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
I'm not sure if it is going to work out in practice
Indeed, if the "small cap high risk coin" (as you euphemistically called it) bites the dust in the blink of an eye, it might work out. But who is going to pay for it and why would they agree to be a victim? On the other hand, why would you want to offer a coin for collateral which is as stable as the borrowed one, and two coins for one at that? To me, it makes no financial sense
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
This is the whole story
The system is sustainable as long as the market keeps rising. But trees don't grow to the sky. and the higher it goes, the lower it will crash (in relative terms). Or do people seriously believe that Bitcoin is going to hit 25k (100k as some predict) by the end of the year?