I’m in the process of buying a house and would like to consider my options for borrowing on aave or alike.
I think this applies to all crypto lending platforms, in that you cant borrow more than your collateral?
how can defi compete with banks in this regard? I can borrow over 400k with 100k down and good credit. but this type of stuff isnt available in crypto, right?
11 thoughts on “is it possible to borrow > 100% of your collateral?”
Crypto can’t sieze your house in forclosure.
Nor will it get bailed out by the gov if it loses money on your loan.
Banks can take those risks because they pass them on to the government if the problem is large enough.
Undercollateralized lending is how you get 3AC, FTX, Celsius, etc.
Undercollateralized lending is always way riskier with far higher risk of bad debt
When you “borrow” 400k against 100k you are actually borrowing 400k vs 100k + a 500k house. This is overcollateralized by effectively 200k.
Most crypto lending protocols offer over-collateralized lending, this is very similar to the mortgage loans and 2nd mortgage loans that you’re familiar with. When you get a mortgage you pay 20% up-front, if you fail on your payments the bank takes the house and the 20%. When you take a mortgage the value of your collateral (20% + property value) is larger than the borrowed amount, the same holds for over-collateralized lending in DeFi. The biggest protocols that offer over-collateralized lending are AAVE, Compound, Euler… here’s a [list](https://defillama.com/protocols/Lending)
Under-collateralized lending like personal loans, payday loans and similar don’t require you to deposit collateral. They rely on the bank being able to sue you and get their money back in case you stop paying. This is generally not possible in DeFi.
There are some protocols that offer DeFi undercollateralized loans to traditional companies. They generally let any DeFi depositor lend but only a whitelisted set of borrowers can use them. These protocols are usualyl have a trad-fi arm that is responsible for suing non-paying borrowers. Here’s a list of under-collateralized lending protocols: [https://defillama.com/protocols/Uncollateralized%20Lending](https://defillama.com/protocols/Uncollateralized%20Lending)
>how can defi compete with banks in this regard?
DeFi protocols offer under-collateralized margin loans for very specific purposes that can be controlled and validated by the protocol such as leveraged spot, futures trading, perpetuals trading, options trading, and leveraged yield farming.
Creating a generic under-collateralized lending protocol would require the protocol to be associated with a legal entity and to be aware of the identity and credit score of all users. I can see that happening in a few years, but we’re not there yet.
Good article on on-chain lending: [https://jumpcrypto.com/paradigms-for-on-chain-credit/](https://jumpcrypto.com/paradigms-for-on-chain-credit/)
No. Who would lend money to an unidentified stranger on a decentralized platform without collateral to cover the debt? That would be a literal free money making machine for you.
When you take out a mortgage, the collateral is the house, not your down payment.
You can get borrow 80-90% of the value of the collateral in this case.
Your down payment satisfies the rest.
Some “decentralized” platforms have credit based lending systems where they allow funds to get 0 collateral loans where the rate starts high and decreases as they payback more and more loans. A system dedicated to catering to the scums of scums and will eventually fail.
Although, you don’t want this. It’s how collapses happen (ha ha, not funny?).
Under-collateralized loans are still in the experimental phase. I don’t think they’ll ever come without KYC for borrowers and the DAO/protocol being located in a jurisdiction that recognizes DAOs as legal entities (thus they can take legal actions to reclaim the borrowed funds)
That’s fractional reserve banking and how they print new money. I get the desire to want to avoid banks and use crypto and defi but there’s no crypto mortgages that I’m aware of.
I’m not sure that it will work for you though.
These are two companies that offer crypto-backed mortgages.
COLAB LENDING colablending.com
What could go wrong?