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I don’t understand why anyone, even an enthusiast, would dare to touch cryptocurrency lending with a forty-nine-and-a-half-foot pole. There’s no technical measu

I don’t understand why anyone, even an enthusiast, would dare to touch cryptocurrency lending with a forty-nine-and-a-half-foot pole. There’s no technical measure that can force me to pay back the coins I borrowed if I don’t have them. If you wanted to enforce being paid back in the real world legal system you’d be much better served with normal lending systems, know your customers, and report them to credit authorities. And if it’s not one of those “stablecoins” you’re borrowing something that could conceivably be worth 10x more in a year; that sounds like financial suicide. What do you possibly gain from engaging with all this? Maybe if I built a defi lending platform myself so I could take a lot of loans from my customers and then default. That’d work just fine. Otherwise, run for the hills.

yokem55 5y ago
Because the only way to get a loan is to put up collateral that is locked into a contract. And that collateral can only be extracted if you pay back the loan. So, if you value the collateral less then your debt, then, sure, walk away. But if the value of that collateral falls to less then the liquidation threshold (an amount some percentage greater then the value of your debt), your debt will be paid back by a liquidation bot and the the liquidator will take your collateral for themselves.
- UncleMeat 5y ago
  There is a huge problem with the collateral model: liquidity. If you put up $X in FOO_COIN as collateral and FOO_COIN starts tanking in value, the contract is supposed to auto-liquidate once it hits a certain point. But there is absolutely no guarantee that this can find a buyer. So the "guaranteed" collateral recovery is not exactly guaranteed.
  - bhaak 5y ago
    How is that different to traditional finance? Evergrande almost went belly-up as the prices of their real state fell sharply because they sold so much of it to cover their credits. The financial crisis from 2007 was because the collaterals were nowhere as sound as they were sold for. Don’t get me wrong I think it’s mostly a house of cards but crypto finance is just traditional finance on steroids IMO.
    - UncleMeat 5y ago
      > How is that different to traditional finance? There are a lot more backstops. Traditional finance can have this problem, but we can install human systems to limit the blast radius of things. As you say, it is traditional finance on steroids. Crypto enthusiasts seem to think it is the opposite. People tell me that defi loans are "zero risk" because of the automatic collateral systems and I just laugh and laugh.
      - bhaak 5y ago
        Crypto finance and especially DeFi is tiny compared to traditional finance. The blast radius is still small without the regulations. But the regulations will come. Crypto finance is going down the same path that traditional finance did just in a period of a few years than a century. Everybody who claims there's "zero risk" is either lying or blind to the risks. You can't get those large yields with zero risk.
  - yokem55 5y ago
    That's why you can only borrow up to 80-ish% of your collateral, and that's getting very risky for the borrower. It also means that the sane lending protocols are somewhat stingy with what they take as collateral and then set the borrowing limits and liquidation thresholds fairly conservatively. When the market starts making big moves downward the liquidation bots have a keen eye on which positions are at risk, watching and predicting the oracle updates, and within a block or 2 (~30 seconds) of a position being vulnerable have the deal all closed out. It can even be all done in a single transaction bundle that calls the liquidation function, pays back the debt, takes the collateral, and sells it on a dex, all in one go. The market price for the collateral would have to drop more then 20% in the span of that 30-seconds for it to not be profitable for the liquidator. That's not to say it's impossible for this to fail, the biggest and sharpest dumps happen during liquidation cascades. But a failure is in the category of 'black swan event', and not something that is seen with regularity.
    - wizzwizz4 5y ago
      > That's not to say it's impossible for this to fail, the biggest and sharpest dumps happen during liquidation cascades. If it happens, it's not a black swan event.
      - TomSwirly 5y ago
        This is a wrong use of the term. Black swans are rare but actually exist. https://en.wikipedia.org/wiki/Black_swan_theory https://en.wikipedia.org/wiki/Black_swan_theory
        wizzwizz4 5y ago
