6 ms·

I think of it like this. Various tokens give you certain types of exposures with different risk profiles. Yields are so high because of the risk. This really i

I think of it like this. Various tokens give you certain types of exposures with different risk profiles. Yields are so high because of the risk. This really isn't so different from the centralized financial system where we have built complex structures (exotic derivatives, structured products, etc) to give you certain types of exposures. The difference is that DeFi is globally accessible and permissionless. Even if DeFi never moves beyond these "financial speculation" use cases, if it replaces what's currently centralized in government-regulated financial markets, that's a multi-trillion dollar opportunity. I'm doubtful we'll see any retail use cases or mass option beyond speculation soon, just like your average retail user does not buy exotic derivatives. That doesn't mean it's not useful.

slg 5y ago
Except those "exotic derivatives, structured products, etc" do have real investments at the heart of them. What is at the heart of those "DeFi" investments? It seems to mostly be criminal and criminal-like behavior (this includes transferring money in ways the local government doesn't approve of which can admittedly be great if the local government is oppressive).
- borrowcheckfml 5y ago
  I think it's arguable what real investments are. How "real" is the stock price of Gamestop? Aren't most prices just driven by imaginary narratives? Investors rarely care about dividends. There are also DeFi projects that are based what you call "real investments" such as stablecoins, synthetic assets for stocks and commodities, etc. When the backing/staking mechanism for these works as intended, they are just as real as any derivatives on these assets in the traditional financial markets.
  - bob33212 5y ago
    True, a good chunk of trading and wall street in general is not doing anything real. But just like the dotcom bubble, the music stops eventually, and you don't want to be stuck holding worthless stocks or coins when that happens.
  - slg 5y ago
    Let's say Gamestop is shutdown tomorrow. There is real estate, there is IP, and there are physical products that could all be sold to recoup losses. There is intrinsic value there regardless of whether the current stock price has greatly exceeded those values. The overwhelming majority of cryptocurrency investments have no intrinsic value.
    - borrowcheckfml 5y ago
      And crypto projects that are derivatives on real world assets, like fiat currencies (stablecoins) or stocks (synthetic tokens), have equivalent backing. If the project were to dissolve, there would be assets backing that. Not suggesting this is the case here, but I keep seeing this worrisome trend where people are stuck in the Bitcoin and ICO world from 5 years ago and think nothing has changed and they don't really understand the technical details of how DeFi protocols work today. In the case where tokens are not backed by anything they are often governance tokens, which are kind of like startup equity. Startups without much IP or real estate are commonly valued at millions of dollars. This is no different in that anyone is a VC investing in e.g. future governance rights.
      - lottin 5y ago
        A startup equity consists of the startup's net assets, so the owners have a claim on these assets. In the case of these "governance rights" what assets do the holders have a claim on?
        arcticbull 5y ago
        Governance tokens are just a glorified twitter poll.
      - slg 5y ago
        What percentage of cryptocurrencies are backed by real world assets? Who ensures that this backing is actually baked into the cryptocurrency and isn't just some marketing speak? For example there is Tether which claimed to be backed by USD. "[I]t turns out that the stablecoin that used to say it was 100 per cent backed by cash reserves is in fact . . . 2.9 per cent backed by cash reserves".[1] [1] - https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b4d9 https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...
  - NationalPark 5y ago
    Companies have intrinsic value in their balance sheets and are also subject to accounting rules that give confidence (and value) to their cashflows. So, ultimately, a share in a company does map to something material that could theoretically be used for something other than speculation.
  - saddlerustle 5y ago
    In the short term prices are driven by liquidity, but the fundamental value of a company's stock is the net present value of its future free cash flows. Anyone believing otherwise will, in the long term, lose money.
  - IAmGraydon 5y ago
    > Investors rarely care about dividends. This one statement reveals that you have zero idea what you’re talking about and are just presenting yourself as knowledgeable. Why do that?
    - theK 5y ago
      I can see this being true in the stocks world. A lot of companies have IPOed without a plan for dividend payouts because their main business plan is investment in expansion. People who jumped onto amazon and tesla may have made fortunes but have gotten exactly 0 dividends.
