13 ms·

DeFi risks and the decentralisation illusion

91 points by wallflower 5y ago

jonathan-adly 5y ago
Lost me at "lack of shock absorbers such as banks" - DeFi has lots of flaws, but it takes truly a sheltered economists to think that banks absorb shocks! I will pay attention when Goldman Sachs starts to hand out stimulus money or even loans in a crisis to absorb the shock
- ethanbond 5y ago
  Banks hand out loans to mitigate localized shocks all the time, which is one thing that prevents them from turning into more macro shocks.
  - clutchdude 5y ago
    Exactly - for instance, if the commercial paper markets don't function, paychecks don't get issued.
  - pishpash 5y ago
    You make it sound as if the ability to create loans is an intrinsic property of banks, as opposed to it being a licensed monopoly granted to such institutions by the state.
    - ethanbond 5y ago
      Anyone can give out loans. Having enough capital to give out tons of loans simultaneously, though, is yes a semi-unique feature of a bank.
- tablespoon 5y ago
  > Lost me at "lack of shock absorbers such as banks" - DeFi has lots of flaws, but it takes truly a sheltered economists to think that banks absorb shocks! My car has a bumper. It's not valid to claim it doesn't absorb shocks because it can't absorb all the shock of a 20mph collision. A similar situation might be the case here. It's quite plausible that banks absorb all kinds of shocks all the time, but we have a distorted view because the shocks we tend to hear about are the ones they didn't absorb (or didn't absorb as smoothly as usual). > I will pay attention when Goldman Sachs starts to hand out stimulus money or even loans in a crisis to absorb the shock Isn't the fed a bank and hasn't it done things similar to "hand[ing] out stimulus money or even loans"?
- agentultra 5y ago
  The US government responded to the 2008 financial crisis with the Dodd-Frank Act of 2008 to protect everyone against the kind of speculation that caused that financial crisis. Much of the financial legislation that regulates banks, payment systems, and other intermediaries is created in response to fraudsters and scammers. There are lots of "shock asorbers" that you might not be aware of. In the US payments system, a pull-based payment system, when a merchant makes a request to pull funds from your bank account, your bank is liable for the funds if they authorize the transaction. This protects the merchant from not receiving their money. The whole network is filled with debits and credits and liabilities. In fact it already is a distributed system that mirrors the social and political structures of moving value. Another shock absorber is that state chartered banks that handle a certain volume of transactions must first prove they have enough funds in reserve to serve their liabilities. Again to protect consumers. It's quite a fascinating industry and if you want to learn more about it there is an excellent book to get started [0]. However don't take the US system as the ideal model. There are more modern payment networks and protocols that enable transaction settlement in near real-time that is much more convenient and common in places like the EU and Canada. [0] https://www.amazon.com/Payments-Systems-U-S-Third-Professional/dp/0982789742/ref=sr_1_1?crid=1U50U4D4YG41E&keywords=payment+systems+in+the+us&qid=1640111811&sprefix=payment+systems%2Caps%2C115&sr=8-1 https://www.amazon.com/Payments-Systems-U-S-Third-Profession...
  - AnthonyMouse 5y ago
    > The US government responded to the 2008 financial crisis with the Dodd-Frank Act of 2008 to protect everyone against the kind of speculation that caused that financial crisis. Let's review the 2008 financial crisis. The was a thing called a credit default swap. It's a type of insurance. If you make a loan, and the borrower fails to pay you back, the insurance pays you instead. The insurance actuaries did the math on how much these should cost based on the historical rate at which homeowners paid back their loans. They also calculated that most of the claims would be offset by the ability to foreclose on the house, so they'd only have to pay to the extent that the homeowner owed more on the mortgage than the house was worth. That seemed pretty unlikely, right? Enter moral hazard. If you're a bank buying credit default swaps, you don't care one bit whether the borrower can pay back the loan, so you issue loans to everybody. Banks issuing loans to people who can't afford them inflates a housing bubble. The regulators who should have seen this and said "hey wait a minute" instead said "neat, they're promoting home ownership" and just let it happen. Then when those borrowers, in fact, can't afford the loan payments, they default. Around the same time, the insurance companies figure out that they fucked