who are financially uneducated, as it expresses their ownership percentage, debt obligations, and potential secured borrowing options in one go. Whilst a lot of it could be done without the crypto side of things if everything happens with the same bank/group of people, with buying and selling assets, you're working on trust with a bunch of different organisations and people, the ledger aspect could help with this.
"You wouldn't download a house" memes aside, like a lot of the move from analogue to digital, there was always a chance someone could have socially engineered you out of the deeds to a house, the technology just opens up the attack potential exponentially.
> This doesn't gain anything over existing legal contracts.
>> I think this interface might actually be clearer for some people who are financially uneducated, as it expresses their ownership percentage, debt obligations, and potential secured borrowing options in one go. Whilst a lot of it could be done without the crypto side of things if everything happens with the same bank/group of people, with buying and selling assets, you're working on trust with a bunch of different organisations and people, the ledger aspect could help with this.
I'm not arguing for it, merely point out the potential use case people would push for, and if it were to be pushed, I outlined why I think it could beat out existing legal contracts.
Since there are many tokens (and increasing) that people must hold to be part of some network, tokens that are effectively shares of a business and stuff like that, these may make a good deal as collateral. People do lend out their stock, for example, today.
If the borrower is the one setting the collateral, what's to prevent me from putting up something that's rapidly depreciating like my collection of e-Beanie Babies and effectively stealing the loan?
How can this make sense? If the collateral is X, then the borrowed amount (Y) has to be less then X. Why lend anything in the first place, when that means you can only spend Y while otherwise you could have spent X which is more?
Say I own 1 bitcoin at $10k/BTC.
I want to go buy a mining rig for $5k.
I could sell 0.5BTC and buy the rig.
BUT, I believe that BTC is going to $20k, and I don't want to sell.
So I go to person X and say lend me $5k against what is currently $10k of BTC.
He has 2x collateral coverage... so he makes the loan. if BTC falls to $7500, he may have the option to sell and recover his loan.
I get my money so I can create more "money" out of thin air (or rather electricity and metal). When BTC goes to $20k I am rich. RICH.
This can easily be done on CME futures market, we don't need dharma for this. Futures can be used in multiple ways to swap inherent volatility with a fixed stream of return.
This happens quite regularly in the world of margin trading.
Imagine the following:
1. I own ETH, and want to hold my ETH position so I can enjoy price increases, but I need liquidity to live my day to day life and, well, it's hard to pay for things with ETH.
2. Instead of selling ETH and exiting my position, I put ETH up for collateral and borrow a stable-coin (like DAI) against it. That way, I maintain my price exposure to ETH, but have liquid cash to use for my day-to-day needs.
If my collateral is another liquid asset it doesn’t make sense to borrow, and if it isn’t how exactly does the lender go about seizing it? I want this explanation to reach a satisfactory conclusion.