      - arcticbull 5y ago
        Yet. Companies pay dividends when they no longer believe that they can provide a better ROI by investing it in themselves. Like AAPL. All it signals is there remains a growth story to be had. However, any money the company invests in itself raises the intrinsic and shareholder value of outstanding equity, just like share buybacks, and dividends.
  - lottin 5y ago
    > There are also DeFi projects that are based what you call "real investments" such as stablecoins, synthetic assets for stocks and commodities, etc. All these are examples of DeFi parasitising conventional finance products. Also none of these are decentralised or "trustless". Notice how all the main stablecoin issuers have to provide regular third-party attestations assuring that the coins have appropriate backing.
  - valuearb 5y ago
    The GME stock price is a derivative. GME stock is a valid contract with a proportional ownership share of all GME tangible and intangible assets. What crypto has the rights to any tangible assets? Even stablecoins are unaudited.
    - arcticbull 5y ago
      Stablecoins do not offer claim on the backing assets anyways, if and when they exist.
  - Aunche 5y ago
    The difference is that GameStop actually has a way to receive cash outside of an investor. They're a real business with revenue. GameStop is using the inflated valuation to raise money to pay off debt and expand its business. While it's unlikely, it's possible that they will eventually make enough profit to justify it's valuation.
- 3np 5y ago
  Government bonds are already on the way there. There are multiple alternatives live today for getting exposure to stocks of major companies as well as commodities. It is a matter of regulatory clarity, and processes and infrastructure (of which some of these projects fill) until we get hard non-crypto-related security tokens etc. Things are starting to fall in place but things have to prove themselves in the current market before
- mech422 5y ago
  >>Except those "exotic derivatives, structured products, etc" do have real investments at the heart of them. Hmm...2008 housing crash and the recession that followed beg to differ.
  - loceng 5y ago
    Regulatory capture is still a possible problem on the other end of the spectrum that needs to be countered with effort.
    - mech422 5y ago
      so we should expend the effort to fix the issues with the existing system.. But we should just throw out new systems like crypto because they still have issues that need "to be countered with effort" ? I'm not claiming any system is perfect, but it seems odd to shrug at the issues in one system and demonize another system for having issues...
      - loceng 5y ago
        You injecting a straw man argument doesn't help. We need to fix the existing system, yes, and it requires real work - real relationship building, real trust networks of competent critical thinkers - a meritocracy, hierarchy of competent to form and be strengthened; regulatory capture is a multi-industry, multi-institutional issue. Certain issues inherently to Bitcoin's issues are unavoidable pitfall and not fixable. The issues with government are fixable, and arguably the US government, democracy and capitalism has been highly successful for getting innovation to where it is today. Next step is making sure people/businesses are paying their fair share into the system and then redistributing a UBI to the largest segment or largest cog in the machinery - consumers, so then the machine has the fuel to run.
        mech422 5y ago
        What strawman would that be? BTW - I agree Bitcoin has issues (speed/cost being the 2 biggest). It was literally the first generation coin. Other coins are trying to solve those problems. Personally I like Cardano/ADA for that reason - its trying to fix some of the issues with first gen. coins. Also, if you think you can get people/businesses to pay their fair share...I think your dreaming. I really hope you can, but I don't see it happening in the next 20 years. I agree about consumers. Its annoying so much energy is spent talking about the 'minimum wage', when we really need people with a 'middle class wage' to drive the economy. Seems like we're more interested in keeping people at the bottom then actually increasing the numbers of people with disposable income to drive the economy.
- newswasboring 5y ago
  > (this includes transferring money in ways the local government doesn't approve of which can admittedly be great if the local government is oppressive). That is a very weird take. It assumes that privacy is somehow always linked to illicite activities. Even if I'm buying candy, the government doesn't have any right to track it. Hiding my life from the government should not be automatically labeled criminal.
  - slg 5y ago
