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There is a ton of regulations aimed at proper functioning of markets unrelated to banks. In uncollateralized situations you cannot verify/verification is meani

There is a ton of regulations aimed at proper functioning of markets unrelated to banks. In uncollateralized situations you cannot verify/verification is meaningless as you might not be able to claim what you verified.

pishpash 5y ago
Let me pose the question thusly: Is there any decision making process by a bank, even ones executed by humans, not formalizable programmatically, provided sufficient information? If not, then what's to prevent decentralized finance from working just as well, provided the same information into the system?
- hiq 5y ago
  1. The way you'll provide the real-world information won't be decentralized (it'll be some kind of oracle). 2. The costs of decentralized finance are too high.
- smackeyacky 5y ago
  Human intervention is required more than you might think in the current banking system. Mistakes, fat fingered numbers, wrong accounts etc. None of it is resolved without humans with authority. Unless you can build an authority into the system somehow for dispute resolution, the system will always favour bad actors and fraud. The big push for no-authority, decentralised finance sounds wonderful, but the reality is if the system is inherently biased toward fraud and crime because of a lack of dispute resolution, fraud and crime is what you are going to get.
  - pishpash 5y ago
    1. I wonder how much of this still holds in a potential future world where machines are making decisions in most aspects of life already. 2. It doesn't follow that you can't have some recognized authorities within decentralized finance to negotiate fallback cases. For instance, the role of banks could become merely to supply information related to human authentication, not most of market operation.
    - smackeyacky 5y ago
      I guess you could set it up that way, but then you create the problem of competing authorities - it's the same problem that the internet has with DNS. At some point, it has to have a single source of truth. The blockchain itself isn't enough when what is recorded on the blockchain is potentially not what the actors intended (or is what a criminal intended in a fraud scheme).
      - programmarchy 5y ago
        Competing authorities seem like a feature not a bug. It allows for experimentation and evolution of governance models. International law works this way and is what allows people to “vote with their feet”. There is no actual requirement for a single source of truth.
        smackeyacky 5y ago
        That seems kind of different in a way, the different authorities cover different countries where laws are different. It almost seems like to make it work you would need...regulation.
- RandomLensman 5y ago
  At the sharp end, I'd say there are such non-formalized "processes" in place. For example, market making is not really programmatic for low liquidity stuff (and no, AMMs are not good for price formation absent arbitrageurs). Dealing with sudden changes to the state of the world is another. Heck, simple price formation for shares is totally not formalized. Also, not clear how defi would do on balance sheet money creation (at least to me) if we are replacing banks. (And what about all the other players in the financial ecosystem?)
- jacobr1 5y ago
  What about the most traditional business of a bank: providing security and paltry interest for deposits, intermediated by the bank, as capital for loans. Now DeFi can certainly do each of these, but crucially the traditional system also decouples the risk for depositors. The return of deposits is NOT contingent upon the performance of the loans, by both regulation and deposit insurance. Is there a defi solution for a similar system?

pishpash 5y ago

Let me pose the question thusly: Is there any decision making process by a bank, even ones executed by humans, not formalizable programmatically, provided sufficient information? If not, then what's to prevent decentralized finance from working just as well, provided the same information into the system?

hiq 5y ago
1. The way you'll provide the real-world information won't be decentralized (it'll be some kind of oracle). 2. The costs of decentralized finance are too high.
smackeyacky 5y ago
Human intervention is required more than you might think in the current banking system. Mistakes, fat fingered numbers, wrong accounts etc. None of it is resolved without humans with authority. Unless you can build an authority into the system somehow for dispute resolution, the system will always favour bad actors and fraud. The big push for no-authority, decentralised finance sounds wonderful, but the reality is if the system is inherently biased toward fraud and crime because of a lack of dispute resolution, fraud and crime is what you are going to get.
- pishpash 5y ago
  1. I wonder how much of this still holds in a potential future world where machines are making decisions in most aspects of life already. 2. It doesn't follow that you can't have some recognized authorities within decentralized finance to negotiate fallback cases. For instance, the role of banks could become merely to supply information related to human authentication, not most of market operation.
  - smackeyacky 5y ago
    I guess you could set it up that way, but then you create the problem of competing authorities - it's the same problem that the internet has with DNS. At some point, it has to have a single source of truth. The blockchain itself isn't enough when what is recorded on the blockchain is potentially not what the actors intended (or is what a criminal intended in a fraud scheme).
    - programmarchy 5y ago
      Competing authorities seem like a feature not a bug. It allows for experimentation and evolution of governance models. International law works this way and is what allows people to “vote with their feet”. There is no actual requirement for a single source of truth.
      - smackeyacky 5y ago
        That seems kind of different in a way, the different authorities cover different countries where laws are different. It almost seems like to make it work you would need...regulation.
RandomLensman 5y ago
At the sharp end, I'd say there are such non-formalized "processes" in place. For example, market making is not really programmatic for low liquidity stuff (and no, AMMs are not good for price formation absent arbitrageurs). Dealing with sudden changes to the state of the world is another. Heck, simple price formation for shares is totally not formalized. Also, not clear how defi would do on balance sheet money creation (at least to me) if we are replacing banks. (And what about all the other players in the financial ecosystem?)
jacobr1 5y ago
What about the most traditional business of a bank: providing security and paltry interest for deposits, intermediated by the bank, as capital for loans. Now DeFi can certainly do each of these, but crucially the traditional system also decouples the risk for depositors. The return of deposits is NOT contingent upon the performance of the loans, by both regulation and deposit insurance. Is there a defi solution for a similar system?