up real bad, so the price of credit default swaps goes way up and banks stop buying more of them. Which means they stop wanting to loan money to people who can't afford to pay back the loans, and the housing bubble pops. That puts the existing loans underwater, which would bankrupt the insurance companies, which would in turn bankrupt the banks. Then the "solution" became to set interest rates to zero to reinflate the housing bubble, where they've been ever since, and we now have an even bigger housing bubble than we did in 2007. The cause of this was not a fraud or a scam. It wasn't "buffers" or anything like that. It was incompetence. Nobody wants to admit that, because anyone could have asked the question, what does a credit default swap do to a bank's incentive to vet creditworthiness? But they didn't.
- pishpash 5y ago
  Anyone with sufficient capital and willing to take risks can be a shock absorber. The particular organization of such individuals such as into banks is merely an abstraction.
  - puchatek 5y ago
    And this means ... What exactly? If it takes individuals willing to take risks then the crypto space has plenty of them. Are you saying that the point the authors are making is therefore not valid?
xwolfi 5y ago
What I dont understand is how they calculate rates for loans. I dont know much about DeFi and just consider it as scammy as NFTs, but for me a lending rate is always function of a default risk: too high, no loan, high, high rate, low, low rates. I've worked in fintech and am in a bank now and we've always had our proprietary mapping table with field studies of default stats and long attribute lists (age, immigration status, salary, number of other loans, number of past default, other assets and so on), and the key was to either religiously stick to these or take strategic decisions to open the valves if needed (say to fit a quota, we let the younger people in for a while). How is DeFi doing lending rates ? Edit: got it, over collateralized with valuable collateral confiscated rather than promised so not fit for the same purposes as normal consumer loan. You wont pay your daughter's sweet 16 mega party in mexico or your son's wedding in Singapore or your first car in France with a DeFi loan :D So it's not exactly decentralized finance, it's more decentralized leverage, I guess. At least you cant default a DeFi loan, which sounds reassuring on paper.
- norswap 5y ago
  All loans are overcollateralized, and basically used for leverage: put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins. So the risk is limited as long as the loans can be liquidated in time in case of a price crash. The rates are determined the ratio of all stablecoin liquidity provided vs the amount actually borrowed. Liquidity providers can remove liquidity at any time, and so the smaller the remaining liquidity buffer gets, the higher the fees gets. Most of the rates are dynamic: i.e. the interest rate on your existing loan can increase drastically if there is a liquidity crunch. In practice your interest is charged as though it was extra borrowing and so lowers your liquidiation threshold. On the flip side, the dynamic rate also means that as the liquidity gets thinner, the interest rate paid to liquidity provider gets higher, meaning it incentivizes liquidity deposits when they are most needed.
  - bluedevil2k 5y ago
    > put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins Nothing could possibly go wrong with this, right? Tether is found to not have the reserves they claim and it plunges, and the artificial demand for bitcoin disappears and it plunges as well.
aeternum 5y ago
The decentralisation illusion argument seems weak. One could have claimed the same about the early internet: Early internet wasn't truly decentralized as there were still ISPs, and you still need to register your domain with a centralized entity. This misses that the big change is one of access. Content creators were able to reach a large audience without playing ball with the big publishers or newspapers. With defi, the same can happen with finance. Marketplaces, exchanges and new financial instruments can be created by anyone that follows programmatic rules. Complex & expensive relationships with legacy banks are no longer required.
- lottin 5y ago
  You don't require a bank in the same sense that you don't require a baker. If you want to make your own bread, go head, nobody is stopping you. But in a modern society people engage in division of labour and specialisation, because this allows us to be orders of magnitude more productive and have things that we couldn't dream of making ourselves. People don't want to make their own bread, and they don't want to be their own bank either.
  - aeternum 5y ago
