Comment by archerabi
3 years ago
Here's a concrete example. AAVE is a protocol that allows lenders to lend money to borrowers in a decentralized manner.
So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/
AAVE currently has ~$9.9B in assets locked into its protocol.
That no different from any margin loan
It is no different at all. However, in traditional finance that is called a "margin loan" in defi it is called a "crypto interest account paying 20% with 0 chance of losing all your money"
Who in their right mind would say that a collateralized borrow has 0 chance of losing money? That's the whole point of requiring collateral
Somewhat, look at toomuchtodo's comment. In tradfi, there are humans involved and you might be able to avert liquidation.
To be clear, there are humans involved if the amounts are large enough - if you're playing with stocks and margin in your brokerage account it'll probably liquidate automatically, but even when I got a "margin call" by accident they gave me three days to resolve it before liquidation would happen.
Part of it depends on what the margin is used for - margin for VTX is going to be handled differently than forex margin.
Yes it is. In traditional finance, especially at the big players, the bank will call the person about to be margin called to tell them they need to post more collateral, or if it looks like the market is being manipulated they’ll let the loan be undercollateralized for a short time. Defi auto liquidation makes it much easier to spiral due to unwinding after small losses.