    I think it is more your interpretation of my take is weird because I never said anything approaching what you are suggesting. You want privacy, buy in cash. Most cryptocurrencies don't provide added privacy and they usually end up decreasing privacy since all transactions are on the public ledger. The type of thing I am talking about is people transferring money out of an economy in ways that are forbidden by the government. Governments can want to prevent this for legitimate reasons like trying to stop money laundering and tax evasion. They can also do it for illegitimate reasons like the government trying to retain authoritarian control over its citizens or to prop up a failing currency. Either way it would mean the transfers are illegal, but not all of them are necessarily immoral. That is why I dubbed it "criminal-like behavior".
dd36 5y ago
But governments regulate because before regulation, it was a scammers paradise.
lottin 5y ago
DeFi can't do much financing at all since smart contracts can only replicate a small subset of financial products which aren't very useful to begin with. Even calling it "finance" is a bit of a stretch.
- sanderjd 5y ago
  > smart contracts can only replicate a small subset of financial products Why?
  - lottin 5y ago
    One of the reasons is that many financial contracts have provisions to seize assets under certain circumstances. This is not possible with DeFi because DeFi is built around "unconfiscatable" digital assets.
    - sanderjd 5y ago
      I believe it is possible to write in provisions for some actor or set of actors to seize assets in a smart contract. This doesn't seem common either because of immaturity or just culture, but I don't think it is impossible.
      - lottin 5y ago
        No, that's not it. An actor must be able to seize assets from another actor, under certain circumstances. That can't be done with smart contracts because of the security model of blockchains.
        sanderjd 5y ago
        It can if it is written into the contract. I suspect pretty much all contracts will have provisions for this in the future.
        5y ago
ineedasername 5y ago
I don't think you're wrong conceptually. But in practical terms: 1) the traditional options with varying risk profiles are mostly legitimate. The ratio of scam to authentic project is much higher in crypto. Or if not "scam", products where the creators (as pointed out in this article) might be perfectly happy if the product turned out to be successful, but mostly don't care because they make their money up front: reward with very little risk. Retail customers take all the risk. Traditional financial products align incentives better because if no one want is, no one is making transaction or management fees either. They're (mostly) only successful if customers are successful 2) Financial products based on crypto have no real-world assets backing them, making their prices much more volatile. If you're investing in traditional high risk product that ultimately relies on a real-world commodity like oil, you can make reasoned predictions on where oil demand might be headed. Your might make a high risk bet that oil prices are going to bottom out from their current peak due to decreased demand after the Summer and a minor resurgence in COVID as more and more people go back to work and then kids stop distance learning and mostly go back to school in the fall, etc. You might be wrong, but you can see an actual underlying asset with real-world utility to make better reasoned decisions. It is much harder to do that with crypto when a tweet by some high profile billionaire (Elon comes to mind) or rumors of regulatory scrutiny could send prices soaring or plummeting. This is very rare in traditional financial products. I also don't think crypto will ever ever ever replace government regulated markets. It may become part of them, but not replace. The government (at least in the US) is already regulating crypto. CTR's are already required, the SEC has stepped in pretty heavily to classify most crypto as securities, complete with the requirements that comes with that, etc. It can be decentralized but still regulated, and governments are simply not going to allow crypto to take away their ability to control their own monetary policy. Plenty of governments may wish to move on from the USD being the default world reserve currency, but that's because they want it to be something they have more control over. Crypto doesn't fill that role. All the US would have to do is regulate how every US bank works with crypto, and require that US banks only work with foreign banks that follow similar requirements. Any foreign bank wanting to do business even remotely related to the US-- which is nearly all of them, would have no choice but to follow. Or the US could regulate how businesses are able to accept crypto as a currency. Businesses don't operate in a decentralized abstraction layer: They operate in physical locations. It might be difficult to seize their crypto assets if they violate the law (though not impossible) but still very easy to seize & shutdown their physical assets, throw people in jail, etc. Sure, if crypto could somehow avoid all of that until it became the de facto medium of exchange, governments would have a much harder time doing this. But it's not like governments aren't aware of what's going on, and as I said the regulation has already begun.

