Why people take DeFi credit, why they use Aave for this?

Governance
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Hi community.
I’m struggling with some points, why users use DeFi lending protocols? What they do with this assets, if they should have an available balance to lock and get a loan in another?

I just understand this point in one case, user get a loan, then go to another protocol, use farming or joining to farming pools, stake this tokens/coins.
What can be else?

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Source
Just take a look at this image. Comparison Lending process in traditional financial services and DeFi world.
Traditional financial services consist with different types of lending:

  • consumer lending,
  • Auto Loans
  • Student loans
  • mortgage loans
  • Payday Loans

But in DeFi it’s just a loans for make more money? Right?

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Hello defigeek,

In theory, lending protocols allow people to re-inject their funds in real economy. By lending ETH, WBTC or any other cryptoasset and borrowing USDT, USDC or any other stablecoin, you can use your savings to build a real-life business without selling them.

Imagine you want to create a pizza restaurant. All you have is ETH, but you don’t want to sell it because you strongly believe in Ethereum. You can deposit your ETH to Aave, borrow dollars and build yur pizza business. When you start making money, you can then repay your loan and take your ETH back. It’s called a Lombard facility, it’s actually a very old financial practice.

Of course, in practice, no one build a restaurant by borrowing on Aave, and most of people use the borrowed coins in DeFi. You can, for example, put some leverage on the collateral you lent (deposit ETH, borrow USDT, swap USDT for more ETH), provide liquidity on a stable pool to get rewards, etc. In theory, you could borrow USD coins to pay for your rent or your studies, but it’s actually rare ^^

I hope my answer will be usefull to you !

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Great example, thanks.

I hope that DeFi lending will have a big future, and we can see other types of loans like in traditional financial services.

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some other “real case” atm are:

  • leveraging: you deposit eth, borrow USDC, buy more ETH with the USDC.
  • shorting: you deposit USDC, borrow ETH, sell it for USDC and hope to buy it lower with USDC, to repay your ETH loan and keep the profit
  • tax postponement: you have ETH and have accumulated an unrealized gain on it, if you want to buy something with it, you need to sell it and pay taxes on the gain usually, instead, you could borrow USDC against it and use that instead to purchase what you wanted with those funds. This of course runs into problems if you get margin called, but if you had a lot of ETH for example and just wanted to use some, it would be fairly safe.
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