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The primary function of finance is to enable economic agents to trade future consumption for present consumption, by means of debt. And debt requires a trusted

by lottin 5y ago

The primary function of finance is to enable economic agents to trade future consumption for present consumption, by means of debt. And debt requires a trusted third-party that has the capacity to re-allocate assets. Otherwise the borrower can simply walk away with the money, and never repay the debt. Now, blockchains, not only lack a trusted third-party that can re-allocate assets, but they are designed with the explicit goal of preventing such re-allocations. Therefore my question is how can this technology be the "future of finance" when it's designed from the ground up to be incompatible with finance?

yuvalr1 5y ago
Loans are an important concept, that's true. Do blockchains inherently prevent loans? I'm not sure, I think Ethereum smart contracts enable the concept of loans. The 3rd party here is the contract itself, as I understand it.
- cuteboy19 5y ago
  Blockchain "loans" are fully collateralised and sometimes even require upto 4x the collateral than the loan itself. This is not useful in the vast majority of cases
- lottin 5y ago
  If I lend you 1 ETH, I have no means to make you pay me back. Smart contracts can't do that either. A smart contract cannot seize 1 ETH from your wallet and send it back to my wallet. Blockchains are designed specifically to prevent that.
  - carlosdp 5y ago
    That's not true, you can definitely do this with a smart contract blockchain like Ethereum, and there are plenty of loan protocols already that do this in production with $ billions in assets transacted. No one can steal your ETH from your wallet, but they can liquidate your staked collateral held by the smart contract.
    - lottin 5y ago
      If the collateral is "held by a smart contract" it means your buying power hasn't changed and you haven't financed anything.
ricochet11 5y ago
There is no reason that the third-party cant be a contract with globally accessible permissionless apis, that let you borrow peer2peer or peer2protocol against your assets, and that upon you not repaying your debt liquidates your position (by other people/protocols bidding for the assets that are out of position, usually over-collateralized at 150% min). Most of defi is structured in this way and it is working fine, it works because it IS being integrated and made compatible with existing finance. This is "futuristic" because anyone in the world has opportunity to lend/borrow to anyone else in the world, to write code that automates savings accounts by rotating these positions, to write business logic of their startup to borrow money when they need and pay it back when its the best time for them - scaling their finance on demand like spinning up an ec2 instance. A system where you have more voice and opportunity for your work/savings/co-op/club, compared with whatever the state of banking is in wherever you happen to be born in the world. Concrete example: I asked my bank to borrow some money and showed them my bitcoin, they predictably said no because their system cant handle it. I wrapped it onto ethereum, deposited it in aave, borrowed usdc, withdrew to my bank account and carried on with my life without needing the banks permissions. The people lending that usdc to aave to lend out to me know it is safe and I cant run off never paying back my debts and interest (otherwise they get my over-collateralized btc). permissionless global p2p lending and borrowing. it isn't futuristic, it is the present. ill never understand why "hacker"news doesnt find that amazing.
- lottin 5y ago