    Maybe someone does want to create a very special and expensive type of bread and sell it worldwide. In order to accept payment, they must become a merchant with some centralized entity (Paypal, Mastercard, Visa). They must hope they live in the subset of countries where this is allowed. They must agree to a one-sided TOS that can be changed at any time. Then they must hope that all their buyers are honorable and trustworthy as those entities favor the buyer in a dispute. This is not an optimal state of affairs for the aspiring artisan bread maker.
    - dralley 5y ago
      >They must hope they live in the subset of countries where this is allowed. Although the overlap between this subset, and the subset of countries with reliable international shipping, is pretty high.
ruffrey 5y ago
The comparison to banks as shock absorbers is pretty rich. It has been only 12 years since banks caused global recession due to secrecy and greed. At least the decentralized options are more open, despite any flaws, which would be shared by centralized finance anyways. A mix of centralized and decentralized seems the safest.
m00dy 5y ago
This report has been written by old-school economist. I would suggest not pay attention much.
- WheatM 5y ago
- JaimeThompson 5y ago
  Why?
dqpb 5y ago
> it is impossible to write code spelling out what actions to take in all contingencies It sounds like two economists are struggling with the concept of software and systems engineering.
- pavlov 5y ago
  It sounds like economists are much more realistic about the feasibility of bug-free immutable software.
  - dqpb 5y ago
    If their argument was about the insanity of no-one doing model checking, I'd be on board. But that's not their argument.
  - cblconfederate 5y ago
    it's not fair to say that all economic transactions are going to have unaccounted contingencies. There are plenty of transactions which are just dead-simple, and when automated they don't need a middleman
cblconfederate 5y ago
It seems however that defi can be redesigned to be truly free from centralization. I guess this is related to @jack's tweet today. He was talking about VC-funded web3 however, not about defi in general
fennecfoxen 5y ago
It's real plank-in-your-own-eye stuff that all the crypto-huggers will dismiss the BLS analysis so readily at the line about banks acting as a risk buffer. Yes, to be sure! Banks present risks, massive risks, risks which should have been and still should be much better managed, at both bank and government levels — but boy howdy, are you in for a treat, you should see what happened to a financial system in the bad old days, when there were banks but no deposit insurance, and there would sometimes be a run on the banks, and they lose all their customers' cash, and the shock waves ripple through the whole economy. Now let's do the exact same thing in the crypto-verse, except with even dodgier loans, even more pathetic capital buffers, and, by the way, rampant fraud and bank robberies. It is only by the grace of obscurity and irrelevance to anything that matters that crypto-finance as a whole doesn't suffer widespread derision and fear a hundred times worse than the banking crisis.
- NicoJuicy 5y ago
  Crypto: Capital buffers? What's that. We didn't see it in our due diligence list. Here is a summary of that list:
  - cblconfederate 5y ago
    i mean yeah, that is one of the reasons why people are into crypto
- nickff 5y ago
  >"you should see what happened to a financial system in the bad old days, when there were banks but no deposit insurance, and there would sometimes be a run on the banks, and they lose all their customers' cash, and the shock waves ripple through the whole economy." It is my understanding that there was never a run on a solvent bank; runs were the consequences of bank failures, not the causes of them. It should also be pointed out that most bank failures were clearly caused by so-called 'unit banking', where the government prohibited banks from having multiple branches in diverse areas. Less-regulated banks (such as those in Canada and Scotland) suffered fewer failures, and had no issues with runs.
yob28 5y ago
kyruzic 5y ago
