A Smart Contract Now Pays You to Borrow, is This Madness or is it Genius?

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Summary

Now if he is borrowing from himself, the borrowing rate is higher than the interest rate, so it makes no sense. Why are people borrowing dai at an interest rate of 20% from Compund’s smart contract, when they can collateralize it at 2.5%? On the other hand, if he is kind of cornering the market, he can set himself the interest rate and some milky bypasser borrows from him at what might be an inflated interest rate. If you borrow 1,000 dai today on Compound, that’s how much you owe tomorrow and the day after, plus interest. One possibility might be that there’s too much demand to borrow dai.

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The rise of decentralized and natively digital finance comes with a puzzle. Why are people borrowing dai at an interest rate of 20% from Compund’s smart contract, when they can collateralize it at 2.5%?

From their own supplied figures, it looks like people have offered 1.5 million dai and have borrowed about 1.4 million. You now need to pay 20% in interest to get some of that $100,000 worth of dai.

Dai disbalance at compound, December 2018.

Why anyone would pay that interest rate is not clear at all. Nor is it clear why arbitragers have not sent the interest rate close to that of collateralized dai at 2.5%.

Lack of liquidity might be one reason, with the ability to borrow dai on Compound a very new thing, launched only in the last few weeks.

Dai borrowing at 20% on Compound, December 2018.

But might there be something more fundamental?...

Read the full article @ TrustNodes