6 ms·

The risk of events like this one is fundamental to DeFi right? How can people still think that it's the future? Or even remotely better than the banking system

by jstx1 5y ago

The risk of events like this one is fundamental to DeFi right? How can people still think that it's the future? Or even remotely better than the banking system we currently have?

NelsonMinar 5y ago
Because it's unregulated!
- lamp987 5y ago
  We should make software bugs illegal.
  - toomuchtodo 5y ago
    The ones that kill people or cause loss of value are, criminal and civil respectively. You go to court for them, and either go to jail or compensate the victim for their loss (or sometimes both, depending on the bug and the intent and actions around it).
snarf21 5y ago
Well it is the pump of the pump & dump. Everyone assumes that they can get out of the pyramid scheme before it crashes.
deleted 5y ago
[deleted]
jakear 5y ago
It's just like how Younique is the future of beauty products. Those who profit the most from more people believing it do a very good job of convincing more people to believe it. Do they "truly" believe it themselves, or are they just rational actors well aware that they lose a lot of money if people stop listening to them? No way to know.
- danielvf 5y ago
  We know from today's transactions that at least one individual had 4 billion dollars loaned out to a competing DeFi Project. That's very much putting your money where hype is.
raintrees 5y ago
I suggest the concept that the risk is fundamental to all systems of trade, fiat/government included. All suffer from theft by insiders as well as theft by outside attackers/exploiters.
- jstx1 5y ago
  Maybe that's vaguely true in the abstract but let's talk specifics. If I have a balance on a DeFi platform, it's vulnerable to attacks like the one in the original article. If I have a balance in a bank, this isn't the case. The risks aren't the same at all. Not the same type of risk, not the same magnitude of risk.
  - raintrees 5y ago
    Theft by insiders includes inflation, for me. The US alone is creating how many trillion how quickly? This will likely not end well. :(
isoskeles 5y ago
They think it’s better because interest earned on their deposit is much higher than in a bank. Of course, that doesn’t account for this sort of risk.
Havoc 5y ago
Anything can be hacked. Bank, paypal, DeFi. DeFi allows for a lot of unique and flexible things...and people are re-discovering that writing bullet proof code in such an environment is really really hard. i.e. No training wheels and lots of footguns available >How can people still think that it's the future? I'd view these events more as growing pains of a complex technology rather than an indication that it has no future. People are learning though. See Cardano and their choice of Haskell and emphasis on formal verification.
- n8cpdx 5y ago
  If a bank gets hacked, they can work out an arrangement with their partners to undo it, because the T-word is involved. If someone steals from my credit account, I Trust my financial institution to undo it. Trustless systems are overrated when you have trustworthy institutions.
  - liquidise 5y ago
    > "when you have trustworthy institutions" Quite. But what if you don't have access to trustworthy institutions? Or what if you need to coordinate between trustworthy institutions that either don't work together or don't share mutual trust? What if you distrust the very currency the institution does business with? Your point is correct. If you trust the institutions all the way down, trustless is complicated and unnecessary. If you don't trust the institutions, what are your other options?
    - roywiggins 5y ago
      Did every dollar of the $130m come from people who had genuinely evaluated the code, or had most of it come from people who trusted the authors not to screw it up this time? It sounds like people trusted CREAM with their money, and shouldn't have. Not as trustless as you might hope.
      - liquidise 5y ago
        I agree with you. My comment is not advocating for any platform in particular, least of all Cream, i'm replying only to the notion that trustless is unnecessary.
dcolkitt 5y ago
Plenty of asset classes exist with fundamental risks. The risk of investing in stocks is always that the underlying companies could have their business ruined overnight for any reason. The risk of swaps is always that the counterparty could go bust and be unable to pay you even if your bet pays off (see Lehman Brothers). The risk of leveraged futures positions is you can get liquidated on fat finger trades or flash crashes. The risk of structured credit products like CLOs or mortgage backed securities is that the pool is fraudulent. The risk of many quant strategies is that the correlations go to one and your capital gets wiped out as your hedges fail to protect you. Do any of these risks mean those asset classes are doomed? No, all of the above asset classes are bigger than ever. Markets can and do live with disastrous risk looming over their heads all the time. Unless your name is Nassim Taleb, the reality is that you mitigate the risks you can, model out the risks that you cannot, then price the asset accordingly. The foundation of modern finance is “we don’t have to live in mortal fear of risk if we’re smart about it” If inherent risk was an insurmountable barrier to the existence of a financial product, then I guarantee you the financial system would just be the old-timely community bankers like in It’s a Wonderful Life.
- jstx1 5y ago
  No banking system has the type of risks DeFi has. Saying that they have some other risks is just a long way to change the topic and it doesn't answer any of the questions around DeFi.
  - dcolkitt 5y ago
    Many quant funds have similar “gap to zero” risks like DeFi. Many swaps desks at bulge bracket banks have “gap to zero” risk. Many derivatives strategies actually have “gap beyond zero” risk, as in you can lose more than 100% of your investment. All of these systems are complex black boxes, for which the full risk profile can never be fully known let alone eliminated. Yet all of these asset classes continue to reach record size. For the foreseeable future, risk is not a meaningful constraint on financial activity or the growth of any otherwise profitable sector. Global capital is insanely hungry for yield. It’s willing to accept very large, outsized risks as long as returns are attractive. DeFi continues to grow because it offers significantly higher top-line returns than traditional products. As long as that continues to be true, investors will stomach, and in many cases outright ignore, the risks.

by jstx1 5y ago

The risk of events like this one is fundamental to DeFi right? How can people still think that it's the future? Or even remotely better than the banking system we currently have?