Their entire point about defi not being decentralized is almost entirely false. Uniswap the company is entirely disconnected from the uniswap router which is what defi really is. The uniswap router is what completes transactions on the blockchain. Not the uniswap website. The uniswap website simply provides a front end for interacting with the uniswap protocol. You can easily, like less than 100 lines of code, write your own implementation of the uniswap swap functionality. This is why it truly is decentralized. Uniswap the company has no way of preventing you from doing that in their v1, v2, or v3 router. Further they themselves are not running the router. Anyone who is running an eth node, or miner is running the router. So yes, uniswap has a financial interest in making a commercially successful product. But that product is uniswap.org/app It is not the smart contract. The smart contract is what makes it decentralized. Their only argument besides the financial interests of the companies who created the first defi products is claiming that blockchain rewards lead to concentration. Which is the same argument that has been made since bitcoin was first launched, but every single day the likelyhood of any sort of attack related to concentration becomes less likely. As more people start their own mining operations and start hosting their own node. If someone wanted to centralize the chain they missed their opportunity. Because it is simply not feasible for it to occur at this point. Like usual, old school economists desire to control crypto markets. But they know they aren't able to and won't ever be able to so they write ill informed articles filled with factually incorrect claims in order to misled policy makers to implement laws to attempt to regulate the industry. Which will also fail.
- throw_nbvc1234 5y ago
  Agreed, you see this misunderstanding constantly here and it makes it hard to take the valid parts of any counter-arguments seriously. De-centralization doesn't mean that there are no centralized UI winners. It's that if those winners disappear overnight (https://nftplazas.com/hic-et-nunc-finds-a-solution-after-sudden-shut-down/ https://nftplazas.com/hic-et-nunc-finds-a-solution-after-sud...) or start to abuse their power, people can just move to alternatives and the company has no power to lock them in. HackerNews would love this kind of "data portability" hedge against the classic google deletion of chat apps and other services. The blockchain just provides a decentralized trusted authority to ensure that the portable data is authentic. Without this, any data portability solution would have a problem with spoofing, or the data would require another centralized authority to validate the data which defeats the purpose. I guess you could argue the government could be that authority but idk how that works in a global sense. Having a data portable chat app is sketch if someone can just make up messages and import them into their new 3rd party app. it's dangerous/unworkable if the application is something with more consequences like defi.
_448 5y ago
So is it popcorn time now? :) Looks like the banks(and some countries) are sharpening their swords against cryptocurrencies.
anonu 5y ago
I have been saying this for a while: DeFi depends on CeFi (Centralized Finance). Coinbase depends on people connecting their bank accounts or credit cards to fund their accounts. Coinbase's value was created through an IPO on the NYSE - the mecca of centralized finance...
delabay 5y ago
About BIS: The BIS mission is to support central banks' pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. > It is difficult to get a man to understand something when his salary depends upon his not understanding it.
- defaultprimate 5y ago
  This, but applied to crypto bagholders
  - amirhirsch 5y ago
    no one depends on their cryptocurrency like their salary or retirement savings. the total market capitalization of cryptocurrency is basically the total amount of wealth humanity is willing to just throw away
    - defaultprimate 5y ago
      Weird how every time there's a crash there's suicide hotline posts on all the subreddits and crypto news websites then
    - deleted 5y ago
      [deleted]
  - delabay 5y ago
    The psychological momentum of BIS far exceeds that of crypto. BIS and affiliated parties are comprised of thousands of old guard who have built their career and sense of self worth on the belief what they are doing is necessary and beneficial for society. Crypto participants are at max involved a few years and overwhelmingly young 20-somethings. Just as science advances one funeral at a time, so too will this whole industry. It will help if we just stop debating whether crypto assets are real to begin with, and accept that this stuff isn't going away.
    - defaultprimate 5y ago
deleted 5y ago
[deleted]
aantix 5y ago
How do so many coins offer absurd APRs for staking?
- reducesuffering 5y ago
  It's the same principle as junk bonds. The less people believe that their principle will be recovered, the higher the APR to incentivize buyers. If some $100 coin offers you 100% APR, you best believe it's not likely that your original coin is still going to be worth $100 at the end of the year. More likely you'll have 2 coins worth $50 each now.
- wmf 5y ago
  There's a massive bubble with people throwing money into anything and everything.
- hrhrhrhrhr 5y ago
  The APR is paid in the coin itself, not dollars, so they just inflate the supply to pay the "yield".
deleted 5y ago
[deleted]