slg 5y ago

Except those "exotic derivatives, structured products, etc" do have real investments at the heart of them. What is at the heart of those "DeFi" investments? It seems to mostly be criminal and criminal-like behavior (this includes transferring money in ways the local government doesn't approve of which can admittedly be great if the local government is oppressive).

borrowcheckfml 5y ago
I think it's arguable what real investments are. How "real" is the stock price of Gamestop? Aren't most prices just driven by imaginary narratives? Investors rarely care about dividends. There are also DeFi projects that are based what you call "real investments" such as stablecoins, synthetic assets for stocks and commodities, etc. When the backing/staking mechanism for these works as intended, they are just as real as any derivatives on these assets in the traditional financial markets.
- bob33212 5y ago
  True, a good chunk of trading and wall street in general is not doing anything real. But just like the dotcom bubble, the music stops eventually, and you don't want to be stuck holding worthless stocks or coins when that happens.
- slg 5y ago
  Let's say Gamestop is shutdown tomorrow. There is real estate, there is IP, and there are physical products that could all be sold to recoup losses. There is intrinsic value there regardless of whether the current stock price has greatly exceeded those values. The overwhelming majority of cryptocurrency investments have no intrinsic value.
  - borrowcheckfml 5y ago
    And crypto projects that are derivatives on real world assets, like fiat currencies (stablecoins) or stocks (synthetic tokens), have equivalent backing. If the project were to dissolve, there would be assets backing that. Not suggesting this is the case here, but I keep seeing this worrisome trend where people are stuck in the Bitcoin and ICO world from 5 years ago and think nothing has changed and they don't really understand the technical details of how DeFi protocols work today. In the case where tokens are not backed by anything they are often governance tokens, which are kind of like startup equity. Startups without much IP or real estate are commonly valued at millions of dollars. This is no different in that anyone is a VC investing in e.g. future governance rights.
    - lottin 5y ago
      A startup equity consists of the startup's net assets, so the owners have a claim on these assets. In the case of these "governance rights" what assets do the holders have a claim on?
      - arcticbull 5y ago
        Governance tokens are just a glorified twitter poll.
    - slg 5y ago
      What percentage of cryptocurrencies are backed by real world assets? Who ensures that this backing is actually baked into the cryptocurrency and isn't just some marketing speak? For example there is Tether which claimed to be backed by USD. "[I]t turns out that the stablecoin that used to say it was 100 per cent backed by cash reserves is in fact . . . 2.9 per cent backed by cash reserves".[1] [1] - https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b4d9 https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...
- NationalPark 5y ago
  Companies have intrinsic value in their balance sheets and are also subject to accounting rules that give confidence (and value) to their cashflows. So, ultimately, a share in a company does map to something material that could theoretically be used for something other than speculation.
- saddlerustle 5y ago
  In the short term prices are driven by liquidity, but the fundamental value of a company's stock is the net present value of its future free cash flows. Anyone believing otherwise will, in the long term, lose money.
- IAmGraydon 5y ago
  > Investors rarely care about dividends. This one statement reveals that you have zero idea what you’re talking about and are just presenting yourself as knowledgeable. Why do that?
  - theK 5y ago
    I can see this being true in the stocks world. A lot of companies have IPOed without a plan for dividend payouts because their main business plan is investment in expansion. People who jumped onto amazon and tesla may have made fortunes but have gotten exactly 0 dividends.
    - arcticbull 5y ago
      Yet. Companies pay dividends when they no longer believe that they can provide a better ROI by investing it in themselves. Like AAPL. All it signals is there remains a growth story to be had. However, any money the company invests in itself raises the intrinsic and shareholder value of outstanding equity, just like share buybacks, and dividends.
- lottin 5y ago
  > There are also DeFi projects that are based what you call "real investments" such as stablecoins, synthetic assets for stocks and commodities, etc. All these are examples of DeFi parasitising conventional finance products. Also none of these are decentralised or "trustless". Notice how all the main stablecoin issuers have to provide regular third-party attestations assuring that the coins have appropriate backing.
