The loan is settled when you take it out. Collateral sold to RUNE... 50% back to you in asset of choice, 50% to the LP of the collateral. Debt/loan accounted for on blockchain.
It is more complicated than I am describing, but this is the simple take. You give me $10 collateral, I give you a $5 loan and keep $5. When you pay me $5 back, I will give you back your $10 (as I will have the $10 you originally gave me). It is that simple... it only gets complicated when assets spike higher than RUNE / RUNE falls harder than asset. TC burned (set aside) 60,000,000 RUNE to safeguard against such events.
So what are most people doing with services like this? Putting up collateral to buy alts they think are going to pump in the next year or so?
But really, it could be that you need a car, or have an unexpected expense pop up and you don't want to sell your crypto. You can borrow against it and incur no tax for the transaction.
This is a good strategy if you feel the risk is worth taking on. You keep your collateral and get 50% more exposure...
Yes most people are probably leveraging this to go DEGEN LONG without liquidations.
That doesn't mean it's how it should be used.
Or maybe it does... we are at a good place in the 4-year cycle to rotate to alts.
My understanding is that they dump ALL the collateral for Rune.
You're saying they add it to the LP for more liquidity?
That goes against all the research I've done (although would be awesome if true).
Yes, you are right, it is hard to explain...
ALL gets sold to RUNE.
50% of that RUNE goes to the borrower (and can be swapped for whatever asset you want to borrow, the other 50% effectively goes into the LP via synthetic asset purchase (in the case of a BTC loan it would go into synthetic BTC which effectively is a position in the RUNE:BTC pool). That is my understanding of the system.
Yeah I still need to research synthetics that topic just keeps popping up.
It is pretty much an acocunting device for things like lending. Synthetic BTC is kind of like an IOU that is accounted for in the LP. So 1 synth BTC would end up being 50% RUNE and 50% BTC at all times.
The risk of synths is the same as the risk of lending itself. The protocol guarantees the syth at 1:1. So a me holding 1 synth BTC is as good as holding 1 BTC as long as THORChain is solvent / trustworthy etc. The protocol risk is the only risk. It can get way more complex than that... I haven't dove any deeper but I do know that liquidity providers bare some of the risk from derived synthetics.