91 points by wallflower 5y ago

Lost me at "lack of shock absorbers such as banks" - DeFi has lots of flaws, but it takes truly a sheltered economists to think that banks absorb shocks! I will pay attention when Goldman Sachs starts to hand out stimulus money or even loans in a crisis to absorb the shock

ethanbond 5y ago
Banks hand out loans to mitigate localized shocks all the time, which is one thing that prevents them from turning into more macro shocks.
- clutchdude 5y ago
  Exactly - for instance, if the commercial paper markets don't function, paychecks don't get issued.
- pishpash 5y ago
  You make it sound as if the ability to create loans is an intrinsic property of banks, as opposed to it being a licensed monopoly granted to such institutions by the state.
  - ethanbond 5y ago
    Anyone can give out loans. Having enough capital to give out tons of loans simultaneously, though, is yes a semi-unique feature of a bank.
tablespoon 5y ago
> Lost me at "lack of shock absorbers such as banks" - DeFi has lots of flaws, but it takes truly a sheltered economists to think that banks absorb shocks! My car has a bumper. It's not valid to claim it doesn't absorb shocks because it can't absorb all the shock of a 20mph collision. A similar situation might be the case here. It's quite plausible that banks absorb all kinds of shocks all the time, but we have a distorted view because the shocks we tend to hear about are the ones they didn't absorb (or didn't absorb as smoothly as usual). > I will pay attention when Goldman Sachs starts to hand out stimulus money or even loans in a crisis to absorb the shock Isn't the fed a bank and hasn't it done things similar to "hand[ing] out stimulus money or even loans"?
agentultra 5y ago
The US government responded to the 2008 financial crisis with the Dodd-Frank Act of 2008 to protect everyone against the kind of speculation that caused that financial crisis. Much of the financial legislation that regulates banks, payment systems, and other intermediaries is created in response to fraudsters and scammers. There are lots of "shock asorbers" that you might not be aware of. In the US payments system, a pull-based payment system, when a merchant makes a request to pull funds from your bank account, your bank is liable for the funds if they authorize the transaction. This protects the merchant from not receiving their money. The whole network is filled with debits and credits and liabilities. In fact it already is a distributed system that mirrors the social and political structures of moving value. Another shock absorber is that state chartered banks that handle a certain volume of transactions must first prove they have enough funds in reserve to serve their liabilities. Again to protect consumers. It's quite a fascinating industry and if you want to learn more about it there is an excellent book to get started [0]. However don't take the US system as the ideal model. There are more modern payment networks and protocols that enable transaction settlement in near real-time that is much more convenient and common in places like the EU and Canada. [0] https://www.amazon.com/Payments-Systems-U-S-Third-Professional/dp/0982789742/ref=sr_1_1?crid=1U50U4D4YG41E&keywords=payment+systems+in+the+us&qid=1640111811&sprefix=payment+systems%2Caps%2C115&sr=8-1 https://www.amazon.com/Payments-Systems-U-S-Third-Profession...
- AnthonyMouse 5y ago
  > The US government responded to the 2008 financial crisis with the Dodd-Frank Act of 2008 to protect everyone against the kind of speculation that caused that financial crisis. Let's review the 2008 financial crisis. The was a thing called a credit default swap. It's a type of insurance. If you make a loan, and the borrower fails to pay you back, the insurance pays you instead. The insurance actuaries did the math on how much these should cost based on the historical rate at which homeowners paid back their loans. They also calculated that most of the claims would be offset by the ability to foreclose on the house, so they'd only have to pay to the extent that the homeowner owed more on the mortgage than the house was worth. That seemed pretty unlikely, right? Enter moral hazard. If you're a bank buying credit default swaps, you don't care one bit whether the borrower can pay back the loan, so you issue loans to everybody. Banks issuing loans to people who can't afford them inflates a housing bubble. The regulators who should have seen this and said "hey wait a minute" instead said "neat, they're promoting home ownership" and just let it happen. Then when those borrowers, in fact, can't afford the loan payments, they default. Around the same time, the insurance companies figure out that they fucked up real bad, so the price of credit default swaps goes way up and banks stop buying more of them. Which means they stop wanting to loan money to people who can't afford to pay back the loans, and the housing bubble pops. That puts the existing loans underwater, which would bankrupt the insurance companies, which would in turn bankrupt the banks. Then the "solution" became to set interest rates to zero to reinflate the housing bubble, where they've been ever since, and we now have an even bigger housing bubble than we did in 2007. The cause of this was not a fraud or a scam. It wasn't "buffers" or anything like that. It was incompetence. Nobody wants to admit that, because anyone could have asked the question, what does a credit default swap do to a bank's incentive to vet creditworthiness? But they didn't.
pishpash 5y ago
Anyone with sufficient capital and willing to take risks can be a shock absorber. The particular organization of such individuals such as into banks is merely an abstraction.
- puchatek 5y ago
  And this means ... What exactly? If it takes individuals willing to take risks then the crypto space has plenty of them. Are you saying that the point the authors are making is therefore not valid?