NelsonMinar 5y ago

Because it's unregulated!

lamp987 5y ago
We should make software bugs illegal.
- toomuchtodo 5y ago
  The ones that kill people or cause loss of value are, criminal and civil respectively. You go to court for them, and either go to jail or compensate the victim for their loss (or sometimes both, depending on the bug and the intent and actions around it).

snarf21 5y ago

Well it is the pump of the pump & dump. Everyone assumes that they can get out of the pyramid scheme before it crashes.

deleted 5y ago

[deleted]

jakear 5y ago

It's just like how Younique is the future of beauty products. Those who profit the most from more people believing it do a very good job of convincing more people to believe it. Do they "truly" believe it themselves, or are they just rational actors well aware that they lose a lot of money if people stop listening to them? No way to know.

danielvf 5y ago
We know from today's transactions that at least one individual had 4 billion dollars loaned out to a competing DeFi Project. That's very much putting your money where hype is.

raintrees 5y ago

I suggest the concept that the risk is fundamental to all systems of trade, fiat/government included. All suffer from theft by insiders as well as theft by outside attackers/exploiters.

jstx1 5y ago
Maybe that's vaguely true in the abstract but let's talk specifics. If I have a balance on a DeFi platform, it's vulnerable to attacks like the one in the original article. If I have a balance in a bank, this isn't the case. The risks aren't the same at all. Not the same type of risk, not the same magnitude of risk.
- raintrees 5y ago
  Theft by insiders includes inflation, for me. The US alone is creating how many trillion how quickly? This will likely not end well. :(

isoskeles 5y ago

They think it’s better because interest earned on their deposit is much higher than in a bank. Of course, that doesn’t account for this sort of risk.

Havoc 5y ago

Anything can be hacked. Bank, paypal, DeFi. DeFi allows for a lot of unique and flexible things...and people are re-discovering that writing bullet proof code in such an environment is really really hard. i.e. No training wheels and lots of footguns available >How can people still think that it's the future? I'd view these events more as growing pains of a complex technology rather than an indication that it has no future. People are learning though. See Cardano and their choice of Haskell and emphasis on formal verification.

n8cpdx 5y ago
If a bank gets hacked, they can work out an arrangement with their partners to undo it, because the T-word is involved. If someone steals from my credit account, I Trust my financial institution to undo it. Trustless systems are overrated when you have trustworthy institutions.
- liquidise 5y ago
  > "when you have trustworthy institutions" Quite. But what if you don't have access to trustworthy institutions? Or what if you need to coordinate between trustworthy institutions that either don't work together or don't share mutual trust? What if you distrust the very currency the institution does business with? Your point is correct. If you trust the institutions all the way down, trustless is complicated and unnecessary. If you don't trust the institutions, what are your other options?
  - roywiggins 5y ago
    Did every dollar of the $130m come from people who had genuinely evaluated the code, or had most of it come from people who trusted the authors not to screw it up this time? It sounds like people trusted CREAM with their money, and shouldn't have. Not as trustless as you might hope.
    - liquidise 5y ago
      I agree with you. My comment is not advocating for any platform in particular, least of all Cream, i'm replying only to the notion that trustless is unnecessary.

dcolkitt 5y ago

Plenty of asset classes exist with fundamental risks. The risk of investing in stocks is always that the underlying companies could have their business ruined overnight for any reason. The risk of swaps is always that the counterparty could go bust and be unable to pay you even if your bet pays off (see Lehman Brothers). The risk of leveraged futures positions is you can get liquidated on fat finger trades or flash crashes. The risk of structured credit products like CLOs or mortgage backed securities is that the pool is fraudulent. The risk of many quant strategies is that the correlations go to one and your capital gets wiped out as your hedges fail to protect you. Do any of these risks mean those asset classes are doomed? No, all of the above asset classes are bigger than ever. Markets can and do live with disastrous risk looming over their heads all the time. Unless your name is Nassim Taleb, the reality is that you mitigate the risks you can, model out the risks that you cannot, then price the asset accordingly. The foundation of modern finance is “we don’t have to live in mortal fear of risk if we’re smart about it” If inherent risk was an insurmountable barrier to the existence of a financial product, then I guarantee you the financial system would just be the old-timely community bankers like in It’s a Wonderful Life.

jstx1 5y ago
No banking system has the type of risks DeFi has. Saying that they have some other risks is just a long way to change the topic and it doesn't answer any of the questions around DeFi.
- dcolkitt 5y ago
  Many quant funds have similar “gap to zero” risks like DeFi. Many swaps desks at bulge bracket banks have “gap to zero” risk. Many derivatives strategies actually have “gap beyond zero” risk, as in you can lose more than 100% of your investment. All of these systems are complex black boxes, for which the full risk profile can never be fully known let alone eliminated. Yet all of these asset classes continue to reach record size. For the foreseeable future, risk is not a meaningful constraint on financial activity or the growth of any otherwise profitable sector. Global capital is insanely hungry for yield. It’s willing to accept very large, outsized risks as long as returns are attractive. DeFi continues to grow because it offers significantly higher top-line returns than traditional products. As long as that continues to be true, investors will stomach, and in many cases outright ignore, the risks.