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Borrow Big, Lose Big

I recently looked at a DeFi platform and realized that the common practice of over colleralization and then borrowing another coin with the proceeds of the colleralized loan can lead to a gain on your borrowed coins and a loss of your seed money. Here's how.

Look at this example. You deposit $1000 USDT and borrow $650 worth of WBTC. Then your WBTC grows by 25%, your borrowed WBTC will be worth $812.5, and your collateral (USDT) will be liquidated (taken by the smart contract), leaving you with borrowed WBTC.

Your WBTC grew in value and the LTV (Loan to Value) ratio decreased as it grew. Your collateral in stable coin stays at $1000.

When you hit the magic # of your LTV ( look at your contract) the bots rush in and liquidate your collateral. Keep a close eye on your LTV. Maybe just borrow 50% and if it gets too close for comfort, pay off more on the loan. This will help more on the percentage and keep the bots at bay.

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