  You don't seem to get it. If the borrower has to put up 100% collateral it means that their buying power remains the same. Borrowers borrow money in order to increase their present buying power (at the expense of future buying power). You can't do that with overcollateralised loans, smart contracts, or blockchain technology.
  - mywaifuismeta 5y ago
    > You don't seem to get it No, you are only describing a part of what borrowing is about. Your use case is valid, but it is just one of many use cases. Consider the following: I own a a long-term retirement account, but I need to pay an emergency medical bill and don't have cash at hand. Obviously I don't want to liquidate my savings account, but I can put it up as collateral to go to a bank and get a cash loan. If I'm unable to pay the account may be liquidated. That's an overcolleralized loan. It's useful. The same is happening when you put up your house as collateral, or arguably even your reputation. The blockchain equivalent of this is the same. You put up one asset as collateral e.g. Bitcoin, and you can get another more liquid asset. Another use case for this is simply market exposure and hedging. You can put up Bitcoin as collateral, still having exposure, and then use the loan to buy another asset to get exposure to, creating a more complex structured exposure. This has nothing to do with blockchain, it's the same in traditional finance.
jtsiskin 5y ago
Are you saying that most loans are uncollateralized?
- lottin 5y ago
  I'm saying that blockchain technology is inherently incompatible with financing, which is the basic and most important function of finance.
  - CurrentB 5y ago
    There's no reason why Blockchains can't also incorporate their own trust model to facilitate lending that isn't fully collateralized. There are already projects working towards this. Pseudonymous p2p lending isn't some impossible thing. The current frothy state of crypto, unsustainable as it may be, is evidence that people are willing to trust crypto projects enough to give them money if there's a chance of getting some amount of more money. Much of this looks like equity financing. Debt financing isn't inherently off limits though it just is harder.
    - lottin 5y ago
      Debt financing is definitely not simply harder but entirely impossible. If you think otherwise, please explain how the borrower can be made to repay the debt with this technology.
      - CurrentB 5y ago
        Borrowers cannot be "made" to repay debt in traditional finance either. Lenders must make decisions based on some measure of the credit worthiness of potential borrowers. The same mechanisms could be replicated on blockchains. See: https://docs.truefi.io/faq/ https://docs.truefi.io/faq/ https://teller.gitbook.io/teller-docs/protocol-1/overview https://teller.gitbook.io/teller-docs/protocol-1/overview
        lottin 5y ago
riptheworld 5y ago
You could use existing trusted lending Institutions, no? Investors can loan their excess Bitcoin to a lending institution that pools Bitcoin from multiple investors and loans it out to borrowers? In return, the investor receives interest on the loaned amount when it is paid back in full? If the loan isn’t repaid, the courts get involved to seize other physical assets from the borrower (cars, homes, etc.). In some sense, we would be back to having banks with the exception that the bank now exists solely as an investment vehicle. I guess I’m struggling to see what barriers prevent crypto currencies from being used in traditional financing?
- lottin 5y ago
  Nothing prevents crypto-currency denominated loans in traditional finance. That was not the claim. The claim is that financing operations are not possible in so-called "decentralised finance".
  - riptheworld 5y ago
    Ahh I see! Thanks for the clarification!

