There are at least two ways to borrow things and pay them back. The difference between these two methods can lead to ideas for designing new financial products.
“First, how to pay off in the same quantity as when borrowing. If you borrowed 10 pencils, you could return 10 pencils when you pay them back. Regardless of the fluctuations in the price of pencils, the calculation is simple and easy to remember. Second, there is a method of repaying the goods for the same price as the price when borrowing. When the price of 10 pencils was borrowed, it was 1,000 won, but if it rose to 2,000 won, only five are repaid.
The first method in finance can be seen in a system called lenders that lend stocks. In particular, it is used for short selling, where borrowed stocks are sold at a high price and bought at a low price. The second method can be found in a new financial technique that entrusts bitcoins as collateral and borrows bitcoins. It is a commodity that attracts taste when the price of bitcoin rises.
As the price of bitcoin continues to rise, the demand to borrow bitcoins increases as in the second method. TVL is an indicator that can measure the demand. It stands for Total Value Locked.
There is a company called Delio that lends bitcoins with bitcoin as collateral. In Delio, the Loan to Value(LTV) is 90%. The handling fee equivalent to interest is 0.044% per day, which is equivalent to 16% annual interest. With 10 bitcoins as collateral, you can borrow 9 bitcoins depending on the LTV. Converted to 50 million won per unit when borrowed, it is 450 million won.”
Let’s say that the bitcoin price has risen to 100 million won. You borrowed 9, so if you repay 4.5 Bitcoins excluding interest at this time, you will have 4.5 remaining. It is not strange to borrow 9 and repay 4.5. When it is 50 million won, 9 sides are 450 million won, and when it is 100 million won, 4.5 sides have the same value, so it is correct to repay 4.5 when converted into principal.
It is not just that the price of bitcoin rises. Sometimes it gets off. When the price of bitcoin plummets, the institution that lent bitcoin will go against trade.
Take stocks as an example. When the price of stocks bought from loans plummets and the value of the collateral falls, it is called counter trading that a securities company forcibly sells stocks as collateral. The collateral maintenance ratio is the index that is used as a standard for counter trading. If the total asset value (for example, the value of the stock entrusted as collateral + the value of the stock purchased by credit) is less than 140% of the loan amount, a counter trading notice is usually issued. When the combined price of 19 bitcoins entrusted as collateral and 9 borrowed coins reach 630 million won, 140% of the total collateral of 450 million won (i.e., when the bitcoin price drops to 33.16 million won), it is the case.
Both the method of paying off the amount as it is when borrowing and the method of paying off at the amount corresponding to the price at the time of borrowing are expected to be released as financial products. A strange idea came up with a product that borrows bitcoin as collateral for bitcoin.
[Kim Hyung-Joong Special Professor, Graduate School of Information Security, Korea University]
The opinion is from Hyung-Joong Kim Special Professor, Graduate School of Information Security, Korea University. Korea University is ranked as number 1 university in Korea and number 11 in Asia area from 2020 QS Asia college rank. The professor also worked in Cryptocurrency Research Center which is placed at Korea University Seoul Campus.
The article is from Maeil Business Newspaper, which is a comprehensive economic daily newspaper published in Korea. The head office is showing the largest number of publications as an economic newspaper. It also established D.STREET, an online professional media that focuses on the blockchain (cryptocurrency), the core technology of the 4th industrial revolution.
[Delio Official Websites]
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