- valuearb 5y ago
  The GME stock price is a derivative. GME stock is a valid contract with a proportional ownership share of all GME tangible and intangible assets. What crypto has the rights to any tangible assets? Even stablecoins are unaudited.
  - arcticbull 5y ago
    Stablecoins do not offer claim on the backing assets anyways, if and when they exist.
- Aunche 5y ago
  The difference is that GameStop actually has a way to receive cash outside of an investor. They're a real business with revenue. GameStop is using the inflated valuation to raise money to pay off debt and expand its business. While it's unlikely, it's possible that they will eventually make enough profit to justify it's valuation.
3np 5y ago
Government bonds are already on the way there. There are multiple alternatives live today for getting exposure to stocks of major companies as well as commodities. It is a matter of regulatory clarity, and processes and infrastructure (of which some of these projects fill) until we get hard non-crypto-related security tokens etc. Things are starting to fall in place but things have to prove themselves in the current market before
mech422 5y ago
>>Except those "exotic derivatives, structured products, etc" do have real investments at the heart of them. Hmm...2008 housing crash and the recession that followed beg to differ.
- loceng 5y ago
  Regulatory capture is still a possible problem on the other end of the spectrum that needs to be countered with effort.
  - mech422 5y ago
    so we should expend the effort to fix the issues with the existing system.. But we should just throw out new systems like crypto because they still have issues that need "to be countered with effort" ? I'm not claiming any system is perfect, but it seems odd to shrug at the issues in one system and demonize another system for having issues...
    - loceng 5y ago
      You injecting a straw man argument doesn't help. We need to fix the existing system, yes, and it requires real work - real relationship building, real trust networks of competent critical thinkers - a meritocracy, hierarchy of competent to form and be strengthened; regulatory capture is a multi-industry, multi-institutional issue. Certain issues inherently to Bitcoin's issues are unavoidable pitfall and not fixable. The issues with government are fixable, and arguably the US government, democracy and capitalism has been highly successful for getting innovation to where it is today. Next step is making sure people/businesses are paying their fair share into the system and then redistributing a UBI to the largest segment or largest cog in the machinery - consumers, so then the machine has the fuel to run.
      - mech422 5y ago
        What strawman would that be? BTW - I agree Bitcoin has issues (speed/cost being the 2 biggest). It was literally the first generation coin. Other coins are trying to solve those problems. Personally I like Cardano/ADA for that reason - its trying to fix some of the issues with first gen. coins. Also, if you think you can get people/businesses to pay their fair share...I think your dreaming. I really hope you can, but I don't see it happening in the next 20 years. I agree about consumers. Its annoying so much energy is spent talking about the 'minimum wage', when we really need people with a 'middle class wage' to drive the economy. Seems like we're more interested in keeping people at the bottom then actually increasing the numbers of people with disposable income to drive the economy.
newswasboring 5y ago
> (this includes transferring money in ways the local government doesn't approve of which can admittedly be great if the local government is oppressive). That is a very weird take. It assumes that privacy is somehow always linked to illicite activities. Even if I'm buying candy, the government doesn't have any right to track it. Hiding my life from the government should not be automatically labeled criminal.
- slg 5y ago
  I think it is more your interpretation of my take is weird because I never said anything approaching what you are suggesting. You want privacy, buy in cash. Most cryptocurrencies don't provide added privacy and they usually end up decreasing privacy since all transactions are on the public ledger. The type of thing I am talking about is people transferring money out of an economy in ways that are forbidden by the government. Governments can want to prevent this for legitimate reasons like trying to stop money laundering and tax evasion. They can also do it for illegitimate reasons like the government trying to retain authoritarian control over its citizens or to prop up a failing currency. Either way it would mean the transfers are illegal, but not all of them are necessarily immoral. That is why I dubbed it "criminal-like behavior".

