4 ms·

It's not about the exact percentage, it's about it being significantly higher than the risk-free interest offered elsewhere in the market (which is <1%). That's

It's not about the exact percentage, it's about it being significantly higher than the risk-free interest offered elsewhere in the market (which is <1%). That's a big red flag that it's not actually risk-free.

wallacoloo 5y ago
This is misleading. Different people asses risks differently. I have extremely little insight into the existing financial system: does my bank really have good security over their servers? Do they practice recovery on a regular basis so that there’s confidence my money will still be there when failures do happen? Will the IRS make a typo that results in my bank assets being frozen? I have zero insight into that. A lot of people seem to take it foregranted that existing bank systems are infallible. I have no way to assess that beyond the test of time (which is still worth something). Cryptocurrency lending platforms have similar types of risk: what’s the feasibility of the thing being hacked. For most of these, I can actually do a very rough assessment because the code is public, the team is usually public (and has a track record) and there are probably some security audits by groups who either are or aren’t yet reputable. I have more tools for assessing risk. So yes, some people will judge the risk of the 0.1% system to be lower than the 4% system. Some people will judge the risk to be the reverse (more practical if you substitute Compound/Aave for the 4% system). But you can’t separate the risk of a system from the users of that system so cleanly. There’s a very large subjective component to it.
- Denvercoder9 5y ago
  Everything you mentioned (servers failing, hacks, etc) is operational risk, and that isn't what I'm talking about here. The point here is financial risk: things like a counterparty defaulting on their loan, the intermediary (a bank, Coinbase or their insurer) going insolvent when that happens too often, and you losing your "guaranteed" money. The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate.
  - wallacoloo 5y ago
    The consumer primarily cares "what's my expected return, and what's the variance". Operational risk surely affects that, so what's the justification in ignoring it? > The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate. Look at your wording here: "generally regarded". This is the point I'm after: risk assessment is a thing done by individual actors. Yes, they'll outsource much of this to 3rd parties, but at the end of the day, it's a subjective thing. People with political ties with the US may be more likely to view US banking as a low-risk activity; the disenfranchised or the people with weaker US ties might view it as higher risk. It can be simultaneously true that Alice's risk-adjusted return through Lend is more than her risk-adjusted return through traditional banking, while Bob's risk-adjusted return through Lend is less than through traditional banking. That's not necessarily a contradiction.

wallacoloo 5y ago

This is misleading. Different people asses risks differently. I have extremely little insight into the existing financial system: does my bank really have good security over their servers? Do they practice recovery on a regular basis so that there’s confidence my money will still be there when failures do happen? Will the IRS make a typo that results in my bank assets being frozen? I have zero insight into that. A lot of people seem to take it foregranted that existing bank systems are infallible. I have no way to assess that beyond the test of time (which is still worth something). Cryptocurrency lending platforms have similar types of risk: what’s the feasibility of the thing being hacked. For most of these, I can actually do a very rough assessment because the code is public, the team is usually public (and has a track record) and there are probably some security audits by groups who either are or aren’t yet reputable. I have more tools for assessing risk. So yes, some people will judge the risk of the 0.1% system to be lower than the 4% system. Some people will judge the risk to be the reverse (more practical if you substitute Compound/Aave for the 4% system). But you can’t separate the risk of a system from the users of that system so cleanly. There’s a very large subjective component to it.

Denvercoder9 5y ago
Everything you mentioned (servers failing, hacks, etc) is operational risk, and that isn't what I'm talking about here. The point here is financial risk: things like a counterparty defaulting on their loan, the intermediary (a bank, Coinbase or their insurer) going insolvent when that happens too often, and you losing your "guaranteed" money. The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate.
- wallacoloo 5y ago
  The consumer primarily cares "what's my expected return, and what's the variance". Operational risk surely affects that, so what's the justification in ignoring it? > The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate. Look at your wording here: "generally regarded". This is the point I'm after: risk assessment is a thing done by individual actors. Yes, they'll outsource much of this to 3rd parties, but at the end of the day, it's a subjective thing. People with political ties with the US may be more likely to view US banking as a low-risk activity; the disenfranchised or the people with weaker US ties might view it as higher risk. It can be simultaneously true that Alice's risk-adjusted return through Lend is more than her risk-adjusted return through traditional banking, while Bob's risk-adjusted return through Lend is less than through traditional banking. That's not necessarily a contradiction.