xwolfi 5y ago

What I dont understand is how they calculate rates for loans. I dont know much about DeFi and just consider it as scammy as NFTs, but for me a lending rate is always function of a default risk: too high, no loan, high, high rate, low, low rates. I've worked in fintech and am in a bank now and we've always had our proprietary mapping table with field studies of default stats and long attribute lists (age, immigration status, salary, number of other loans, number of past default, other assets and so on), and the key was to either religiously stick to these or take strategic decisions to open the valves if needed (say to fit a quota, we let the younger people in for a while). How is DeFi doing lending rates ? Edit: got it, over collateralized with valuable collateral confiscated rather than promised so not fit for the same purposes as normal consumer loan. You wont pay your daughter's sweet 16 mega party in mexico or your son's wedding in Singapore or your first car in France with a DeFi loan :D So it's not exactly decentralized finance, it's more decentralized leverage, I guess. At least you cant default a DeFi loan, which sounds reassuring on paper.

norswap 5y ago
All loans are overcollateralized, and basically used for leverage: put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins. So the risk is limited as long as the loans can be liquidated in time in case of a price crash. The rates are determined the ratio of all stablecoin liquidity provided vs the amount actually borrowed. Liquidity providers can remove liquidity at any time, and so the smaller the remaining liquidity buffer gets, the higher the fees gets. Most of the rates are dynamic: i.e. the interest rate on your existing loan can increase drastically if there is a liquidity crunch. In practice your interest is charged as though it was extra borrowing and so lowers your liquidiation threshold. On the flip side, the dynamic rate also means that as the liquidity gets thinner, the interest rate paid to liquidity provider gets higher, meaning it incentivizes liquidity deposits when they are most needed.
- bluedevil2k 5y ago
  > put up your bitcoins as collateral, borrow stablecoins, buy more bitcoins Nothing could possibly go wrong with this, right? Tether is found to not have the reserves they claim and it plunges, and the artificial demand for bitcoin disappears and it plunges as well.

aeternum 5y ago

The decentralisation illusion argument seems weak. One could have claimed the same about the early internet: Early internet wasn't truly decentralized as there were still ISPs, and you still need to register your domain with a centralized entity. This misses that the big change is one of access. Content creators were able to reach a large audience without playing ball with the big publishers or newspapers. With defi, the same can happen with finance. Marketplaces, exchanges and new financial instruments can be created by anyone that follows programmatic rules. Complex & expensive relationships with legacy banks are no longer required.

