And while we are at it, can anyone explain to me what is driving the people who are borrowing coins this way? I've been trying to come up with a single reason what's in it for the borrowers, and still can't wrap my head around it. If you have to provide 200% of collateral, how does all that make sense?
Seriously, what's the point?
Well that's some sort of stop-loss. You invest in small cap high risk coin (via dex because not traded on big exchanges) with 1000$ and borrow 500$ eth using your coin as collateral. Now if price drop 90% due to exit scam or something like that you will not loose more than 50% that you have in ETH (or dumped to USDT) already.
The Dark Side of Crypto Lending
The sad truth about any such system is that the scheme is sustainable only in pretty narrow margins. To better see why it is so, lets take a look at how it might fold, or, in other words, what would make it collapse. The answer is obvious, and it is the failure of the asset used as collateral. For example, if you borrow Ether and provide some token as a pledge, it is unlikely that your token will on average outperform the premier cryptocurrency you take on loan
However, it is almost a given that the collateral will crash way harder than the asset borrowed when the market starts to slide downhill. Realistically, it is only a matter of time till we see blood in the market. It essentially means that once the borrowers start to default en masse, no matter how overcollateralized the system was at first, it wont suffice as no collateral will be worth anything at 0. The system enters the dreaded death spiral and eventually expires
Interesting point. Looks like we have
another brick to the domino. Another because same thing we have with stop-losses, margin trading, leveraged tokens, derivatives with leverage. One trigger another.