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This is a solid answer. Just to elaborate about borrowing - AFAIK noone borrows at 40%, as the parent said, at least with common tokens. There might be exceptions for borrowing niche tokens with massive issuance or what not. People do borrow things like USDC at ~5%, sometimes higher. It varies a lot; see Compound or Aave for current market rates. These are basically margin loans, collateralized by tokens. As for why users take these DeFi loans, sometimes it's just to access leverage, but I think it's mostly to chase those (say) 40% APRs. In theory they can make much more than the loan rate, though this assumes that the token they're farming retains its value, doesn't get hacked, the pool's rewards don't stop or get diluted too much, etc. Why wouldn't those users instead take "TradFi" loans, which can be as low as ~1%? To access those low rates, I would need substantial collateral in stocks, real estate, etc. I might not have those assets (or I'm already borrowing what I can against them), whereas I might have e.g. BTC sitting around. I could sell the BTC, but that would be a taxable event, plus I might want to remain long BTC. |