lottin 5y ago
You don't require a bank in the same sense that you don't require a baker. If you want to make your own bread, go head, nobody is stopping you. But in a modern society people engage in division of labour and specialisation, because this allows us to be orders of magnitude more productive and have things that we couldn't dream of making ourselves. People don't want to make their own bread, and they don't want to be their own bank either.
- aeternum 5y ago
  Maybe someone does want to create a very special and expensive type of bread and sell it worldwide. In order to accept payment, they must become a merchant with some centralized entity (Paypal, Mastercard, Visa). They must hope they live in the subset of countries where this is allowed. They must agree to a one-sided TOS that can be changed at any time. Then they must hope that all their buyers are honorable and trustworthy as those entities favor the buyer in a dispute. This is not an optimal state of affairs for the aspiring artisan bread maker.
  - dralley 5y ago
    >They must hope they live in the subset of countries where this is allowed. Although the overlap between this subset, and the subset of countries with reliable international shipping, is pretty high.

ruffrey 5y ago

The comparison to banks as shock absorbers is pretty rich. It has been only 12 years since banks caused global recession due to secrecy and greed. At least the decentralized options are more open, despite any flaws, which would be shared by centralized finance anyways. A mix of centralized and decentralized seems the safest.

m00dy 5y ago

This report has been written by old-school economist. I would suggest not pay attention much.

WheatM 5y ago
JaimeThompson 5y ago
Why?

dqpb 5y ago

> it is impossible to write code spelling out what actions to take in all contingencies It sounds like two economists are struggling with the concept of software and systems engineering.

pavlov 5y ago
It sounds like economists are much more realistic about the feasibility of bug-free immutable software.
- dqpb 5y ago
  If their argument was about the insanity of no-one doing model checking, I'd be on board. But that's not their argument.
- cblconfederate 5y ago
  it's not fair to say that all economic transactions are going to have unaccounted contingencies. There are plenty of transactions which are just dead-simple, and when automated they don't need a middleman

cblconfederate 5y ago

It seems however that defi can be redesigned to be truly free from centralization. I guess this is related to @jack's tweet today. He was talking about VC-funded web3 however, not about defi in general

fennecfoxen 5y ago

It's real plank-in-your-own-eye stuff that all the crypto-huggers will dismiss the BLS analysis so readily at the line about banks acting as a risk buffer. Yes, to be sure! Banks present risks, massive risks, risks which should have been and still should be much better managed, at both bank and government levels — but boy howdy, are you in for a treat, you should see what happened to a financial system in the bad old days, when there were banks but no deposit insurance, and there would sometimes be a run on the banks, and they lose all their customers' cash, and the shock waves ripple through the whole economy. Now let's do the exact same thing in the crypto-verse, except with even dodgier loans, even more pathetic capital buffers, and, by the way, rampant fraud and bank robberies. It is only by the grace of obscurity and irrelevance to anything that matters that crypto-finance as a whole doesn't suffer widespread derision and fear a hundred times worse than the banking crisis.

NicoJuicy 5y ago
Crypto: Capital buffers? What's that. We didn't see it in our due diligence list. Here is a summary of that list:
- cblconfederate 5y ago
  i mean yeah, that is one of the reasons why people are into crypto
nickff 5y ago
>"you should see what happened to a financial system in the bad old days, when there were banks but no deposit insurance, and there would sometimes be a run on the banks, and they lose all their customers' cash, and the shock waves ripple through the whole economy." It is my understanding that there was never a run on a solvent bank; runs were the consequences of bank failures, not the causes of them. It should also be pointed out that most bank failures were clearly caused by so-called 'unit banking', where the government prohibited banks from having multiple branches in diverse areas. Less-regulated banks (such as those in Canada and Scotland) suffered fewer failures, and had no issues with runs.