dd36 5y ago

But governments regulate because before regulation, it was a scammers paradise.

lottin 5y ago

DeFi can't do much financing at all since smart contracts can only replicate a small subset of financial products which aren't very useful to begin with. Even calling it "finance" is a bit of a stretch.

sanderjd 5y ago
> smart contracts can only replicate a small subset of financial products Why?
- lottin 5y ago
  One of the reasons is that many financial contracts have provisions to seize assets under certain circumstances. This is not possible with DeFi because DeFi is built around "unconfiscatable" digital assets.
  - sanderjd 5y ago
    I believe it is possible to write in provisions for some actor or set of actors to seize assets in a smart contract. This doesn't seem common either because of immaturity or just culture, but I don't think it is impossible.
    - lottin 5y ago
      No, that's not it. An actor must be able to seize assets from another actor, under certain circumstances. That can't be done with smart contracts because of the security model of blockchains.
      - sanderjd 5y ago
        It can if it is written into the contract. I suspect pretty much all contracts will have provisions for this in the future.
        5y ago

ineedasername 5y ago

I don't think you're wrong conceptually. But in practical terms: 1) the traditional options with varying risk profiles are mostly legitimate. The ratio of scam to authentic project is much higher in crypto. Or if not "scam", products where the creators (as pointed out in this article) might be perfectly happy if the product turned out to be successful, but mostly don't care because they make their money up front: reward with very little risk. Retail customers take all the risk. Traditional financial products align incentives better because if no one want is, no one is making transaction or management fees either. They're (mostly) only successful if customers are successful 2) Financial products based on crypto have no real-world assets backing them, making their prices much more volatile. If you're investing in traditional high risk product that ultimately relies on a real-world commodity like oil, you can make reasoned predictions on where oil demand might be headed. Your might make a high risk bet that oil prices are going to bottom out from their current peak due to decreased demand after the Summer and a minor resurgence in COVID as more and more people go back to work and then kids stop distance learning and mostly go back to school in the fall, etc. You might be wrong, but you can see an actual underlying asset with real-world utility to make better reasoned decisions. It is much harder to do that with crypto when a tweet by some high profile billionaire (Elon comes to mind) or rumors of regulatory scrutiny could send prices soaring or plummeting. This is very rare in traditional financial products. I also don't think crypto will ever ever ever replace government regulated markets. It may become part of them, but not replace. The government (at least in the US) is already regulating crypto. CTR's are already required, the SEC has stepped in pretty heavily to classify most crypto as securities, complete with the requirements that comes with that, etc. It can be decentralized but still regulated, and governments are simply not going to allow crypto to take away their ability to control their own monetary policy. Plenty of governments may wish to move on from the USD being the default world reserve currency, but that's because they want it to be something they have more control over. Crypto doesn't fill that role. All the US would have to do is regulate how every US bank works with crypto, and require that US banks only work with foreign banks that follow similar requirements. Any foreign bank wanting to do business even remotely related to the US-- which is nearly all of them, would have no choice but to follow. Or the US could regulate how businesses are able to accept crypto as a currency. Businesses don't operate in a decentralized abstraction layer: They operate in physical locations. It might be difficult to seize their crypto assets if they violate the law (though not impossible) but still very easy to seize & shutdown their physical assets, throw people in jail, etc. Sure, if crypto could somehow avoid all of that until it became the de facto medium of exchange, governments would have a much harder time doing this. But it's not like governments aren't aware of what's going on, and as I said the regulation has already begun.