        It's actually a correct use of the term. A “black swan” is something that is believed not to be possible – or, in retrospect, something that was believed impossible but happened anyway. The term predates the discovery of black swans; > However, in 1697, Dutch explorers led by Willem de Vlamingh became the first Europeans to see black swans, in Western Australia.[9] The term subsequently metamorphosed to connote the idea that a perceived impossibility might later be disproven. Taleb notes that in the 19th century, John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.[10]
- lottin 5y ago
  Yeah, but the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral. Otherwise, there's no financing going on. It's simply a bet on the relative value of the principal vs the collateral. Calling this "a loan" is misleading.
  - pdonis 5y ago
    > the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral Um, what? If I take out a mortgage to buy a house, the loan amount is not going to be larger than the value of the collateral (the house). If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car). What kind of loan are you thinking of?
    - throwawaygh 5y ago
      > If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car). Pray tell of these new cars whose value does not plummet the moment they are driven off the lot.
      - pdonis 5y ago
        Which is why car loan providers usually require a substantial down payment so the loan is not underwater. (And why home mortgage providers usually require a LTV well under 100 percent--and make you pay mortgage insurance even then unless the LTV is even lower.)
        throwawaygh 5y ago
        What the hell are you taking about? I have never made a down payment for a car and have never paid interest on a car loan. Ever. And I’ve purchased many cars. E: woah! .06 seconds to the first downvote to a Dow thread comment on a two day old post! I’m out.
      - 5y ago
Workaccount2 5y ago
Crypto evangelists have done so much to obfuscate the fundamental problem of the real world/digital world divide that I think many of them have lost sight of the problem themselves. Until we find the API for reality, many of these decentralized projects are hopeless.
- doliveira 5y ago
  > Until we find the API for reality, many of these decentralized projects are hopeless. That was nicely put. I see so many of these projects promising to end with banking, bureaucracy, but forgetting that at some level the bits and bytes have to be input or acted on by a human.
- belltaco 5y ago
  In some ways it's like the early days of banks, where flaws like this were found and fixed. However a lot of those fixes were put in place by governments and regulation with the threats of prison time and fines for both banks and their customers. Another question is if things like this will poison the well and scare people away permanently.
  - bduerst 5y ago
    It's almost like an authority is needed to enforce contracts. This decentralization for the sake of being decentralized doesn't solve the problem fully.
  - cguess 5y ago
    The difference is that the "early days of banking" were the 1200's CE (and arguably way before then). And even then, it took 800 years to really nail it down and finally get away from fiat currency. For some reasons none of this applies to crypto because reasons that definitely aren't a pump-and-dump.
saalweachter 5y ago
You can't get Rich with a capital R through safe, traditional investing working even a SWE job. You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich. If you want to be Rich you need to to resort to something like playing the lottery, or starting a unicorn startup, or exploiting large numbers of people for your own profit, or crazy "technically it's not a pyramid" schemes like crypto and DeFi.
- whimsicalism 5y ago
  or inheritance
- ranma4703 5y ago
  Sounds like we should tax people enough that they can't get "private jet rich", in order to disincentivize those harmful behaviors. Nobody should have the power that having a billion dollars gives you
  - nybble41 5y ago
    > Nobody should have the power that having a billion dollars gives you Let's pretend for a moment that I agreed with you on this. Your proposal to address the situation is to take all that money, which is currently at least somewhat distributed, and concentrate it in a single organization which already claims a license to steal, kidnap, and murder. I really don't think you've thought this through…
- 6gvONxR4sf7o 5y ago
  > You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich. SWE at the staff level will get you low to mid eight-figures rich [0] by the time you're old with safe, traditional investing. Sure you aren't Masters of the Universe Rich, but you're still filthy rich. And how many crypto people are going to beat low-to-mid eight figures? Maybe if you put $100k into bitcoin in 2013, but I'd bet there are more SWEs making $500k+ than there are people who put that much into crypto early enough (and weren't already filthy rich). [0] Low-to-mid eight-figures in today's dollars. Nine figures in future dollars. Assume $500k income, putting half away from 35 to 65, getting 7% (4.1% after 2.9% inflation).

