Loans are overcollateralized and collateral is automatically liquidated once the collateral ratio falls below the liquidation threshold. Eg. for eth as collateral the liquidation threshold is 75%, meaning $75 borrowed for $100 in collateral.
Compound itself has survived multiple violent price crashes and lenders didn't lose anything.
To be clear, you mean that I can borrow $75 by giving $100 first, then pay back the $75 with interest and get back my $100?
Why don't I use my $100 directly instead?
There are a few cases outside the blockchain where you get loans although you already have the cash (e.g. for tax reasons), but I don't understand how it makes financial sense in this case, if everything happens on the blockchain with no other incentive.
Maybe another direct question would be: as a lender, for which risk are you getting paid some interest?
Because it's not $100 in dollars, but $100 worth of eth or something else. Borrowed dollars can be used to buy something else, hoping the price of that something rises.
>as a lender, for which risk are you getting paid some interest?
It's theoretically possible for prices to fall fast enough so that the liquidated value of the collateral isn't enough to pay the debt.
I don't think rewards are risk adjusted at all. More like same people that could provide dollars are likely to speculate on cryptocurrencies themselves, or take part in more risky and active yield generating schemes.