yob28 5y ago

kyruzic 5y ago

Their entire point about defi not being decentralized is almost entirely false. Uniswap the company is entirely disconnected from the uniswap router which is what defi really is. The uniswap router is what completes transactions on the blockchain. Not the uniswap website. The uniswap website simply provides a front end for interacting with the uniswap protocol. You can easily, like less than 100 lines of code, write your own implementation of the uniswap swap functionality. This is why it truly is decentralized. Uniswap the company has no way of preventing you from doing that in their v1, v2, or v3 router. Further they themselves are not running the router. Anyone who is running an eth node, or miner is running the router. So yes, uniswap has a financial interest in making a commercially successful product. But that product is uniswap.org/app It is not the smart contract. The smart contract is what makes it decentralized. Their only argument besides the financial interests of the companies who created the first defi products is claiming that blockchain rewards lead to concentration. Which is the same argument that has been made since bitcoin was first launched, but every single day the likelyhood of any sort of attack related to concentration becomes less likely. As more people start their own mining operations and start hosting their own node. If someone wanted to centralize the chain they missed their opportunity. Because it is simply not feasible for it to occur at this point. Like usual, old school economists desire to control crypto markets. But they know they aren't able to and won't ever be able to so they write ill informed articles filled with factually incorrect claims in order to misled policy makers to implement laws to attempt to regulate the industry. Which will also fail.

throw_nbvc1234 5y ago
Agreed, you see this misunderstanding constantly here and it makes it hard to take the valid parts of any counter-arguments seriously. De-centralization doesn't mean that there are no centralized UI winners. It's that if those winners disappear overnight (https://nftplazas.com/hic-et-nunc-finds-a-solution-after-sudden-shut-down/ https://nftplazas.com/hic-et-nunc-finds-a-solution-after-sud...) or start to abuse their power, people can just move to alternatives and the company has no power to lock them in. HackerNews would love this kind of "data portability" hedge against the classic google deletion of chat apps and other services. The blockchain just provides a decentralized trusted authority to ensure that the portable data is authentic. Without this, any data portability solution would have a problem with spoofing, or the data would require another centralized authority to validate the data which defeats the purpose. I guess you could argue the government could be that authority but idk how that works in a global sense. Having a data portable chat app is sketch if someone can just make up messages and import them into their new 3rd party app. it's dangerous/unworkable if the application is something with more consequences like defi.

_448 5y ago

So is it popcorn time now? :) Looks like the banks(and some countries) are sharpening their swords against cryptocurrencies.

anonu 5y ago

I have been saying this for a while: DeFi depends on CeFi (Centralized Finance). Coinbase depends on people connecting their bank accounts or credit cards to fund their accounts. Coinbase's value was created through an IPO on the NYSE - the mecca of centralized finance...

delabay 5y ago

About BIS: The BIS mission is to support central banks' pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. > It is difficult to get a man to understand something when his salary depends upon his not understanding it.

defaultprimate 5y ago
This, but applied to crypto bagholders
- amirhirsch 5y ago
  no one depends on their cryptocurrency like their salary or retirement savings. the total market capitalization of cryptocurrency is basically the total amount of wealth humanity is willing to just throw away
  - defaultprimate 5y ago
    Weird how every time there's a crash there's suicide hotline posts on all the subreddits and crypto news websites then
  - deleted 5y ago
    [deleted]
- delabay 5y ago
  The psychological momentum of BIS far exceeds that of crypto. BIS and affiliated parties are comprised of thousands of old guard who have built their career and sense of self worth on the belief what they are doing is necessary and beneficial for society. Crypto participants are at max involved a few years and overwhelmingly young 20-somethings. Just as science advances one funeral at a time, so too will this whole industry. It will help if we just stop debating whether crypto assets are real to begin with, and accept that this stuff isn't going away.
  - defaultprimate 5y ago

deleted 5y ago

[deleted]

aantix 5y ago

How do so many coins offer absurd APRs for staking?

reducesuffering 5y ago
It's the same principle as junk bonds. The less people believe that their principle will be recovered, the higher the APR to incentivize buyers. If some $100 coin offers you 100% APR, you best believe it's not likely that your original coin is still going to be worth $100 at the end of the year. More likely you'll have 2 coins worth $50 each now.
wmf 5y ago
There's a massive bubble with people throwing money into anything and everything.
hrhrhrhrhr 5y ago
The APR is paid in the coin itself, not dollars, so they just inflate the supply to pay the "yield".

deleted 5y ago

[deleted]