by lottin 5y ago

yuvalr1 5y ago

Loans are an important concept, that's true. Do blockchains inherently prevent loans? I'm not sure, I think Ethereum smart contracts enable the concept of loans. The 3rd party here is the contract itself, as I understand it.

cuteboy19 5y ago
Blockchain "loans" are fully collateralised and sometimes even require upto 4x the collateral than the loan itself. This is not useful in the vast majority of cases
lottin 5y ago
If I lend you 1 ETH, I have no means to make you pay me back. Smart contracts can't do that either. A smart contract cannot seize 1 ETH from your wallet and send it back to my wallet. Blockchains are designed specifically to prevent that.
- carlosdp 5y ago
  That's not true, you can definitely do this with a smart contract blockchain like Ethereum, and there are plenty of loan protocols already that do this in production with $ billions in assets transacted. No one can steal your ETH from your wallet, but they can liquidate your staked collateral held by the smart contract.
  - lottin 5y ago
    If the collateral is "held by a smart contract" it means your buying power hasn't changed and you haven't financed anything.

ricochet11 5y ago

There is no reason that the third-party cant be a contract with globally accessible permissionless apis, that let you borrow peer2peer or peer2protocol against your assets, and that upon you not repaying your debt liquidates your position (by other people/protocols bidding for the assets that are out of position, usually over-collateralized at 150% min). Most of defi is structured in this way and it is working fine, it works because it IS being integrated and made compatible with existing finance. This is "futuristic" because anyone in the world has opportunity to lend/borrow to anyone else in the world, to write code that automates savings accounts by rotating these positions, to write business logic of their startup to borrow money when they need and pay it back when its the best time for them - scaling their finance on demand like spinning up an ec2 instance. A system where you have more voice and opportunity for your work/savings/co-op/club, compared with whatever the state of banking is in wherever you happen to be born in the world. Concrete example: I asked my bank to borrow some money and showed them my bitcoin, they predictably said no because their system cant handle it. I wrapped it onto ethereum, deposited it in aave, borrowed usdc, withdrew to my bank account and carried on with my life without needing the banks permissions. The people lending that usdc to aave to lend out to me know it is safe and I cant run off never paying back my debts and interest (otherwise they get my over-collateralized btc). permissionless global p2p lending and borrowing. it isn't futuristic, it is the present. ill never understand why "hacker"news doesnt find that amazing.

lottin 5y ago
You don't seem to get it. If the borrower has to put up 100% collateral it means that their buying power remains the same. Borrowers borrow money in order to increase their present buying power (at the expense of future buying power). You can't do that with overcollateralised loans, smart contracts, or blockchain technology.
- mywaifuismeta 5y ago
  > You don't seem to get it No, you are only describing a part of what borrowing is about. Your use case is valid, but it is just one of many use cases. Consider the following: I own a a long-term retirement account, but I need to pay an emergency medical bill and don't have cash at hand. Obviously I don't want to liquidate my savings account, but I can put it up as collateral to go to a bank and get a cash loan. If I'm unable to pay the account may be liquidated. That's an overcolleralized loan. It's useful. The same is happening when you put up your house as collateral, or arguably even your reputation. The blockchain equivalent of this is the same. You put up one asset as collateral e.g. Bitcoin, and you can get another more liquid asset. Another use case for this is simply market exposure and hedging. You can put up Bitcoin as collateral, still having exposure, and then use the loan to buy another asset to get exposure to, creating a more complex structured exposure. This has nothing to do with blockchain, it's the same in traditional finance.

jtsiskin 5y ago

Are you saying that most loans are uncollateralized?

lottin 5y ago
I'm saying that blockchain technology is inherently incompatible with financing, which is the basic and most important function of finance.
- CurrentB 5y ago
  There's no reason why Blockchains can't also incorporate their own trust model to facilitate lending that isn't fully collateralized. There are already projects working towards this. Pseudonymous p2p lending isn't some impossible thing. The current frothy state of crypto, unsustainable as it may be, is evidence that people are willing to trust crypto projects enough to give them money if there's a chance of getting some amount of more money. Much of this looks like equity financing. Debt financing isn't inherently off limits though it just is harder.
  - lottin 5y ago
    Debt financing is definitely not simply harder but entirely impossible. If you think otherwise, please explain how the borrower can be made to repay the debt with this technology.
    - CurrentB 5y ago
      Borrowers cannot be "made" to repay debt in traditional finance either. Lenders must make decisions based on some measure of the credit worthiness of potential borrowers. The same mechanisms could be replicated on blockchains. See: https://docs.truefi.io/faq/ https://docs.truefi.io/faq/ https://teller.gitbook.io/teller-docs/protocol-1/overview https://teller.gitbook.io/teller-docs/protocol-1/overview
      - lottin 5y ago

riptheworld 5y ago

You could use existing trusted lending Institutions, no? Investors can loan their excess Bitcoin to a lending institution that pools Bitcoin from multiple investors and loans it out to borrowers? In return, the investor receives interest on the loaned amount when it is paid back in full? If the loan isn’t repaid, the courts get involved to seize other physical assets from the borrower (cars, homes, etc.). In some sense, we would be back to having banks with the exception that the bank now exists solely as an investment vehicle. I guess I’m struggling to see what barriers prevent crypto currencies from being used in traditional financing?

lottin 5y ago
Nothing prevents crypto-currency denominated loans in traditional finance. That was not the claim. The claim is that financing operations are not possible in so-called "decentralised finance".
- riptheworld 5y ago
  Ahh I see! Thanks for the clarification!