yokem55 5y ago

Because the only way to get a loan is to put up collateral that is locked into a contract. And that collateral can only be extracted if you pay back the loan. So, if you value the collateral less then your debt, then, sure, walk away. But if the value of that collateral falls to less then the liquidation threshold (an amount some percentage greater then the value of your debt), your debt will be paid back by a liquidation bot and the the liquidator will take your collateral for themselves.

UncleMeat 5y ago
There is a huge problem with the collateral model: liquidity. If you put up $X in FOO_COIN as collateral and FOO_COIN starts tanking in value, the contract is supposed to auto-liquidate once it hits a certain point. But there is absolutely no guarantee that this can find a buyer. So the "guaranteed" collateral recovery is not exactly guaranteed.
- bhaak 5y ago
  How is that different to traditional finance? Evergrande almost went belly-up as the prices of their real state fell sharply because they sold so much of it to cover their credits. The financial crisis from 2007 was because the collaterals were nowhere as sound as they were sold for. Don’t get me wrong I think it’s mostly a house of cards but crypto finance is just traditional finance on steroids IMO.
  - UncleMeat 5y ago
    > How is that different to traditional finance? There are a lot more backstops. Traditional finance can have this problem, but we can install human systems to limit the blast radius of things. As you say, it is traditional finance on steroids. Crypto enthusiasts seem to think it is the opposite. People tell me that defi loans are "zero risk" because of the automatic collateral systems and I just laugh and laugh.
    - bhaak 5y ago
      Crypto finance and especially DeFi is tiny compared to traditional finance. The blast radius is still small without the regulations. But the regulations will come. Crypto finance is going down the same path that traditional finance did just in a period of a few years than a century. Everybody who claims there's "zero risk" is either lying or blind to the risks. You can't get those large yields with zero risk.
- yokem55 5y ago
  That's why you can only borrow up to 80-ish% of your collateral, and that's getting very risky for the borrower. It also means that the sane lending protocols are somewhat stingy with what they take as collateral and then set the borrowing limits and liquidation thresholds fairly conservatively. When the market starts making big moves downward the liquidation bots have a keen eye on which positions are at risk, watching and predicting the oracle updates, and within a block or 2 (~30 seconds) of a position being vulnerable have the deal all closed out. It can even be all done in a single transaction bundle that calls the liquidation function, pays back the debt, takes the collateral, and sells it on a dex, all in one go. The market price for the collateral would have to drop more then 20% in the span of that 30-seconds for it to not be profitable for the liquidator. That's not to say it's impossible for this to fail, the biggest and sharpest dumps happen during liquidation cascades. But a failure is in the category of 'black swan event', and not something that is seen with regularity.
  - wizzwizz4 5y ago
    > That's not to say it's impossible for this to fail, the biggest and sharpest dumps happen during liquidation cascades. If it happens, it's not a black swan event.
    - TomSwirly 5y ago
      This is a wrong use of the term. Black swans are rare but actually exist. https://en.wikipedia.org/wiki/Black_swan_theory https://en.wikipedia.org/wiki/Black_swan_theory
      - wizzwizz4 5y ago
        It's actually a correct use of the term. A “black swan” is something that is believed not to be possible – or, in retrospect, something that was believed impossible but happened anyway. The term predates the discovery of black swans; > However, in 1697, Dutch explorers led by Willem de Vlamingh became the first Europeans to see black swans, in Western Australia.[9] The term subsequently metamorphosed to connote the idea that a perceived impossibility might later be disproven. Taleb notes that in the 19th century, John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.[10]
lottin 5y ago
Yeah, but the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral. Otherwise, there's no financing going on. It's simply a bet on the relative value of the principal vs the collateral. Calling this "a loan" is misleading.
- pdonis 5y ago
  > the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral Um, what? If I take out a mortgage to buy a house, the loan amount is not going to be larger than the value of the collateral (the house). If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car). What kind of loan are you thinking of?
  - throwawaygh 5y ago
    > If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car). Pray tell of these new cars whose value does not plummet the moment they are driven off the lot.
    - pdonis 5y ago
      Which is why car loan providers usually require a substantial down payment so the loan is not underwater. (And why home mortgage providers usually require a LTV well under 100 percent--and make you pay mortgage insurance even then unless the LTV is even lower.)
      - throwawaygh 5y ago
        What the hell are you taking about? I have never made a down payment for a car and have never paid interest on a car loan. Ever. And I’ve purchased many cars. E: woah! .06 seconds to the first downvote to a Dow thread comment on a two day old post! I’m out.
    - 5y ago

Workaccount2 5y ago

Crypto evangelists have done so much to obfuscate the fundamental problem of the real world/digital world divide that I think many of them have lost sight of the problem themselves. Until we find the API for reality, many of these decentralized projects are hopeless.

doliveira 5y ago
> Until we find the API for reality, many of these decentralized projects are hopeless. That was nicely put. I see so many of these projects promising to end with banking, bureaucracy, but forgetting that at some level the bits and bytes have to be input or acted on by a human.
belltaco 5y ago
In some ways it's like the early days of banks, where flaws like this were found and fixed. However a lot of those fixes were put in place by governments and regulation with the threats of prison time and fines for both banks and their customers. Another question is if things like this will poison the well and scare people away permanently.
- bduerst 5y ago
  It's almost like an authority is needed to enforce contracts. This decentralization for the sake of being decentralized doesn't solve the problem fully.
- cguess 5y ago
  The difference is that the "early days of banking" were the 1200's CE (and arguably way before then). And even then, it took 800 years to really nail it down and finally get away from fiat currency. For some reasons none of this applies to crypto because reasons that definitely aren't a pump-and-dump.

saalweachter 5y ago

You can't get Rich with a capital R through safe, traditional investing working even a SWE job. You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich. If you want to be Rich you need to to resort to something like playing the lottery, or starting a unicorn startup, or exploiting large numbers of people for your own profit, or crazy "technically it's not a pyramid" schemes like crypto and DeFi.

whimsicalism 5y ago
or inheritance
ranma4703 5y ago
Sounds like we should tax people enough that they can't get "private jet rich", in order to disincentivize those harmful behaviors. Nobody should have the power that having a billion dollars gives you
- nybble41 5y ago
  > Nobody should have the power that having a billion dollars gives you Let's pretend for a moment that I agreed with you on this. Your proposal to address the situation is to take all that money, which is currently at least somewhat distributed, and concentrate it in a single organization which already claims a license to steal, kidnap, and murder. I really don't think you've thought this through…
6gvONxR4sf7o 5y ago
> You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich. SWE at the staff level will get you low to mid eight-figures rich [0] by the time you're old with safe, traditional investing. Sure you aren't Masters of the Universe Rich, but you're still filthy rich. And how many crypto people are going to beat low-to-mid eight figures? Maybe if you put $100k into bitcoin in 2013, but I'd bet there are more SWEs making $500k+ than there are people who put that much into crypto early enough (and weren't already filthy rich). [0] Low-to-mid eight-figures in today's dollars. Nine figures in future dollars. Assume $500k income, putting half away from 35 to 65, getting 7% (4.1% after 2.9% inflation).